A bumpy upwards path ahead

Every hangover comes to an end, and the equity market’s malaise lasted no longer than usual. After refusing to get out of bed the previous week, last week the markets decided to go to work. Europe recovered the previous week’s losses while US indices moved ahead smartly. However, softness in global banks hit the UK Large-Cap index as did a continued pullback in energy and materials sectors (that is, the more commodityrelated companies).

Is disinflation transitory?

The capital market rally into the end of 2023 was all about inflation and, more specifically, its retreat. After the pandemic price spike, last year offered clear reprieve. Goods prices cooled significantly, led by falling energy prices, while tight labour markets loosened, and service inflation fell in the second half.

The disinflation trend excited investors for two reasons. First, weaker price pressure is a precursor to interest rates falling from their highest levels for ten years. On cue, dovish signals from the major central banks – led by the US Federal Reserve (Fed) – started the rally in late Autumn. Second, lower rates and inflation mean the economic growth cycle can start anew. This expectation was clear in the outperformance of cyclical assets – like European equity, or small and mid-cap stocks – into the end of the year.

India’s stalling course of reforms

Among Emerging Markets (EMs), India is something of a firm favourite for UK investors. The reasons may seem obvious: it is the fifth-largest country economy in the world and is growing faster than any of those above it on the list. It has strong economic and financial ties with developed nations – a particular draw for UK investors – but its financial and corporate structures still have plenty of room to improve. More recently, India’s stock market also benefitted from EM investors dramatically reallocating their capital away from the disappointing China. This led to a 20% jump in the Nifty 50, India’s headline equity index, in 2023. The index has doubled since the start of 2019.

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