Investment outlook for 2024: navigating investments, pensions, savings, house prices and interest rates

Susannah Streeter: Hello and welcome to Switch Your Money On from Hargreaves Lansdown with me – Susannah Streeter – Head of Money and Markets.

Sarah Coles: And me – Sarah Coles – Head of Personal Finance.

Susannah Streeter: So Sarah, we’ve made it to the end of what’s been a pretty tough year all round. This is the episode where we cast aside the tinsel, wade through the wrapping paper, and peer into our snow globes.

Sarah Coles: [Laughs] They’re probably about as reliable as a crystal ball, but we’re not going to be relying on mystical relics – we’re going to forget what Santa delivered and discuss what the 2024 fairy will bring to the world of savings and investments, and pensions.

Susannah Streeter: So, we have a star-studded Switch Your Money On line-up with us today.

On the shares stage will be our Lead Equity Researcher, Sophie Lund-Yates – she’ll take us through some listed companies to keep an eye on next year.

Sarah Coles: In the fund corner, we’ll have Emma Wall – our Head of Investment Analysis and Research – and she’ll provide us with a pick-and-mix of funds to watch.

Susannah Streeter: And, in the pensions porch, we have Helen Morrissey, who’ll be delving into the dilemmas we might face next year when saving for retirement.

Helen Morrissey: ‘Pensions porch?!’ I think I’d prefer something like ‘Waiting in the wings’ [laughs] – but, yes, I will be telling you about what you should be thinking about when it comes to putting money away for your future.

Sarah Coles: So, 2023 has certainly been another year when inflation dominated the scene. The price spiral has been painful for so many people – so what can we expect next year?

Susannah Streeter: Well, move over inflation – there’s a new kid in town – disinflation – a reduction in the price spiral – and it looks set to dominate some economies more than others next year.

In the UK, inflation is likely to continue to trend lower but to stay above the Bank of England’s 2% target. In November, the Office for Budget Responsiblity forecast that inflation – in the last three months of 2023 – would be higher than it had expected in March. It’s also forecasting that inflation is going to be a problem for an entire year longer than it had expected back in March – only falling back to target in 2025.

Policymakers are worried about volatile food inflation, effects of climate change, and risks posed by higher wage demands.

Sarah Coles: Because of this, there are some who expect that the Bank will keep interest rates at current levels at least until the back half of next year, and cuts – when they come – are likely to be very gradual.

However, inflation has come down more swiftly in the US – and in Europe too. The latest big jump down in eurozone inflation was a bigger jump than expected, and markets have been pricing in earlier interest rates as soon as the spring in Europe – and in the US.

Susannah Streeter: There is a risk that inflation could undershoot the 2% target in the eurozone, given the lag between hikes in interest rates and the effect of high borrowing costs on demand in the economy – so the full repercussions have not yet been felt. With the French economy joining Germany in contracting, there is likely to be continued downwards pressure on prices for industrial goods.

Sarah Coles: But it’s no wonder that central bankers still appear reticent to talk about cuts because there are still inflationary risks on the horizon – not least the geopolitical threats.

We may still not have seen the full repercussions of the Israel-Hamas war – it’s already had a major impact creating countless victims and fatalities both in the Middle East and beyond.

Susannah Streeter: It’s also had a global market impact, pushing up the price of both gold and oil amongst other commodities.

In 1973, a war between Israel and its neighbours led to a crisis which saw the price of oil quadruple within a year. We should expect higher oil prices for the foreseeable future – which will feed into what we pay at the pumps and could have an impact on energy bills.

Sarah Coles: So, it seems likely that borrowing costs are set to continue to weigh on economies next year – and growth is likely to stay a bit elusive. It looks like 2024 is set to be a year of subdued growth overall.

Susannah Streeter: Yes – if you look at the UK, for example:

Although we’ve had a more resilient than expected 2023 – amid an interest rate rising cycle pushing rates to the highest levels in 15 years – a weakening labour market, easing wage growth, and a housing market slowdown are all signs though that elevated rates are taking effect.

The growth outlook for 2024 is underwhelming with stagnation settling in – with a lingering risk of recession. This is partly why there continues to be a lack of love for the UK stock market – and it’s been a wallflower of global indices.

