Welcome to your first monthly market outlook of the new year from atomos
If you ate, drank and were merry over the festive season, you might not want to think about food for a while. But food and sustainability were high on the agenda for policymakers at the end of 2023.
COP28 saw world leaders gather in Dubai in November and December to make plans to tackle climate change.
One of the priorities for discussion was biodiversity and more sustainable agriculture. More than 150 countries signed a pledge to integrate food and agriculture into their climate plans.
Food systems - including food production, transportation and waste - are responsible for around 30% of global greenhouse gas emissions (i), so making food more sustainable will be crucial to achieve net zero.
Our view is that, while no single COP can generate the agreements needed to limit global warming to 1.5 degrees, each conference brings incremental progress. This time, there were credible commitments to reduce methane emissions from livestock and food waste, and scale up energy-efficient technologies.
Other environmental and social topics that link to climate were a focus this year, in recognition that it is no longer ok to have ‘climate tunnel vision’ at the expense of other themes. We were interested to see developments in the area of nature and biodiversity. Around 50% of the USD 44tn global economy is dependent on biodiversity, and new nature-focused investment solutions are now emerging to protect it. There is also legislation is place including ‘Biodiversity Net Gain’ in the UK, the EU’s ‘Green Deal’, and ‘No Net Loss’ in the US.
Traditionally, this has been an area where markets have struggled to assign economic value, but this is changing with the growing number of methodologies to track nature loss and regeneration. Asset owners can now begin to determine how their portfolios can consider the natural environment.
As usual, there were lots of well-meaning pledges made at COP28 but the proof of the pudding will be in the actions participants actually take after the conference.
Sector in focus: Healthcare
From climate crisis to health crisis, Britain’s fondness for food is growing waistlines and shrinking productivity. Latest studies show that Britain’s obesity epidemic is now costing around £100 billion a year, hitting national productivity by up to nine times more than previously thought. (ii)
The UK government is rolling out a £40m pilot to make anti-obesity drugs (brand names include Saxenda, Ozempic and Wegovy) more widely available which should be good news for the healthcare sector. The Healthcare sector struggled in 2023 but the future looks promising with the development of new drugs, including weight loss drugs.
Healthcare is typically considered to be a low volatility, defensive sector because demand is usually stable and is not sensitive to the economic cycle. We see signs of an economic slowdown ahead, so healthcare should perform better than other sectors in this environment. We also think current stock valuations may not fully reflect the growth opportunities in new drug areas, especially given the government’s plans to increase investment in the sector.
A surprising boost for the jobs market
Another theme we noticed in December was a surprise uptick in the strength of the labour market in both the UK and US.
UK job vacancies fell below one million for the first time since 2021, suggesting higher interest rates are cooling the labour market. (iii Adzuna) ONS data shows a slight increase in the unemployment rate to 4.2% after a record run of shrinking vacancies. (iv) The US, meanwhile, added 199,000 jobs in November and unemployment fell, beating expectations. (v)
Inflation is down but not out. Consumer prices inflation in the UK fell to 3.9% in November, a two-year low, leading to forecasts that interest rates will drop sooner rather than later. While it’s not our base case, it is possible inflation could rebound if wages increase. Higher wages mean higher spending and greater expectations of pay rises in the future, which can lead to more entrenched inflation. Central banks including the Bank of England have said that wage inflation will be a cornerstone of their future policy decisions.
A shift in the narrative
In 2024 we expect the narrative to shift from inflation to economic growth. We’ve never had policy this tight without a recession before, but this is not what markets are currently focusing on. We think some of the risks are being missed and that’s why our investment team is cautious on equities this year.
As ever, we don’t pin our investment decisions on any one factor but consider a range of market drivers and economic indicators. We maintain diversification in portfolios and include strategies to protect your money in falling markets. We think this is the best way to manage risk and invest successfully for our clients.
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.