January 2024 market commentary

The start of the year saw optimism around the US economy contrast with pessimism in the UK, and weak growth forecasts for Europe. Transformations through artificial intelligence have raised opportunities and concerns, and renewable energy capacity has set new records.

8 February 2024

After the rally that characterised 2023’s final quarter, global markets experienced mixed fortunes in January. While the S&P 500 (1.68%) and Euro STOXX 50 (2.97%) posted modest gains for the month, UK equities stalled with the FTSE 100 falling by almost 1.3%. The Nikkei 225 ended January the top performer, gaining 8.44% despite uncertainty about the economic fallout from the New Year’s Day earthquake. Signs of continuing resilience in the US economy and growth momentum in the UK were tempered by declining retail figures and pushback from central banks on the outlook for interest rate cuts in the first quarter. European manufacturers and retailers were threatened with supply chain disruption as attacks on commercial shipping in the Red Sea restricted passage through the Suez Canal.

January market summary

Optimism around the resilience of the US economy continued with a buoyant labour market, strong wage growth and further gains among the so-called ‘Magnificent Seven’ mega-cap tech stocks (Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla). Fears of a looming recession were also dampened by news that US GDP in the final quarter of 2023 rose by 3.3%, significantly above expectations and driven largely by increased consumer spending. The S&P’s strong start to the month waned, however, as the Federal Reserve explicitly ruled out an interest rate cut in March and warned that the path to falling inflation wasn’t assured.

All returns are sourced from FactSet and are reported as total return in local currency for the period 02/01/2024 – 31/01/2024.  

The UK economic outlook remained pessimistic as 2024 began with growth estimates suggesting the country looks set for another year of stagnation. A rise in consumer confidence may be offset by the increased cost of mortgages facing around 1.6 million households refinancing in 2024 and incomes may be further stretched by the phasing out of cost-of-living support. Interest rates have likely peaked at 5.25% with the government on track to reach the 2-3% baseline target, however, the Bank of England estimates that domestic wage growth needs to fall by around 3.5%. 

The European Central Bank held baseline rates at its January meeting and reiterated its stance on monetary policy. The effects of the Bank’s tightening cycle, however, are gradually being passed on to the region’s economy and the World Economic Forum (WEF) projected in its January Chief Economists Outlook report that the eurozone could experience the worst economic growth in 2024 relative to other regions. Almost 80% of respondents forecast weak European growth due to restrictive lending, exposure to geopolitical risks and a general slowdown in manufacturing.

WEF outlines key global risks for 2024 and beyond

Global weather extremes, polarising geopolitics, accelerating AI development and increasing cyber insecurity were among the predominant themes highlighted in the WEF’s 2024 Global Risk Report. The 19th edition of the Report considers the potential impacts of short- and longer-term risks, ranking them in order of global severity.

Extreme weather events and temperature spikes during 2023 presaged a difficult future for all countries and highlighted increasing vulnerabilities and inequalities. With imbalances in climate mitigation commitments and financing still in evidence, the most climate-vulnerable countries could be left further adrift from the infrastructure, trade and investments they need to secure long-term protection and prosperity. 

As almost 3 billion people worldwide go to the polls in 2024, the increasing spread and accessibility of misinformation threatens to widen political partisanship and social polarisation. Eroding trust in the validity of national elections risks undermining the legitimacy of newly elected governments and longstanding electoral processes. 

AI set to ‘transform the global economy’ – central banks and governments consider consequences

In January, the International Monetary Fund (IMF) published ‘Gen-AI: Artificial Intelligence and the Future of Work’, a report that addresses a growing belief that AI’s ‘profound’ effect on the global economy represents a new industrial revolution.

The IMF estimates that around 40% of global employment is currently exposed to AI with that figure increasing to 60% in advanced economies. AI promises to boost long-term productivity and growth but broader impacts on economies and societies are uncertain and amplified regional disparities are likely. The evolution of AI to better emulate human cognitive abilities broadens its potential but advanced levels of integration could face cultural, ethical or operational resistance. AI growth also challenges traditional beliefs that technological advances only threaten low- and middle-skill jobs.

The International Monetary Fund estimates that around 40% of global employment is currently exposed to AI with that figure increasing to 60% in advanced economies.

The speed of AI adoption and machine learning has prompted concerns among central banks that wider use ‘could pose system-wide financial stability risks’. The Bank of England’s financial policy committee (FPC) has committed to investigate potential algorithmic trading and cyber security risks in 2024 and assess the resilience of the UK’s financial system to broader AI integration.

Governments are also increasing collaborative initiatives to make AI development and use ‘safe by design’. In late 2023, 18 countries including the UK and US drafted a detailed international agreement on how to protect AI from rogue influences: the ‘Guidelines for secure AI system development’. While the agreement lacked legislative power, it was still heralded as a step in the right direction for cyber and infrastructural security.

International Energy Agency (IEA) reports significant increase in global renewable energy capacity

The IEA’s annual renewable energy review reported a 50% increase in global capacity to almost 510 GW in 2023 – the fastest growth rate in 20 years and the 22nd consecutive year that additional capacity set new records. Europe, the US and Brazil hit all-time capacity highs, but China commissioned as much solar PV in 2023 as the entire world managed in 2022, also registering a 66% increase in wind capacity. The IEA predicts that existing policies and market conditions will see global renewable capacity increase by 2.5 times its current level by 2030. If governments work to overcome administrative, implementation and financing challenges, they may fulfil the commitment made at COP28 to triple renewable capacity and double the annual rate of energy efficiency improvements to 2030.

The International Energy Agency predicts that existing policies and market conditions will see global renewable capacity increase by 2.5 times its current level by 2030.

Copernicus confirms 2023 as hottest year on record

Data from the Copernicus Climate Change Service showed that the global average temperature in 2023 was a record 14.98°C. 2023 also marked the first time temperatures every day within a calendar year exceeded 1°C above pre-industrial levels, and average air temperatures were the warmest or near-warmest on record over large areas of ocean and all continents except Australia. Almost half the year exceeded 1.5°C above pre-industrial levels and two days in November exceeded 2°C for the first time on record.

In February 2024 the Copernicus data also confirmed a full 12-month period had exceeded 1.5°C above pre-industrial levels.