Investment Insights - Hot Topics February 2024
Welcome to Balance: Wealth Planning's Hot Topics!
Balance: Wealth Planning's February edition of Hot Topics.
Every month, our financial planners will collate the latest 'Hot Topics' within the industry, which we will share with you. The purpose is to update you regularly as these topics are happening and help cover any frequently asked questions.
So, without further ado, please enjoy this edition of Hot Topics!
An overview of 2023
2023 was a year of heightened uncertainty, from rising inflation and interest rates to a potential banking collapse and fears of rising oil prices due a war in the middle east, anyone would have thought that 2023 would be a continuation of 2022. However, equities prevailed with the MSCI World (the global stock index) returning 15.3% over the course of 2023.
The role of markets
This is a helpful reminder that markets (for the most part) function very well. They are designed to process information about the past, present and future and reflect this information into the price of stocks and bonds. While the headlines we saw throughout 2023 may cause concern for some investors, it’s important to remember that the market prices happen quicker than you can react to it. Therefore, the return markets will produce in 2024 will be more akin to what will happen in the global economy in 2025 and beyond, rather than what happens during 2024.
This brings us to the most asked question in 2023, “Should I move to cash?”. A fair question given the interest rates available throughout 2023. However, if we reflect on what happened over the course of the year, the best easy access savings accounts were offering around 6.5% at their peak, UK headline inflation didn’t fall below 6% until October and global equities returned 15.3%. While this is only a short period to reflect upon, moving to cash would not have been the optimum solution over this period.
The laws of capitalism
While there is now a lot of news around when interest rates will fall and how much they’ll fall by in 2024, its important to highlight that while it might feel like this time is different, the laws of capitalism still haven’t changed. If we look at the basics of the circular economy:
- Government have to pay higher returns than cash to borrow. If cash in the bank is offering 5% then governments must pay more to tempt people to move their cash from the bank and lock this into a government bond.
- Companies have to pay more than governments to borrow. They will also only borrow if a new project has the potential to beat what the bank is offering. Otherwise they will just keep their cash in the bank
- Equities must offer the chance of being paid more than corporate bonds. Companies need to generate money for their shareholder, otherwise shareholders wouldn’t invest and would leave their money in the bank. Companies therefore need to invest in projects that have the potential of producing a return greater than cash.
The long-term
We can see from the basics outlined above, cash sets the bar for the potential returns of bonds and equities over the longer-term.
While we don’t know what will happen in 2024 and while all the noise around interest rates is falling, they may end up staying higher for longer. But we should be reassured by the fact that the laws of capitalism (outlined above) remain in place, and that over the longer-term an investor should be compensated with a return above cash, otherwise every investor and companies will keep all their cash in the bank.
Please note: This update is provided for information only, and you should not take any action before speaking to a Financial Planner, who will confirm what suits you. In addition, past performance is not a guarantee of future returns. Values can fall and rise – you may get back less than you have invested.
Please feel free to share it with anyone who may be interested. If you have any questions, please get in touch with your usual contact or investments@balancewealth.uk.