MATURITY is the investor’s watchword for 2024, says Richard Hunter

Every December, Interactive Investor's Richard Hunter looks at the year ahead and outlines his word for the year – and why the items whose first letters form the acronym matter.

This year the key word is MATURITY. Richard explains why below.

Last year we wondered if 2023 would be a time for REFLECTION, considering the factors of Recession/Earnings/Federal Reserve/Provisions for Credit Losses/ESG/Consumer/Total Return/Inflation and Interest Rates/Online and Nasdaq.

This indeed proved to be the case in a year dominated by inflation and interest rate expectations, a move towards strong growth stocks such as mega-cap tech stocks in the US and recessions that did not materialize.

And the year is heading towards a more positive end as interest rate forecasts have anchored and the possibility of a soft landing in the US appears to be increasing.

At the time of writing, the Dow Jones Industrial Average in the US is up 9.3 percent in the past year, the S&P 500 is up 20 percent and the Nasdaq is up 37 percent.

In Britain, meanwhile, the FTSE 100 is up just 0.8 percent, while the more domestically focused FTSE 250 is down 2 percent this year.

This year, in our annual acronym – in 2024 we ask ourselves: will a market recovery reach MATURITY or can we go further?

The factors that are likely to influence investors are as follows:

• The beautiful seven of technology

M&A

M&A activity is in the doldrums due to market volatility, but there are some signs that this could change next year.

In particular, a stabilization of interest rates and high pent-up demand could cause sovereign wealth funds, private equity or larger companies to reach for their checkbooks.

Similar to the push the pharmaceutical industry gave to mergers and acquisitions several years ago by acquiring small specialist companies rather than pursuing their own massive research and development units, next year could be a year for AI.

Companies that want a fast track to AI exposure and don't have their own in-house development skills may well decide to pick up existing AI products and experts.

AI

This is the investment buzzword of the year and its potential applications across most walks of life are likely to keep the frenzy alive.

The speed at which it is developing, and the potential for big profits that will flow from it, could mark the beginning of a new technological revolution.

It will also have to overcome the obstacles that will come its way, such as job losses, governments, regulation and restrictions.

Regardless, it will remain a dominant theme for investors.

Turbulence

Perhaps one thing that can be guaranteed in any given year is market turbulence.

On the face of it, next year promises to be no different, with geopolitical concerns such as between Russia/Ukraine and Israel, as well as ongoing and simmering tensions between the US and China.

In addition, corporate profit increases or decreases, unexpected economic shocks or central bank actions, and elections in the US and Britain will all add to the mix.

British market

UK shares have been on the wrong track with international investors for some time, initially prompted by the Brexit referendum and then snubbed as the chase for growth intensified.

The record highs set for the main index in February were completely wiped out as investors looked for growth elsewhere.

While the constituents of the FTSE 100 have a large exposure to foreign profits, this has been of little use as many of the companies are not growing, even though they are stable, consistent and profitable.

Richard Hunter, head of markets at Interactive Investor

Based on valuations, Britain trades about half of what the US (and most of the developed world) gets.

Many agree that the UK market has been overdue for a revaluation. It remains completely unclear when that could happen.

Recession

The holy grail for investors this year has been whether the Federal Reserve can engineer a soft landing in the US, where economic growth is sustained despite the offsetting effect of an aggressive rate hike policy.

The current optimism that this will be reflected next year has been a pillar of recent market strength and will certainly be an important factor in determining sentiment.

In Britain the situation is more problematic, with a recent decline in consumer durables spending due to cost-of-living pressures a worrying trend. Meanwhile, inflation (and even interest rates) remain high, which, combined with anemic economic growth, could yet push Britain into recession territory.

Inflation

At various times this year, inflation and the need to raise interest rates to control it have put some drag on both market performance and sentiment.

The latest data suggests that some battles have been won, but not the war. There is also the possibility that the 'last distance' between, say, 3 percent inflation and a 2 percent target could be the most difficult.

A cooling labor market and falling costs of living would help, as would stabilizing energy prices. Meanwhile, the Fed's current mantra, “higher for longer,” is an example of central banks' determination to get the headline figure back to target rates once and for all.

The 'beautiful seven' of technology

The so-called 'Magnificent Seven' stocks in the US – Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft and Tesla – have had a positive but disproportionate impact on market performance this year.

It is estimated that they represent 29 percent of the S&P 500 in terms of market capitalization, a dominant position. Furthermore, Goldman Sachs has shown that this handful of stocks are up 71 percent this year, while the remaining 493 companies have gained just 6 percent – ​​an astonishing revelation.

But can it continue?

As mentioned above, the potential applications (and profitability) of AI have certainly lit a fire under tech stocks this year, and the Magnificent Seven in particular.

But AI isn't the only game in town.

We're seeing rapid and massive innovations in many other areas, ranging from augmented reality (AR) to 6G technology, which should revolutionize network communications – and much in between.

Personalized healthcare and treatment based on DNA data are no longer a distant dream, while developments in nanotechnology are finding new applications in a wide range of industries.

Innovation will continue to develop rapidly and many of the larger technology companies in particular appear to be able to benefit from this. As we said this time last year, 'it may also be fair to say that investors are ignoring the tech giants at their peril, as there is plenty of room for further growth'.

Yield

Bond yields, which are an important guide to interest rates, have been elevated for most of this year in light of increased interest rate expectations.

The situation should hopefully have stabilized by now, as evidenced by a recent drop in interest rates.

In any case, given the inverse relationship between bond prices and yields, both capital gains and an attractive interest rate level are possible.

They would also likely be targeted for interest rate buying if economic shocks were to occur, with investors comforted by the safety of government bonds such as US government bonds and UK government bonds.

Dividend yields will also remain a theme for income-seeking investors in particular. On average, the FTSE 100 currently yields 3.9 percent, and while dividends can never be guaranteed, the prospects are high that such returns can be maintained given the strength of the underlying components.

Richard Hunter is head of markets at Interactive Investor.