What a rollercoaster year it has been for the financial markets. US stocks are nearing an all-time high despite all the dire predictions, and Apple is worth almost $3 trillion again.
A wild ride in the bond markets, with the yield on ten-year government bonds – that crucial indicator of the cost of government borrowing – starting at 3.7 percent, falling below 3 percent in February and rising to 4.7 percent in August and October – and now back to 3.5 percent. Shares in London are not following New York, despite the FTSE 100 index breaking the 8,000 mark in February, ending the year up 2 percent.
The pound had quite a rally, starting at $1.21, above $1.30 in July, encouraging me to expect it to continue towards $1.40. This then proved me wrong by sliding back to $1.21 before starting the modest recovery now to $1.27.
And Bitcoin, if you go for that kind of thing, rises from $16,700 to $42,600, proving once again that you can make a lot of money investing in something with no intrinsic value. Oh dear.
So what's to come? Well, I think reason and value are still good guides for long-term investors. Of course you have to pay attention to the fashion of the day, and as an example of this, any sensible investor should have a stake in Apple, Microsoft and the other Magnificent Seven of American big tech.
Reset: For investors abroad, the election will make them notice the better economic performance and think they may have misunderstood Britain
The US accounts for around 60 percent of global equities, so it would be irrational not to be there, even if it offers less value than the UK or the rest of Europe, as measured by price-to-earnings ratios – with In other words: how much you pay for shares in a company against the profit it generates.
The S&P 500's price/earnings ratio is around 25, the Footsie just above 11 – so double the value – and while US economic growth will continue to be faster than Britain's, that could make up the difference not explain. In any case, three-quarters of the revenues of Britain's 100 largest listed companies are generated abroad.
A year ago I expected the gap in this rating to narrow, but it widened. I still expect it to narrow over the next year and UK shares to outperform US ones, so let's see if I'm wrong again.
The reason I expected the pound to recover more strongly against the dollar is that at current levels it is below the purchasing power parity of $1.40 to $1.50 (the Organization for Economic Co-operation and Development puts it at $1, 44).
But for a revaluation of both shares and sterling, there needs to be a broader revaluation for Britain.
That will come, and my instinct is that the switch will happen sometime next year – hence the idea I put forward last week of 2024 as a year of two halves, the second being much more positive than the first.
What could cause that shift in trust? There are two broad answers to that. One is that the UK economy will continue to perform better than expected, a point made by Alex Brummer on the other page. Frankly, the continued negative assessment of Britain by most economists has become embarrassingly wrong.
Interestingly, there were two more positive outlooks last week, one from the Center for Economics and Business Research, which focused on solid long-term growth prospects, and another, as noted opposite, from accounting group PwC.
The other answer is that the general election will cause a reset regardless of who forms the next government. That's not to pass judgment on politics. I would simply like to point out that investors abroad, who own more than half of UK shares, will notice the better economic performance due to the election and think that perhaps they have misunderstood Britain.
There are many things that could go wrong in the coming year, as the terrible conflicts in Ukraine and Gaza show us. There are real concerns that while inflation will fall sharply everywhere, this decline will not be sustained and that inflation will continue to bubble up at 3 or 4 percent, rather than 2 percent. There are concerns about a recession, especially on the continent. But the view from London is slightly brighter.
So let's end by sticking our neck out, with six predictions. For the Footsie at the end of 2024: 8,500. For Pound Sterling: $1.40. For the yield on ten-year government bonds: 3.5 percent (so no change on an annual basis). For Apple's market cap: $2.75 trillion (less than today). For house prices: increase of 5 percent. For bitcoin: $16,700 – so back to where it was at the beginning of this year.
As you might have guessed, I have a fair amount of confidence in the first four, a lot of confidence in the fifth… and zero confidence in number six.
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