Inflation didn’t miss by much in the US – 3.2% versus 3.1% predicted. In the Eurozone, inflation climbed to 2.9% in December, from 2.4% in November, but was back down to 2.8% in January. In the UK, inflation rose marginally to 4% in December, up from 3.9% in November, after economists had predicted a slight fall.

Nevertheless, it has been enough to trouble the bond markets. The US 10-year treasury yield is back above 4%, and shorter-dated yields have moved even higher. The UK 10-year gilt yield has moved from around 3.5% at the start of the year to just under 4% today and the 2-year from 4% to 4.5%. This disrupts the view that government bonds are a one-way bet for the year ahead.

See also: It’s time for multi-asset managers to ditch bond proxies

The US Federal Reserve has pushed back on market expectations for a rate cut in March, saying that “the committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably towards 2%”.

Nevertheless, most believe that rate cuts are deferred rather than cancelled. Anthony Willis, investment manager on Columbia Threadneedle’s multi-manager team, says: “Chair Jay Powell spoke positively about the progress made so far but said there was a need to have more confidence on the disinflation path”. The Fed is “not looking for better data, but a continuation of the better data” that has already been seen. Powell said that a March cut is not the most likely case, because the committee is unlikely to have hit that level of confidence by then.

“Futures markets are pricing only a 35% probability of a cut in March – though the Fed will have two more inflation data points to digest by then. Powell’s comments suggest that if inflation remains on track, then even if March is not likely, rate cuts are coming soon,” adds Willis.

See also: Facing the inflation dilemma head on

Jim Leaviss, manager of the M&G Global Macro Bond fund, also believes rate cuts are still likely: “Inflation has started collapsing – both core inflation and headline inflation. The numbers that the Fed looks at – core PCE inflation – are back down towards 2%. It is going in the right direction.”

Inflationary risks

That said, Leaviss also believes there may be longer term risks to the current benign inflation picture, particularly in the US. He points out that there is usually a balancing mechanism for government debt. Governments borrow more when the economy is weak; and when the economy is weak, inflation is falling and interest rates are generally coming down as well.

However, he adds, “this relies on a world in which governments borrow more when economies are weak, not where they borrow more to juice an already strong economy.” The US has seen two quarters of 4-5% growth, and its employment market is very strong. Nevertheless, he believes that widespread disgruntlement with rising prices is likely to usher Donald Trump into the White House, and that tax cuts are likely to be his priority once he gets there.

Tax cuts have historically been a significant contributor to rising debt to GDP. Leaviss says Trump’s election is likely to be inflationary and the US government will have to borrow more at higher bond yields.

Inflation protection?

Charlotte Yonge, assistant manager on the Personal Assets Trust, is also alert to the risks inherent in US borrowing: “The US government is spending money like it’s going out of fashion. This has provided a great fillip to growth. The fiscal deficit – the amount by which government expenditure exceeds receipts – was $1.3trn for the first three quarters of 2023, or nearly 5% of GDP.  We have never seen this level of government spending outside of a recession or its immediate aftermath.  On a gross basis, the fiscal outlay relative to the size of the economy is approaching a level consistent with the peak in government support provided during the Second World War.”

She believes this phenomenon is consistent with a multi-decade long trend and is not unique to America.  It is both a symptom and a cause of lower pain thresholds on the part of electorates around the world. She adds: “We expect that the next recession will see a fiscal response on top of a monetary one, such that the benefits extend beyond owners of capital to labour as well. This, as we saw with Covid, is likely to mean inflation for goods and services on top of asset price inflation.  Governments’ increased readiness to respond to economic hardship will help define the shape of the next recession and subsequent rates of inflation.”

The consequence of this shift is likely to be more volatile and structurally higher inflation than we have experienced over the course of the last 10-15 years. In response, the trust now has around 40% in index-linked bonds, mostly in the US. This is well above the trust’s long-term average of around 30%.

For Leaviss, the bond market is still good value, and they are keeping a watching brief on the election outcome. He adds: “The Fed says that long-term interest rates, based on demographics, technology, globalisation, and those long-term factors that determine how much we save and invest, will be around 2.5%. The treasury market thinks it’s more like 5%. We’ve never seen this degree of dislocation.” As a result, he is focusing on longer duration government bonds, believing this is where the opportunity lies.