Sarah Coles: Yes, for a number of years.

But it’s worth being reminded that the largest 100 companies listed in the UK earn about 80% of their revenue selling their goods and services around the globe – and this means that these companies aren’t just reliant on the health of the UK economy to thrive.

The UK’s reputation as a leading income market is also well established – with lots of businesses boasting impressive records of growing dividends over the long term.

Susannah Streeter: Lets peer over the Atlantic now and look at the prospects for the US.

The US economy has shown remarkable resilience despite the ratcheting up of borrowing costs. But there have been signs of weakness filtering through – and those disinflationary forces taking hold.

Sarah Coles: Yes – pending home sales fell back in October to the lowest level recorded in over two decades – while the Feds preferred inflation snapshot showed a further decline during the month. There will still be hopes the economy will have a soft-landing next year, but – due to the lag effect of interest rate hikes – it’s by no means certain.

So, the rampant enthusiasm we saw in November on Wall Street risks being a very short-lived trend, if wider repercussions are felt across the vast US economy.

Remember, the US Federal Reserve has raised interest rates to their highest level since 2001 in order to combat inflation. It can only be expected that this level of monetary tightening could cause some slowdown in economic growth over the coming years.

Susannah Streeter: The US market has valuations towards the top end of its historic range. Seven large tech companies – known as ‘The Magnificent Seven’ – led returns in 2023. There is an expectation they will continue to benefit from accelerating spending on artificial intelligence, but the trajectory of AI is hard to map – and there’s no guarantees – so we encourage investors to diversify their risks to include other styles, sectors, and countries.

Sarah Coles: Meanwhile, in Europe, there’s still a risk of recessions looming.

Germany and France are already in contraction territory – was expected to hit earnings and potentially lead to increased stress for corporate bond holders – that’s those investors in company debt. However, government bonds offer the potential for upside – if there was a severe downturn – but the pause in central banker activity expected, it means we expect no big downward movements in bond yields next year, but we see scope for lower yields and higher prices further out – with higher volatility along the way.

Susannah Streeter: Talking of volatility, it’s quite a year ahead on the political scene – with outcomes of some big elections far from clear-cut.

In 2024, a huge raft of countries are holding elections – including the US and probably the UK.

If elected, Donald Trump is contemplating increasing trade tariffs and withdrawing from NATO – adding uncertainty for investors.

So, certainly – as far as the US is concerned – investors should expect some ups and downs – not least approaching November 2024, which is a date for every investor’s diary with this impending US presidential election.

Sarah Coles: Yes – despite his legal troubles, in a hypothetical rematch, ex-President and Republican – Donald Trump – narrowly leads current Democrat President, Joe Biden – according to pollsters. At a time where the US global leadership is under the microscope, this election will be one of the most hotly anticipated ever.

By contrast, there’s probably less room for surprises in the UK, as high government borrowing costs limit the room for manoeuvre for policy makers – as we covered pretty extensively just a few podcasts ago.

Susannah Streeter: The outlook for Asian and emerging markets looks a little brighter – particularly in contrast to developed economies. In the coming year, the International Monetary Fund anticipates a substantial 4% GDP grown for emerging economies, which is over double the projections for advanced economies – which includes influential players like the US, Germany, and the UK.

Sarah Coles: Yes, emerging markets companies are also expected to produce superior earnings growth next year – following a tougher 2023.

Factors like expanding populations, the rise of the middle class, and increasing urbanisation rates are among the structural tailwinds creating some promising opportunities.

Susannah Streeter: But there is still caution surrounding China’s prospects due to perceived risks – especially as property sector troubles appear to be worsening and spilling over into the financial sector.

But it’s too early to write off the world’s second largest economy. Much of the pessimism is likely to be already factored into share prices. While there may be more challenges ahead, China’s role in global economic growth won’t simply evaporate – although, of course, one other risk to watch is further geopolitical fracture – the tense Taiwan-China relations – especially given that one of the key elections taking place in 2024 is in Taiwan – so there will be keen eyes trailed on whether a new Taiwanese government takes a more pro-independence stance.

So, that’s a gallop around the world for you – but how should we be viewing the year through a personal finance lens? Sarah, over to you.

