Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

As an investor, it’s more important than ever to keep an eye on what’s driving the markets and our latest Wealth Forum explored just that.

Interest rates have been front and centre of investor’s minds. It’s clear we’re living through a higher for longer interest rate environment. Our final Wealth Forum of the year focused on this. The theme of the event was how to invest in a 5% world.

The event kicked off with a gripping presentation by Tom Stevenson, investment director. He carved out the key themes driving markets right now and in 2024.

Here are six themes you can look out for:

1. Inflation

“Inflation has been a key driver of markets in the past two years. Although, we appear to be over the worst, the UK does remain an outlier, with persistent inflation,” said Tom.

Despite the latest figures showing a dip in UK inflation to 4.6%, it’s still more than double the Bank’s 2% target.

“It’s still a work in progress for central banks,” said Tom.

Last week, (21 November) Bank of England governor, Andrew Bailey said, “We are concerned about the potential persistence of inflation as we go through the remainder of the journey down to 2%.”

A similar sentiment can be heard from Christine Lagarde, president of the European Central Bank and Jerome Powell, Federal Reserve chair. 

What’s key for investors is understanding how different classes perform better in inflationary environments. 

2. Interest rates

“The direction of inflation is one of the biggest influences on interest rates. The key question for investors is whether rates have peaked on either side of the Atlantic and how quickly rates will fall,” said Tom.

Our latest forward market interest rates forecast (23 November) shows that rates are expected to fall in quarter 2 of 2024.

It’s a slight divergence to the previous month’s forecast (16 November) where rates were expected to fall quicker. 

Part of the reason why may be because the Bank of England has reiterated that it’s too soon to discuss interest rate cuts.

On November 24 the Bank’s chief economist Huw Pill told the Financial Times that the central bank can't afford to ease off tight monetary policy, even if it sees signs of weakening economic activity. 

3. Earnings season

In the long run, markets are driven by the outlook for earnings.

Earnings season drew to a close in November, with around 450 of the US’s top 500 companies reporting and earnings growth gravitating towards 4%. 

A whopping 80% of companies were reported to have beaten expectations which points to an ongoing recovery in earnings. Tom expects double digit gains next year and in 2005.

Given that earnings only fell around 3% this year, Tom said that this signals a pretty soft landing. 

The question to ask is, can earnings hold up if a recession happens next year? 

4. Valuations

“There is a mismatch between earnings and valuation cycles, which makes market timing difficult. Valuations tend to move ahead of earnings, but the lag is variable and unpredictable. That’s because they march to a different drumbeat,” said Tom. 

The key question is whether valuations are pricing in the outlook for earnings and whether valuation discrepancies between different markets are justified.

Look at today’s markets and multiples aren’t out of line with the long run averages.

And historically, there’s a wide divergence between valuations in different parts of the world. For example, the US is more highly valued compared to the rest of the world. 

5. Geopolitical risk

There’s been an increase in geopolitical risk. This includes the Ukraine Russia war and the recent Israel Gaza war. 

Outside this, there’s risk in domestic politics. In the year ahead, there’s an election in the US and key votes in India. Closer to home, there’s an expectation that the general election will be held in Spring.

So, what’s the impact on markets?

Well, the impact of war is not as clear cut as you’d think but we do know that economies are adaptable.

6. Gold

The performance of gold as a safe haven trumps the influence of interest rates.

According to the World Gold Council, gold gained just under 7% in October. It reversed an early-month slump to finish at $1,997 per ounce. 

Tom said that there’s increased demand for gold especially when the world feels less safe. 

You can watch the full Wealth Forum here. You can also hear from our panel of Fidelity experts - who represent each of the key asset classes for investors at the moment - including cash, bonds and equities. 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.

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