27/12/2024

Investment market update: February 2024

While many economies are still struggling with high inflation there are signs that the pace is starting to slow, which could pave the way for interest rate cuts later this year.

To reflect this, the OECD has lifted its 2024 global growth forecast by 0.3%, when compared to the end of 2023, to 2.9%. However, the international organisation warned that central banks should ensure underlying price pressures were “fully contained” before they cut interest rates.

Market rallies around the world on 22 February highlighted how interconnected markets are and how difficult it can be to predict movements.

US chipmaker Nvidia beat expectations and reported sales of $22.1 billion (£17.4 billion) in the final quarter of 2023 – a 22% increase when compared to the previous quarter and a huge 265% higher than in the final quarter of 2022. In fact, the company has gone from a market cap of $1 trillion to $2 trillion in a record eight months – less than half the time it took technology giants Apple and Microsoft.

It led to widespread optimism that the AI boom would continue. Tech-heavy US index Nasdaq jumped more than 2%, as Nvidia’s share price soared by 12%. The news led to Japan’s main index, the Nikkei, hitting a record high, Europe’s Stoxx 600 index increasing by 1%, and the FTSE 100 benefiting from a boost to its technology stocks.

Read on to find out what else affected markets in February 2024.

UK

The headline news is that the UK is in a technical recession, defined as two consecutive quarters of economic contraction.

The Office for National Statistics (ONS) figures show GDP fell by 0.3% in the final quarter of 2023, following a drop of 0.1% in the previous quarter. The ONS said the biggest drags on growth were manufacturing, construction, and wholesale.

The news places pressure on prime minister Rishi Sunak, who is expected to call a general election in the coming months.

ONS data also showed that UK inflation was unchanged in January at 4%. While positive news, as economists predicted a rise, it’s still double the Bank of England’s (BoE) 2% target.

The BoE’s governor, Andrew Bailey, said the bank needed more confidence that inflation would fall and stay low before it made cuts to interest rates. As a result, the BoE base rate remains at 5.25%. However, Bailey noted that inflation didn’t need to reach 2% before cuts would be considered, signalling that it could happen soon.

Tension in the Red Sea is continuing to affect supply chains around the world. The S&P Purchasing Managers’ Index (PMI) show the manufacturing sector continued to contract in January, with the need for shipping firms to reroute vessels away from the Suez Canal contributing to challenges and rising costs.

In contrast, the PMI for the service sector showed three consecutive months of growth with the highest reading in eight months. The pace of new orders also increased, which led to firms hiring more staff.

After a pre-Christmas slump, retailers have benefited from sales bouncing back, according to the ONS. In January, retail sales volumes increased by 3.4% – the fastest growth recorded since April 2021.

However, the high street still faces significant challenges as consumers watch their spending during the cost of living crisis. The latest high-street casualty is well-known cosmetic brand The Body Shop, which filed for administration in February.

Europe

The eurozone is moving closer to reaching its inflation target of 2%. In the 12 months to January 2024, inflation was 2.8%. Steep falls of 6.8% in energy prices played a role in bringing down the headline figure.

The eurozone avoided falling into a recession, but the GDP data was far from positive. In the final quarter of 2023, eurozone GDP remained the same as the previous quarter as economies stagnated.

In response, the European Commission (EC) has cut its growth forecasts. The EC now expects the eurozone to grow by just 0.8% in 2023, while the wider EU is anticipated to grow by 0.9%.

There were warnings that Europe’s largest economy, Germany, could slip into a recession.

ING data suggest that German industrial production fell by 1.6% month-on-month in December, and was 3% lower than a year ago. What’s more, Destatis said German exports fell by 4.6% in December when compared to a month earlier as demand continued to affect business operations.

US

In the US, inflation fell to 3.1% in the 12 months to January and moved closer to the Federal Reserve’s 2% target.

Similar to other economies, the base interest rate was maintained in the US. However, speculation that rates would fall later this year led to the S&P 500 index reaching a new high on 7 February. This was driven by energy, consumer discretionary, and material stocks.

With a presidential election due to take place in the US in November, current president Joe Biden took the opportunity to state that the latest job figures show America’s economy is “the strongest in the world”.

Economists predicted that the US would add 180,000 new jobs in January. This forecast was far surpassed when figures showed 353,000 new jobs were created. In addition, average hourly earnings increased by 4.5% when compared to a year earlier and reached $35.55 (£28.10).

Both of these figures indicate that businesses are feeling confident about their prospects.

Asia

Over the last few decades, China has consistently been one of the fastest-growing major economies in the world. However, the International Monetary Fund (IMF) has warned that an economic slowdown is likely.

The IMF predicts China’s GDP will grow by 4.6% in 2024 although this growth will fall to 3.5% by 2028 due to weak productivity and an ageing population. While the figures may seem high compared to other countries, it follows growth of 5.2% in 2023 and is significantly below the medium-term average.

China’s markets have been experiencing volatility. As stock exchanges in Shanghai and Shenzhen fell to their lowest level since 2019 early in February, the government decided to remove the boss of the stock market regulator in a bid to calm the turbulence.

Official statistics from Japan show the country fell into a recession at the end of 2023. In the final quarter of the year, GDP fell by 0.1%, while the figure from the third quarter of 2023 was revised downwards to a fall of 0.8%.

The contraction means Japan is no longer the world’s third-biggest economy as it slipped into the fourth spot. Japan’s GDP fell to $4.2 trillion (£3.31 trillion) and is now lower than Germany’s GDP of $4.5 trillion (£3.55 trillion).

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.