Sarah Coles: Despite the fact that – in the UK – the year kicks off with a National Insurance cut, it’s actually going to be another year where the taxman dips even deeper into our pockets, taking 37% of GDP – which is a bigger percentage than at any other time since the Second World War.

The bulk of this extra tax is thanks to the horrors of fiscal drag – because frozen tax thresholds – particularly the Income Tax and National Insurance – mean wage rises push us into paying more tax. It’s going to mean we all need to seriously consider whether there are any steps we can take to protect ourselves from the tax grab – whether that’s through ISAs and pensions or things like tax-planning between couples.

Susannah Streeter: We’ve talked about how inflation is set to stay elevated but, with interest rates expected to stay on hold, we are likely to have passed the peak for cash savings – and rates are expected to descend slowly from here. However, given that the Bank of England isn’t in a hurry to cut, there could still be strong savings deals for a good portion of the year.

Sarah Coles: Yes – and the flipside is true for mortgages. They’re only falling gradually – and, at the start of December, the average two-year fixed rate was only a fraction over 6%.

However, a step-change in mortgage rates is likely to require widespread expectations of Bank of England cuts, so there’s no immediate hope for those coming up to a remortgage. This means weakness is likely to remain in the property market.

The fact that rate rises have been passed through so slowly to homeowners means we may still have a fair amount of bad news yet to make itself felt in the market, so we’re not expecting a particularly golden year for property.

Housing transactions have fallen to their lowest level since the middle of the pandemic – and the Office for Budget Responsibility expects them to fall another 6.9% in 2024. House prices, meanwhile, are expected to fall 4.7% during the year.

Susannah Streeter: So, a combination of rising taxes, sticky inflation, and higher interest rates mean living standards are expected to be 3.5% lower in the coming tax year than they were before the pandemic, as we’re forced to make some horrible spending cuts to stay afloat.

For those in employment, the good news is that wages are likely to keep pace with inflation for the first time in a while. However, overall, the economy is still expected to grow at a really sluggish pace, which could have a knock-on impact on hiring and firing, and the OBR expects unemployment to rise during the year.

Sarah Coles: What will all this mean for anyone thinking about their pensions? Let’s bring in Helen Morrissey – our Head of Retirement Analysis.

Helen Morrissey: Thanks, Sarah – I have indeed been waiting in the wings.

Susannah Streeter: Great to have you with us, Helen – so what about people making pensions plans? What have they got to be a bit festive about in the New Year?

Helen Morrissey: It’s a really interesting one. We’ve had some big announcements on the retirement front this year. The increase in annual allowance, for instance, means that most people can put up to £60,000 per tax year into their pension – so we can expect people to continue to take advantage of that. Additionally, those who’ve already accessed their pensions – and now want to rebuild them – have the extra headroom brought about in the increase in the Money Purchase Annual Allowance from £4,000 to £10,000 per tax year.

Please keep in mind the benefits do depend on circumstances, so you may be able to add more or less than the headline figures mentioned here – but it is all really positive. However, when we come to the next blockbusting change in pensions – the abolition of the lifetime allowance – then things look a bit less clear.

Sarah Coles: What’s still murky about the lifetime allowance?

Helen Morrissey: So, it’s abolition was intended to give people extra flexibility in building bigger pensions, but its removal is easier said than done.

The lifetime allowance is how much pension you build up over your lifetime before being taxed. It was £1,073,100 [laughs] in the 2022/2023 tax year. The Finance Bill has just landed – and it’s a weighty tome of which around 100 pages have been dedicated to the lifetime allowance.

Now, someone starting to take their benefits after April 2024 would retire under this new regime. There are also a whole host of transitional arrangements for people who have taken benefits before April 2024 to work out how much allowance they have left. All of this is going to take some time to work through and get our heads around.

Susannah Streeter: This sounds like quite a challenge – but am I right in thinking there are some other issues as well?

Helen Morrissey: Yes, you are right. So, when the government initially announced the abolition of the lifetime allowance, the Labour government said that, if they got into power, then they would look to reinstate it. With a general election due to happen pretty soon, this brings real uncertainty to people’s retirement planning. We could see people looking to fund their pensions over and above the lifetime allowance while they can, but with one eye on the fact that this opportunity may only be around for a year or two.

