Lothar Mentel – 2024 Financial Outlook

We welcome back Lothar Mentel to answer our questions and provide us with his professional opinion on what transpired in 2023 and what from a financial market’s perspective does 2024 have in store.

Q. How would you summarise the challenges of 2023?

A. Lothar: “We entered 2023 with the cost of living crisis, energy prices going through the roof, inflation taking money out of our pockets and there was a very broad consensus around the world that the global economy was going to go into recession. In March some US banks wobbled and everybody was reminded of the financial crisis 15 years ago.

The global economy went more sideways than upwards to be fair except for the US that had some positive growth, but from a UK perspective we didn’t really have any growth.

Having said that we didn’t have a recession either and as a consequence equity investor actually had quite a decent year with higher single digit returns, which nobody had expected at the beginning of the year. This proved that the global economy with all its sub regions is far more resilient to higher interest rates than anybody had thought.

There remained the big threat however of central banks continuing to raise interest rates to combat inflation, which would eventually put the economy under pressure with a risk that companies could start to default on their debts and retail mortgagees would increasingly fall into arrears. Thankfully inflation came down allowing the central banks to pause on any further rate rises towards the end of the year which in turn helped drive up equity prices.

In the end, 2023 provided a very nice positive surprise.’’

Q. So do you think recession fears have gone away?

A. Lothar: “To a large extent, but they’ve not totally gone because even though we can see that inflation is going to come down further and probably touch that magical 2% sometime in April, May there is still a chance that it rebounds somewhat and central banks have already said they are going to be really, really careful.

The central banks are not going to lower interest rates in the short term because they don’t see a particular need for it whilst the economy is holding up reasonably well. That means rates will stay higher for longer and that could still cause some trouble. For those companies that are having to refinance and were hoping not to refinance at 6.5%, but rather at 4.5% that’s just not going to happen for a while and so we’re not totally out of the woods, but we can see the light.’’

Q. Do you think economic confidence is beginning to return?

A. Lothar: “Those last 2 months of 2023 when central banks pivoted by saying they were not going to raise interest rates anymore really shifted overall sentiment. That trickled down into businesses and we saw it in the improving purchasing managers indices that provides us with a measure of the prevailing direction of economic trends in manufacturing.

Manufacturing is still a bit weak, probably on weak demand from China, but that’s now improving and that’s quite positive for the global economy.

Positive sentiment is extremely important and that is what’s driving things upwards at the moment. It makes analysts believe that corporate earnings will be positive for 2024 and as we know that helps underpin stock market valuations.’’

Q. How much of the positive sentiment and growth of last year is down to the technology companies?

A. Lothar: “A lot, – it wasn’t the whole of the US stock market that went up last year. If you take the top 10 stocks out of the S&P 500, which are almost all tech stocks, then the performance of the US market was no different to the UK or European markets.

Whilst it does remind us, to a certain extent, of what happened during the dot-com bubble 25 years ago there are differences. These companies are making real profits and there is real growth already. They are very large and it’s not uncommon that there are periods when a lot of the growth comes from a particular part of the economy.

If we go back more than 100 years ago in the US, it was the big railway companies that drove the economy upwards and they were the big growth area.’’

Interestingly 2022 was a real negative year for tech stocks whilst in comparison the FTSE 100 was the only market that made gains. This underlines the importance of having a well diversified investment portfolio.’’

Q. With interest rates at their highest for some 10 years, should we be embracing the old saying ‘Cash is King’?

A. Lothar: “It’s not bad that we’re now able to get a return on our rainy day cash again, but there is one certainty and that was reiterated last year, you will not beat inflation with cash.

Do not forget that interest rates weren’t at 5.25% for the whole year. Whilst experience teaches us that nothing is certain, there is a certainty that cash cannot beat inflation over the longer term and it didn’t even in the shorter term last year. The risk therefore in holding cash is that it’s buying power is eroded by inflation.

So, if you are investing for the longer term e.g. 5 years plus stick with the investment mandate.’’

Q. Have we started 2024 on a better economic footing and will this see improvements in stock market valuations?

A. Lothar: “The economic outlooks does look a lot better, but as we know, financial markets look forward and therefore quite a bit of the good news that we’re now hearing on the economic data might have already been priced in. So our hope and expectation at the moment is that interest rate yields will not upset the markets again.

To a certain extent that provides some stabilization and then if corporate earnings grow, adding profit to the bottom line, equity values can then go up. But with bond (a fixed income investment) yields (the return an investor expects to receive each year over a bond’s term to maturity) having been quite volatile at the tail end of last year and having started 2024 on a bit of a volatile footing again, I don’t think we can expect it to be a straight path.

Because market participants are currently a bit nervous and wondering how the high yields will play out in the corporate sector, the first half of the year will continue to be a bit bumpy. If we get to a positive single mid-digit return I’ll be quite happy and I think that will really build the case for further gains in years to come.’’

Q. Will the various global elections this year have an impact on portfolios?

A. Lothar: “History shows us that surprisingly politics has little impact on capital market returns.

The one thing that we would need to be wary about is that at the moment the US is again the growth engine of the world as neither China or Europe are doing that job, so if Trump gets elected, he has already alluded to introducing tariffs on imported goods. This could indeed scupper things a little bit and have a negative impact for the global economy over the medium term, because if we’re not doing trade with each other anymore that just drives down the effectiveness of our combined economies.’’

Financial Investment Advice Cheltenham

As we look ahead to 2024, the echoes of 2023’s economic challenges linger. The spectre of higher inflation threatens to disrupt the delicate balance of pandemic recovery. However, amidst these uncertainties, Cheltenham residents seeking sound financial guidance can turn to Piercefield Oliver. As a trusted local advisory firm, Piercefield Oliver stands ready to offer bespoke solutions. Their holistic approach, backed by a whole-market choice, ensures unbiased financial investment advice in Cheltenham tailored to individual needs. Whether it’s investment planning, tax strategies, or retirement preparation, Cheltenham’s financial advisors at Piercefield Oliver are well-equipped to navigate the complexities of the year ahead. Let us heed their insights and chart a prudent course for our financial well-being in 2024.

Remember, seeking professional advice is crucial, especially during uncertain times.

You can listen to the full interview here.

Our thanks once again to Lothar for his financial market insights.