Logic Monday Espresso Podcast

Monday Espresso Podcast - 2nd January 2024

[00:00:00] Nathan Sweeney: Good morning, everybody. It is the 2nd of January. Hard to believe it is 2024 already.

[00:00:07] Nathan Sweeney: Today I'm joined by Scott Truter, Scott's the assistant portfolio manager on our funds, and he is also our lead analyst on US equity. So good morning, Scott, and welcome to the show.

[00:00:19] Scott Truter: Morning.

[00:00:20] Nathan Sweeney: We'll get some insight from Scott in a second, but firstly, let's recap on what was driving markets last year.

[00:00:27] Nathan Sweeney: So clearly the beginning of 2023, a lot of people were quite bearish or concerned about the outlook for markets. This was really due to the expectation that the impact of higher interest rates would create a challenging backdrop for both markets and the economy and ultimately this pessimism that a lot of commentators had, it didn't really come to fruition because things turned out to be a lot better than expected and there were a lot of things driving that and behind that.

[00:00:58] Nathan Sweeney: So I'll jump over to Scott now to get a quick recap on some of those kind of headline grabbing news items, which were in the media last year.

[00:01:07] Scott Truter: The keyword I think for 2023 was resilience, and as you just mentioned, thinking back to the start of the year, we had issues with regional banks failing in the US and also Credit Suisse in Europe. And there was that expectation that we'd see this feed through and hurt and as you just mentioned about the consumers and that impact the interest rate rise have had.

[00:01:29] Scott Truter: What we've seen is the consumer has been more resilient, the economy's been more resilient and that recession that everyone's been forecasting and talking about didn't materialize.

[00:01:39] Scott Truter: And we saw it most in those big tech companies because they really blew their earnings out of the water and that drove stock market movements throughout the year and particularly in the US.

[00:01:49] Nathan Sweeney: So the market always has a way of throwing a lot more at investors throughout any period and we definitely saw that again with Geopolitical tensions.

[00:01:57] Nathan Sweeney: So we had, you know, geopolitical tensions on the rise last year, so not only do we have the ongoing war between Russia and Ukraine, we also then had the eruption of conflict between Palestine and Israel and again, just adding that uncertainty.

[00:02:10] Nathan Sweeney: So people concerned about the ramifications of wider conflict in the Middle East. What would that mean for oil prices? What would that mean for supply chains? Would that impact inflation?

[00:02:21] Nathan Sweeney: And then on top of that, we also have simmering tensions between China and Taiwan, and we do expect that to come into the spotlight further in 2024.

[00:02:31] Nathan Sweeney: And the reason behind that is because there is an election in Taiwan in January of this year and the big question will be, will we see a pro Taiwanese party or a pro China party getting into power there?

[00:02:44] Nathan Sweeney: So we do expect to see an escalation in tensions between China and Taiwan early this year.

[00:02:50] Nathan Sweeney: There was some good news last year, so we did see some kind of meaningful progress on inflation, so Scott, what was happening on that front?

[00:02:57] Scott Truter: Yeah, we saw inflation falling substantially as supply chains normalized because the increased supply of goods and also lower energy prices as well.

[00:03:07] Scott Truter: So if you just use the UK as an example, inflation fell from 10.1% to 3.9% and there was a lot of expectation that inflation would be stickier than expected, but that didn't really materialize. So that was the sort of positive or uplift that we saw throughout 2023.

[00:03:26] Nathan Sweeney: That was really helped by the oil price as well, because, you know, if we look at the oil price for 2023, it was actually down 10% throughout the course of the year.

[00:03:34] Nathan Sweeney: And so one of the big concerns we've had is, you know, all of these higher energy prices feeding through into inflation, and you know, despite all of those geopolitical concerns as well, the oil price was lower.

[00:03:46] Nathan Sweeney: And the reason behind that is because a lot of people were expecting that we get slower growth in 2024, and therefore, if you have slower growth, that leads to less demand for things like oil.

[00:03:57] Nathan Sweeney: And that's why you've seen kind of lower oil price, and then you're starting to see some production increases as well coming through from countries which don't sit within that OPEC key oil producing economies, and so we're seeing some supply coming in from other countries, which is helping to reduce the price.

[00:04:15] Nathan Sweeney: But to me, one of the most interesting things is how did this all impact how central banks were thinking?

[00:04:21] Scott Truter: Yeah, so central banks and the view on inflation paved the way for them to stop raising interest rates. If we think of the US, UK and Europe, Interest rates have remained the same for the second half of 2023.

[00:04:34] Scott Truter: That in itself was that first turning point, because it was giving that signal from central banks that they believed they didn't need to raise rates further, and they could see a bit of light at the end of the tunnel.

[00:04:45] Scott Truter: And then in the last month or so, we've also had a bit more signal, particularly in the US, where they may be open to cutting interest rates this year in 2024.

[00:04:54] Scott Truter: And the market certainly expects that to be the case, and there's a number of interest rate cuts priced into markets that we're already seeing.

[00:05:01] Scott Truter: And that change in sentiment has helped stock markets rally in 2023. And we saw some strong performance there.

[00:05:09] Nathan Sweeney: Yeah, so we saw strong performance in markets, but we also saw some strong performance in the products which we managed for clients, which was excellent as well.

[00:05:17] Nathan Sweeney: Quickly, let's take a look ahead for what to expect in 2024. So for us, you know, our central case is that inflation, we can see it's really falling now, and this is going to lead to interest rate cuts.

[00:05:28] Nathan Sweeney: We do expect to see a slowdown at an economic level, but we don't expect to see a meaningful slowdown, we expect it to be modest.

[00:05:35] Nathan Sweeney: Really what that does is it paves the way for continued performance in areas like equities and bonds. And we do think that a lot of investors looked at cash last year and they'll probably be slightly disappointed because we did get that really strong performance coming through from both equity and bond markets at the end of the year.

[00:05:52] Nathan Sweeney: Some of those investors will feel like they're missing out and they will continue to miss out if interest rates come down because the level of interest you get from those cash accounts will be falling and the performance that you get from that bond space is likely to pick up which creates that bigger divergence in performance.

[00:06:08] Nathan Sweeney: So we do expect to see investors coming back into. equity markets.

[00:06:12] Nathan Sweeney: And then lastly, we expect to see some broader participation, so we talked about the fact that it was mega cap tech stocks, which were really high bumper performance last year, but we expect to see a broadening out in participation due to falling interest rates and so we see a lot of other companies playing catch up.

[00:06:31] Nathan Sweeney: So thank you for listening this morning, thank you, Scott, for your insight, and just like to. Finally, wish everybody a happy and prosperous new year.

[00:06:39] Nathan Sweeney: And did you know that only 6% of people actually keep their new year's resolutions for the full 12 months, so hopefully we'll all be in that 6%.