Sarah Coles: That sounds really frustrating. What would happen if you did find yourself with a lifetime allowance liability and Labour won the election?

Helen Morrissey: The likelihood would be that, if Labour did choose to bring the lifetime allowance back, then they would likely need to bring in a whole new protection regime to run alongside it for those people who have breached the lifetime allowance.

Given the complexity the government has faced in removing the lifetime allowance in the first place, we could see another massive legislation go through to bring it back in again. This would be very frustrating and means that many people can’t plan ahead with any real certainty, which is never good.

Susannah Streeter: Okay – thanks, Helen – it looks like it’s going to be yet another interesting year for pensions.

Helen Morrissey: It always is, Susannah.

Susannah Streeter: Okay – so time to have a chat with Sophie Lund-Yates – and Sophie’s been looking at a number of shares to watch for the new year – although, of course, I should make it clear that investing in individual shares isn’t right for everyone. It is high-risk because your investment depends on the fate of a single company – so, if that company fails, you risk losing your whole investment.

So, Sophie, you’ve got a few shares on your horizon, haven’t you?

Sophie Lund-Yates: We have indeed – and, while I’d love to go into all five, we don’t have time, but I can go into three.

The team and I have been through our usual rigorous research process and taken into account the threats and opportunities facing markets and businesses next year – which, of course, includes things like interest rate movements. If you’d like to read about the full five picks, then head on over to the HL website.

Anyway – enough of that. The first name I’ll chat about is CVS Group. So, CVS Group – which Is not to be confused with the US pharmacy giant – is a one-stop shop for pet care. It owns over 500 vet practices across the UK, Netherlands, and Republic of Ireland. It also has an online pharmacy, crematoria, and diagnostic laboratories. It has annual revenue and underlying cash profits – or EBIDTA – in the region of £608m and £121m.

Susannah Streeter: Why have you looked at this name in particular? Is it pet pulling power which is the draw?

Sophie Lund-Yates: Vet care is a resilient corner of the economy. People are prepared to spend on the wellbeing of their pets, and will only cut back as a very last resort. [Laughs] As a slightly neurotic dog-mum myself, I can testify to this being the truth!

From an investment perspective, it’s important to consider that the pandemic triggered a huge rise in pet ownership. That paves the way for a higher volume of CVS patients and treatments. The groups also made a foray into the Australian market, which is another avenue for growth.

CVS’ strategy is acquisition-led. It snaps up local clinics and each individual deal is small, which reduces risk.

One thing not to gloss over is the Competition and Markets Authority (CMA), which has launched an investigation into the vet sector. This focuses on a crackdown on cross-selling of services between partner practices and a probe on pricing.

We remain hopeful that changes will need to be relatively minor. Despite this, the group’s market value has been sorely punished – which we view as overdone. But investors should be aware there are no guarantees, and the outcome of the CMA’s findings will be the primary driver of sentiment in the short term.

Sarah Coles: And who’s next?

Sophie Lund-Yates: Can I just say that purely from a consumer rather than analyst perspective, I am thrilled to say that Greggs has made the list this year!

Susannah Streeter: Is it just to do with the success of their vegan sausage rolls?

Sophie Lund-Yates: And no [laughs] – I wasn’t convinced just by their flaky bakes – it’s more their impressive work to improve the product and capture increased demand. Greggs now are a real staple in town centres and retail parks across the country – with an improved reputation to boot.

Sarah Coles: So – apart from tying to make us hungry – why did Greggs make the cut?

Sophie Lund-Yates: The presence at retail parks is important. An effort to concentrate here allows the chain to better capture footfall which is leaning towards these more convenient locations. Increasing outlets at travel destinations – like train stations and motorway services – is also a shrewd move and helps lower dependence on the more volatile retail sector.

The traditional spots on high streets are also benefitting from a return to more normal life. Greggs has revamped and improved the menu – together with refreshed stores and growing delivery options, all mean it’s able to hoover up demand. Its more accessible price points mean the team thinks it’s well placed to serve people who want to treat themselves, even while watching discretionary spending. The food-to-go market is huge too, and Greggs has only just started to crack this nut.