Bonds markets have re-set since the start of the year and now reflect less optimism on rate cuts and falling inflation. Inflation is unlikely to bounce back significantly, but there are always unpredictable elements, such as the oil price, and markets are jumpy. It can still be the year of the bond, but investors will need to be selective.

This article was written for our sister title Portfolio Adviser

2024’s calendar of elections kicked off this weekend with the Taiwanese election, which immediately careered into controversy. However, markets appear to be untroubled by any potential escalation in geopolitical tensions it may bring about. Is this a sign of things to come, where markets largely ignore the outcome in the busiest year for elections in history?

The Taiwanese election demonstrated some of the potential pitfalls for the year ahead, as China condemned global governments for welcoming the pro-independence victor from the Democratic Progressive party. A US State Department spokesperson congratulated the Taiwanese for “demonstrating the strength of their robust democratic system and electoral process”. This drew ire from China’s foreign ministry, which said the comments “seriously violated US promises that it would only maintain cultural, economic and other non-official ties with Taiwan”.

Markets have taken no notice of this exchange, possibly because relations between the US and China were already weak and it does not alter their position significantly. This reinforces the prevailing narrative that elections don’t matter very much for developed markets. Certainly, analysis of stock markets through history seems to support this view.

Dina Ting, head of global index portfolio management at Franklin Templeton ETF, says: “Data for US markets show that over the longer term, presidential election outcomes tend to have very little impact on market moves.”

See also: Momentum: Seven risks for investors to watch for in 2024

Analysis from Brian Levitt, global market strategist at Invesco, shows that in the US, neither party can claim superior economic or market performance. The stock market posted positive returns across most administrations, with the rare exceptions of presidencies that ended in deep recessions. He adds that the S&P 500 index has delivered an average annual return of approximately 10% since it started in 1957 through both Democratic and Republican administrations.

A similar picture emerges in analysis of UK markets. Research by AJ Bell of all 16 of the general elections since the inception of the FTSE All-Share in 1962 shows that the UK stock market is indifferent to a change of government – and may even welcome it: “On average, the FTSE All Share has recorded a double-digit percentage gain in the first year after an election which sees one prime minister ejected from office and another ushered into it. There are also greater average gains when a government changes relative to when it remains the same.”

However, it can create volatility, and this appears more likely this year than in previous election cycles.

Ting adds: “Typically, the widest range of possible market outcomes relative to other periods of the election cycle occur during the uncertain 12 months preceding election day. With current volatility in the low teens, we see the risk of politically induced spikes throughout the year. Historically, the 12 months leading up to elections post average volatility of 17% in years when the same party continues its hold on the White House; in years when the presidency flips, that figure rises to over 20%. Given the fraught political backdrop, we may see a more nervous market than what is currently priced.”

Anthony Willis, investment manager at Columbia Threadneedle, says there is significant potential for politics to influence markets in the year head. He sees an ‘ugly battle for democracy in the US’ adding: “We are likely to see legal processes involved and the Supreme Court will probably have a role. With the election so tight, it may make a difference. This will be a backdrop all year.”

He also believes it may affect economic outcomes for the year ahead: “Incumbent leaders are going to do all they can to stay in power, so expect governments to do what they can on the fiscal side.”

Oxford Economics is expecting major changes to tax policy in 2025 whatever happens in the election: “Republicans will rush to prevent Trump-era tax cuts from expiring at the end of the year, while Democrats will also feel an urgency to prevent a similarly timed expiration of expanded subsidies for health insurance. In a divided government, a grand bargain that permanently extends key tax priorities of both parties would add at least $1trn to deficits through 2033, and even more beyond.”

Under either party, trade policy is likely to remain protectionist, though in different ways. The Democrats may continue to favour industrial subsidies and regulation, while a Republican administration would likely turn to imposing more tariffs on the rest of the world.

In emerging markets, it is possible that a change of government may create specific investment opportunities. In Mexico, for example, there is a view that the incumbent government has not been friendly to companies looking to ‘near-shore’, meaning the country is missing out on an historic opportunity to draw in investment. The elections in June 2024 could bring in a more investment-friendly government and exploit an easy win for the Mexican economy.

