Financial predictions have been next to useless over the last few years. Some of this is because forecasting is inherently difficult anyway – as the old saying (attributed to a number of people) goes, “it is difficult to make predictions, particularly about the future”.
But the last few years have also brought unpredictable upheavals, from Covid-19 to the cost-of-living crisis to the war in Ukraine.
There is a feeling that this will continue – that things are not going to settle down any time soon as one crisis feeds off another. It seems almost pointless making predictions for 2024. But here are some guides for looking at the key things that will affect your money this year.
1. Realise that the markets are not always right
We are being told that “the markets” are expecting the first ECB interest rate cut in March or April and for European Central Bank (ECB) rates to be more than one point lower by the end of this year.
This is powerful information in that it is the average expectation of tens and thousands of investors. But we have seen over and over how “the markets” are often wrong, or at best half-right.
They can, particularly at turning points like the one we are seeing now on interest rates, be like people running from one side of the boat to another based on the latest piece of information.
We have seen in the later months of last year how the sniff of lower interest rates and bets on an economic “soft landing” helped to revive world markets
So there will be a lot of coming and going based on the latest morsel of data on interest rate expectations. They will – almost certainly – come down this year, but when the first cut will come and how far they will fall is up for debate. For what it’s worth, I think the first ECB cut is unlikely in March, possibly in April but most likely in June. But that is really just a best guess.
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2. Watch the bets on a soft landing
We have seen in the later months of last year how the sniff of lower interest rates and bets on an economic “soft landing” helped to revive world markets. Bond markets went on a strong run late in the year, as did equity markets, with the MSCI World Index, a measure of global share, up 20 per cent for 2023.
In the US a 45 per cent rise by the Nasdaq was driven by the so-called Magnificent Seven of tech-based companies seen as likely to benefit from the AI revolution – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. Ireland’s ISEQ index rose 24 per cent, driven largely by gains by Ryanair.
So 2023, while volatile, brought much relief for investors, including the tens of thousands in Irish pension funds, which had a horrible year in 2022 as both stocks and bonds dived. A lot of the 2022 damage was undone in 2023.
For 2024, much will depend on how the linked stories of lower interest rates and a “soft landing” play out. The US economy defied gloomy predictions last year and may continue to do so. Europe is flirting with recession and the Chinese economy is facing big challenges.
Add in the geopolitical uncertainties and a bumpy ride in markets seems likely, particularly in the early months of the year as investors try to work out how growth and interest rates will play out. There is, in particular, scope for disappointment in market bets that Fed and ECB rates will start to drop early in the year and will decline significantly over the year. On cue this week, markets have opened very nervously with both shares and bonds recording loses, particularly in the US, driven in part by doubts over the timing of US rate cuts linked to the latest economic data.
Geopolitical risks lurk in the background, everywhere from the Middle East to debate on the US presidential election. Experience shows that care is needed here, too, in scoping out implications – expectations of a hit to the US dollar and markets after Trump’s first win in 2016 proved – after an initial wobble – to be largely unfounded.
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3. Do the work
The huge upheavals in recent years have led to a lot of volatility. A fairly stable interest rate backdrop that had lasted for many years has been upended. Energy markets have been thrown into turmoil. Inflation has soared. In turn, this has put more pressure on households - and investors – to react and do the work to seek the best options amid a rapidly changing picture.
In the markets, for example, experts point to the concentration of gains among a number of stocks last year and speculate that stock-picking will be vital for 2024 – as opposed to investing in particular markets based on macroeconomic factors.
For most households, their investments are via pension funds, meaning an investment manager makes these choices. But in terms of household finances, there is work to be done, too.
Billions remain in demand deposit accounts earning little interest, money that could earn a return in notice or fixed-term accounts.
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4. Manage your lending
Those who stayed on tracker loans through the successive interest rate rises can look forward to falling costs as the year goes on. Tracker rates are unlikely to ever go back to the 1 per cent plus level they were at for many years.
But it would be a disappointment if most did not dip back under 5 per cent by this Autumn and analysts anticipate a fall of at least one percentage point over the year as a whole.
However, the borrowers who need to make decisions are those who are coming off fixed-rate loans, typically taken out for three to five years on interest rates around 2.7 per cent.
Most will be newer borrowers with large loans. First, whatever options they choose, they need to be ready for a jump in monthly repayments as their fixed term ends – any of the online calculators will work out what this would mean for them.
Then they need to carefully consider their options. For those whose current fixed term ends early in the year – and with the prospect of potential replacement fixed rate mortgage offers improving as the year goes on – it is worth considering staying on a variable rate for now before considering whether to fix again.
Advice from an independent mortgage broker is worth taking, as the market is quite fractured and different rates are on offer depending on the loan-to-value ratio, the Building Energy Rating Certificate issued (BER), and other factors. For some, switching lenders may be worthwhile.
As the mortgage market and the offers to borrowers are likely to change as the year goes on – and ECB rates look to be at a peak – it is important not to be rushed into a new fixed-rate offer just because that it what you did before. Banks will want to hold on to their borrowers – we must assume – and should start to put better offers on the table in current interest rate trends on markets continue.
The markets will swing and headlines will veer from ‘blows’ to borrowers to ‘new hope’ and back
5. Stay cool
Turning points always bring uncertainties. There will be ups and downs in the early months of this year in particular as expectations on interest rate trends ebb and flow with every new piece of data.
The markets will swing and headlines will veer from “blows” to borrowers to “new hope” and back. It is important to try to keep some perspective. Inflation is easing and we can hope that the worst of the cost-of-living crisis is behind us.
That said, in many cases, prices will remain high so the squeeze on households will only slowly loosen. Interest rates are coming down, even if slowly enough.
There is a good chance of an overall lift in average household living standards this year, even if damage remains from the last few years. Market participants feed on the short-term swings. For households, it is the longer-term trends that matter.