Greggs’ revenue has recovered from a nadir in 2020 and is projected to be up a further 18% to £1.8bn this year. In a few years, the number of shops is set to hit a huge 3,000. So, frankly, there’s a lot to like, but the price-to-earnings ratio does suggest the market has high hopes and a watchful eye.

Susannah Streeter: Thanks, Sophie – and what’s the last thing you have for us? A financial one, perhaps?

Sophie Lund-Yates: I’ve been rabbiting on [laughs] for quite some time, so I’ll keep this one short and sweet. Yes – it’s none other than Lloyds Banking Group.

This might come as a surprise – given economic grumblings and interest rate predictions – but the team and I think there are several tailwinds for banks that we don’t think markets have necessarily fully priced in.

This includes things like improving deposit shifts – banks’ ability to help smooth volatility from interest rate moves from so-called structural hedges – as well as the potential for shareholder returns and strong balance sheets. Please remember that no dividend is ever guaranteed.

That all sounds quite thematic, but there are some Lloyds-specific reasons they made the list over other names – and I suppose you’ll just have to read the full article to find out why.

As always, please remember share prices can go down as well as up, and you could get back less than you invest.

Sarah Coles: What a cruel way to leave it! Thanks, Sophie – we’ll have to get reading.

This isn’t personal advice or recommendation to buy, sell, or hold any investment. No view is given on the present or future value – or price of any investment – and investors should form their own view on any proposed investment.

So, up next, we’re focusing on funds. Let’s bring in Emma Wall now, who’s been looking at the year ahead from a fund's perspective.

So, Emma, your team has chosen their funds to watch – what can you tell us?

Emma Wall: Thanks, Sarah.

Before we dive into the selections, I just want to remind us of a few things – and the first of that is that investing is – by its very nature – long term. Funds are designed to be held for at least five years in a portfolio alongside other different funds to help reduce risk to the market cycle. This long-term view means that every investor will face periods of uncertainty and market volatility in their journey to reach their financial goals – and we think 2024 is likely to be one of those bumpy times.

But that doesn’t mean you shouldn’t invest. In fact, times of market turbulence can create excellent investment opportunities – and don’t worry about getting your timing just right either because, over the long term, it is time in the market – not timing the market – which has proven to be the best indicator of outperformance.

But, before investing in a fund, you should make sure that the fund’s objectives and risk align with your goals. If you’re not sure what’s right for your circumstances, you should ask for personal advice.

Sarah Coles: All very good points – so are you ready to share your 2024 picks?

Emma Wall: I’m going to share three of the five today.

So, the first is Artemis Corporate Bond. Stephen Snowden has been the manager of this fund since joining Artemis – to launch it in October 2019 – but he’s a seasoned corporate bond investor with more than 20 years’ experience running similar strategies. We believe his experience leaves his well-positioned to navigate through different market conditions.

The fund aims to generate a combination of growth and income over the long-term and could form part of a diversified bond portfolio – or diversify an equity-focused portfolio.

The fund’s investment process blends ‘Top-down’ macro-economic research with ‘Bottom-up’ fundamental analysis of individual companies’ bonds.

Within bond markets, we think the investment grade corporate bond space is well-placed to navigate market conditions from here. With the potential of recession in 2024, we are mindful of bonds issued by those companies with the worst credit ratings in the high-yield category – because of the heightened risk of those companies defaulting on their bond payments during a recession.

At the same time, investment grade corporate bonds offer a higher yield than government bond counterparts, which helps to cushion against potential losses – should the economy deteriorate – although, of course, there are no guarantees.

We think this fund could be a good choice as part of a portfolio that has a long-term view – or a portfolio being built to provide income – but, be aware, it could be more volatile than other bond funds.

Sarah Coles: Thanks, Emma – that’s really interesting.

Can you tell us what your second pick is?

Emma Wall: Our second pick is Troy Trojan.

The managers of this fund aim to shelter investors’ wealth just as much as grow it. So, rather than trying to shoot the lights out, the fund aims to grow investors’ money steadily over the long run, while limiting losses when markets fall. It tries to experience smaller ups and downs in the global, broader stock market – or a portfolio that’s mainly invested in shares.