Equally, elections around the world may provide an important barometer of the support for democracy. In major countries such as India and the US, democracy is wobbling. EU parliamentary elections may also see the strength of support for far right parties across Europe. It may be destabilising for markets if democracy appears to be under significant threat.

However, in all these cases, there are two problems for investors. The first is that even if they can predict the outcome for an election, and then the economic changes that are likely to stem from it, it is difficult to pick the resulting market outcome. The second is that there is not much they can do about volatility, and the right course of action is usually to stay invested.

Levitt concludes that monetary policy and innovation are likely to be far greater drivers of market returns: “Investors should be less interested in politics and more interested in private sector business leaders who are going to harness artificial intelligence and robotics. They may be able to help cure debilitating diseases, evolve the nation’s energy sources, and develop new technologies and industries that aren’t even on the radar.”

Markets may not be as sanguine over all the election outcomes as they have been over Taiwan and there could be plenty of noise around elections in the year ahead. However, trying to predict investment returns based on an election outcome is tough and investors are likely to be better off riding out market volatility and staying invested.

This article was written for our sister title Portfolio Adviser

The 39 reaching the status make up 2.8% of funds, a decrease from the 3.9% of funds reaching a top-quartile performance in Q3 of 2023. Historically, the percentage of funds with top-quartile status has sat between 2-4%. While the number of specific funds with top-quartile performances decreased in the final quarter of the year, only two of the Investment Association’s 56 sectors failed to achieve positive total returns, on average.

Kelly Prior, investment manager in the multi-manager team at Columbia Threadneedle Investments, said: “Consistency faltered in the fourth quarter as the mood music again took on a different tempo. Having failed to respond to expectations of a change in rate outlook for much of the year, the final Federal Reserve meeting of 2023 offered a more dovish tone.

The Japan sector had the largest number of funds which reached top quartile, with 12.3% of the funds sitting within that group. Japan also had 32.3% of funds that performed above the median over three years.

“Japan proved to be something of an outlier in 2023,” Prior said. “A market often forgotten due to its ever-decreasing importance in global indices, it continues to prove a rich hunting ground for active management.”

See also: Square Mile: Nine funds poised for success in 2024

The two sectors which recorded negative performance in the fourth quarter of 2023 were China/Greater China, which fell 8.4%, and UK Direct Property, which lost 0.2%. The greatest returns came from the Latin America sector, up by 12%, and the Technology & Telecom sector, returning an average of 11.8%. Property Other also saw strong gains, with an increase of 10.3%.

“As we peer into our tea leaves for inspiration for the year to come it strikes us that we may be nearing a time to be brave. China, the standout underperformer this quarter, looks ripe for a change of sentiment while India is priced for perfection, and if private equity needs to start deploying capital, then smaller companies are viewed as a steal, particularly in the UK,” Prior said.

“High yield has been fabulous but when floating rates start to bite there will be winners and losers, and emerging market central bankers have been ahead of the curve in hiking and then cutting interest rates while their developed market cousins sat on the side lines. Indeed, a change in the fortunes of the ‘Magnificent Seven’ stocks could result in a change in consistency outcomes for US equity funds too.”

This article was written for our sister title Portfolio Adviser

There’s a difference between buying cheaper value shares with higher dividends as opposed to investing in more expensive growth shares that should repay you with future profits due to the company perceived high growth. The styles of investing look at how a company is being valued by the stock market and how that might change.

We invest in both styles but currently, see a clear advantage to leaning towards the value style of investing. However, that doesn’t mean excluding technology and AI-linked shares from portfolios just because they’re traditionally associated with growth, especially after they’ve been such rewarding investments over the past six months.

It’s more recognising that, with inflation still sticky and interest rates higher for longer, and value being historically cheap a bias towards a Value-style investing approach is likely to be more rewarding in the current environment.

Performance linked to the economic background

The growth style of investing outperformed overall from 2007 to 2020, linked to the low cost of capital and low interest rates, success of technology-driven companies and the disruptive shift of many businesses online over that period. However, last year when their share prices slumped, value outperformed.

Global rising interest rates and the potential for a global recession impacted all companies but many value names already reflected a global slowdown. It is crucial to understand the economic background to that period of outperformance of the growth investment-style over value.

This was a period when profits growth was hard to come by and when interest rates and inflation were low, in the aftermath of the global financial crisis. Previously value-style investing had outperformed over the period 1970 to 2006, with a few breaks such as the dot.com bubble.

