When reviewing the 2023 financial markets and Q4 in particular, we see global equity and bond markets both made positive returns as several data points across the US and Euro Area pointed to lower year-on-year inflation levels. In terms of major equity market performance, in local currency, Japan led the way in returns last year, closely followed by the US and then Europe.
Looking ahead, what are our key themes for 2024?
The 2024 market – looking ahead
The three key themes for the 2024 market can be summarised as the ‘three b’s’ – bonds, broadening returns and balanced portfolios.
Bonds – after a period of price dysfunction, bonds should act like bonds again this year with investors being appropriately compensated with a yield return. If we do see a harder landing on recession than expected, then investors may see a capital return opportunity also.
Broadening returns – the 2023 market saw a relative narrow corridor of stocks that provided a return. In 2024 we expect to see growth asset returns spread over wider regional markets. Mid and small cap valuations in particular look attractive.
Balance is key – uncertainties still lie ahead economically and geo-politically, so maintaining a balanced portfolio of different asset classes is crucial for the year ahead.
2023 market – looking back
The US remains the driving force of the global economy and the year-on-year consumer price index, which includes food and energy costs, fell to 3.1% in November. Equally, both the Euro Area and UK year-on-year inflation also fell markedly, at 2.4% and 3.9% respectively.
The data suggested to markets that interest rates might now be at a peak level, with some participants now even expecting cuts to come as soon as March this year. Whilst the UK Office for Budget Responsibility (OBR) forecasts a sluggish 0.7% GDP rise for 2024, valuations for UK equities continue to look attractive at 15% below their long-term average.
However, it is also worth noting that over half the world’s population goes to the polls this year – making it the biggest election year in history. This keeps the potential for geo-political risk firmly in play.
Growth assets
Turning to growth assets, it was a strong final quarter of the year for US equities, reflecting the revised outlook for US rate policy. The fourth-quarter earnings season starts in January, and analysts expect modest growth with consensus estimates for 2.4% earnings growth across the major US companies.
UK equities rose over the quarter, albeit there was a clear difference between its large-cap focused index and mid-cap focused index, with the latter performing relatively strongly. The UK’s comparative underperformance to other indices was not helped by the prospect of lower commodity prices and earnings deterioration in key sectors such as Energy and Healthcare.
Europe was helped by Eurozone inflation dropping to 2.4%, its slowest annual pace since July 2021. Markets are pricing in up to six rate cuts by the ECB for 2024, providing a clear potential incentive for investors.
Q4 was another strong quarter for Japanese equities and finished a strong year. Of particular note was Japan’s decision to incentivize listed companies to boost valuations and earnings, with the possibility of delisting for firms that fail to show efficient capital allocation.
Factor performance
Turning to factor performance, the growth and quality factors were the stand-out performers over both Q4 and also the year as a whole. In comparison, value was the relative laggard over the last 12 months and the final quarter of the year.
Given the strong performance from the growth factor this reflected positively in ESG stocks over the year, and they ended 2023 in a positive fashion.
Defensive assets
Turning to defensive assets, towards the end of the year data showed a clear downtrend in year-on-year inflation and this helped to lift the broader bond index of government and corporate debt for the quarter, particularly helping portfolios that had greater duration (or interest rate) sensitivity.
UK Gilts also benefitted from an uplift in prices and fears of a recession in the UK, with consumers feeling the brunt of higher interest rates more than their US counterparts.
The 2023 market summary
In summary, 2023 finished in a positive way and there was in fact a Santa Claus rally in the US. This has put US valuations at a particularly high level and prone to any vulnerability in a fall in corporate earnings. This comes back to the final B in our three Bs, and that keeping a balanced portfolio in the beginning of 2024 is crucial as we move through the first part of the earning season.
If you want advice on your investments as we start the new year, please contact our team of professionals.