The managers focus on companies based primarily in the UK and US, and this includes some of the world’s best-known companies with highly recognisable brands. The manager also has the flexibility to use derivatives- gearing – which is borrowing to invest – and invest in smaller companies – which, if used, adds risk. The fund also operates a concentrated portfolio, which means each investment can contribute significantly to overall returns, but it can also increase risk.

With the potential for recession in 2024, we think that using a fund that invests with a defensive mindset – like this one – makes a lot of sense. The diversification from both government bonds and gold – alongside those equities within this fund – has the potential to smooth returns in multiple market environments.

Sarah Coles: What’s the final pick you’re sharing today?

Emma Wall: The final pick we’re sharing today is Fidelity Global Dividend.

Daniel Roberts is a highly experienced global investor with a focus on providing long-term income and growth whilst looking to provide shelter in weaker markets. He has managed this fund for more than 10 years and developed a robust process looking for quality companies that provide sustainable dividends – whilst being mindful of valuations.

Roberts invests in companies that he believes have predictable revenue streams that can continue to grow and provide reliable dividends to investors. It’s worth remembering that all income is variable – there are no guarantees. He does have a preference for companies with simple balance sheets, little debt, and experienced management teams.

The focus on valuation and income has led Roberts to have a high degree of exposure to Europe and the UK at the moment. This also means he will typically be less exposed in the US market when compared to a global benchmark.

Although we are wary of the funds Europe overweight – given the macroeconomic backdrop – from a valuation point of view, the market does look cheap compared to its long-term history. Roberts also has a strong track record of picking winning stocks in Europe, and the income discipline of the fund helps to avoid value traps.

The manager can invest in derivatives and smaller companies, which can add risks – and it also takes charges from capital, which can increase the yield, but reduces the potential for capital growth.

Further commentary on these three picks – and the others – can be found on our website, alongside the charges and risks and key information for investors.

Sarah Coles: Thanks, Emma – that’s really interesting funds for 2024.

Before investing in a fund, you should make sure the fund’s objectives align with your own – you understand the fund’s specific risk, and it forms part of a diversified portfolio. If you’re not sure what’s right for your circumstances, you should ask for personal advice.

Susannah Streeter: You’re listening to Switch Your Money On from Hargreaves Lansdown.

Now, to end this episode, we have a quick stat. As I mentioned earlier in the podcast, 2024 is going to be a big election year. But, Sarah, do you know how many countries are due to go to the polls? I’ll give you choice:

Is it 36 – 56 – or 76?

Sarah Coles: I can’t believe it’s as many as 76! I’ll go down the middle – I’ll go for 56.

Susannah Streeter: No – it is as many as 76! Can you hazard a guess as to just how much they account for together in terms of global output – or GDP?

Sarah Coles: I couldn’t even begin to guess! Tell me – what’s the answer?

Susannah Streeter: It’s actually more than 50% – so no wonder it’s being flagged as such an important year ahead.

Sarah Coles: There is so much going on – it’s enough to make me reach for a flaky bake!

Susannah Streeter: I find cheese always calms me down when things get busy. It’s a good job there’s a lot in the fridge!

Sarah Coles: [Laughs] And, on that pungent note – it leaves me to say that’s all from us this time – but, before we go, we need to remind you that this was recorded on December 8th, 2023, and all information was correct at the time of recording.

Susannah Streeter: Nothing in this podcast is personal advice – and you should seek advice if you’re not sure what’s right for you. Unlike the security offered by cash, investments rise and fall in value, so you could get back less than you invest. Past performance is not a guide to the future. You can’t normally take money out of your pension until age 55 – 57 from 2028.

Sarah Coles: And this hasn’t been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication.

Susannah Streeter: Non-independent research is not subject to FCA rules prohibiting dealing ahead of research. However, HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing.

Sarah Coles: You can see our full non-independent research disclosure on our website for more information. All that’s left is for me to thank our guests – Helen, Sophie, Emma, and our Producer, Elizabeth Hotson.

Susannah Streeter: Thank you so much for listening. We’ll be back again soon – goodbye!