This period of value outperformance was during a period with higher average growth, inflation, and interest rates. It is essential to look at all these factors when deciding whether to shift an investment style towards growth or value.

Factors favouring value

New emerging technology is disrupting existing business models and opening new opportunities for companies, as such the market focused on a long-term theme, currently AI, which favours growth.

Aside from this, there are many market factors which point to value looking more attractive this year. For example, interest rates historically determine the value of future versus current profits. Higher interest rates favour value and lower interest rates are better for growth.

As short-term interest rates remain high and central banks seem keen to continue to increase, this favours value, and bond yields indicate interest rates will remain above the level of the previous decade.

In addition, higher inflation drives interest rates and gives opportunities for many companies to raise profits. Inflation has remained stubbornly high and the market forecasts that it will remain above, rather than below, central bank targets, which favours value.

Higher economic growth means companies growing profits are more common and therefore less highly prized. More common GDP growth favours value, but economic recessions are not necessary a bad environment for value investors. The bond market is forecasting a US recession this year, with the yield on US Treasury bonds less than short-term interest rates.

The covid lockdown and recession saw value underperform growth, however previous, non-covid lockdown recessions were more neutral for style performance and mainly saw value outperform.

Taking all this into consideration, all indicators point to value-style investing being the most fruitful against the current economic background this year. However, whilst a lean towards a value style approach in a portfolio might be rewarding, a diversified portfolio is crucial so continuing to hold good quality growth managers is also key.

An investment style bias can impact a fund’s performance relative to its benchmark in a positive or negative way. No investment style performs well in all market conditions. When one style is in favour another may be out of favour. Such conditions may persist for short or long periods.

This article was written for International Adviser by Scott Spencer, investment manager in the multi-manager team at Columbia Threadneedle Investments.

The provider of international life assurance-based wealth solutions has hired Marie Salvo as head of sales for France.

She was most recently country manager of Luxembourg for One Life.

T Rowe Price Group

The asset manager announced that Robert Higginbotham, head of global distribution and global product, plans to retire at the end of 2023 after 11 years with the firm and 33 years in the industry.

Higginbotham, who also serves as chief executive and chair of T Rowe Price International, will be succeeded by management committee member Dee Sawyer.

Effective 1 January 2024, Sawyer will be named the head of global distribution, leading the teams responsible for sales, marketing, and client service globally across all distribution channels and will assume Higginbotham’s responsibilities on the firm’s subcommittees.

Scott Keller, head of Americas, Apac, and Emea distribution, will serve as the chief executive and chair of T Rowe Price International, and will report to Sawyer, while continuing in his current role.

Rothschild & Co

Matthew James has been named as a managing director and head of marketing and business development in the firm’s UK wealth management business.

Most recently, James was director of marketing and business development at Charles Russell Speechlys.

M&G Investments

Richard Godfrey is joining the business as chief operating officer for asset management, subject to regulatory approval, on 31 July 2023.

He joins M&G from HSBC, where his most recent role has been global co-head of the securities services and securities financing businesses.

Columbia Threadneedle Investments

Nick Ring, the chief executive of Emea at the asset manager, will retire at the end of 2023 following a 34-year career in the investment industry.

As a result, David Logan, global chief operating officer at Columbia Threadneedle, will be appointed to the new role of head of Emea and global business operations, subject to regulatory approval.

Collyer Bristow

The law firm has promoted Charles Avens and Charlie Fowler to partner, both in its private wealth department.

Avens joined the firm last year as head of immigration and will continue in this capacity as a partner.

Fowler has been made up to partner in the tax and estate planning and immigration teams.

SimplyBiz

The adviser support services firm has appointed Kelly Phillips to the position of business development quality manager.

The newly created role will see Phillips work closely with SimplyBiz member firms to help create protection opportunities and support advisers in meeting the expectations of Consumer Duty, with a clear focus on business quality to drive better outcomes for the end consumer.

Phillips was previously at AIG and Legal & General.

Capital Financial Markets

Peter Land has joined the firm as an investment manager.

He joins from Walker Crips, where he spent the past seven years. He has 40 years experience in private client and family office management and advice, having previously been a divisional director at Brewin Dolphin.