2023 Economic & Market Review
- 5 hours ago
- 12 min read
Events
Jan 1st - Russia-Ukraine War Continues
Jan 8th - China end zero COVID-19 policy
Feb 6th - Turkey and Syria Earthquake
March 10th - Collapse of Silicon Valley Bank to be followed by Signature Bank and First Republic Bank
March 10th - Xi Jinping re-elected as China’s president
March 14th - OpenAI launches ChatGPT-4
March 16th - President Macron uses special powers to force through unpopular pension reforms
March 24th - Brexit deal for Northern Ireland formally signed
May 6th - Coronation of King Charles III and Queen Camilla
May 30th – Nvidia, the AI and chip company hits $1tn market cap
June 18th - A submersible vessel exploring the Titanic goes missing in the North Atlantic
July 8th - Dutch Prime Minister Mark Rutte’s government collapses
July 9th - US-China Talks
August 9th -President Biden bans Tech investments in China
September 26th - Trump found guilty of fraud
October 7th - Israel/Palestine Conflict
October 23rd - Ten-year U.S. Treasury yield hits 5%, its highest yield since 2007
November 2nd - FTX’s Sam Bankman-Fried convicted of defrauding customers
November 2nd - Global Powers sign Bletchley Declaration at AI Summit
December 9th - Houthi rebels in Yemen attack ships in the Red Sea
2023 was a dynamic year for global stock markets, characterised by significant fluctuations influenced by geopolitical tensions, economic recoveries post-pandemic, and central banks’ switch to monetary policies.
Closing out the year, markets maintained confidence in central banks, relying on their capacity to control inflation, facilitate a soft landing for the global economy, and sustain stability in financial markets. Yet, there are inherent risks in entrusting those who previously pledged that inflation would be transitory.
US
Despite challenges such as multi-year highs in interest rates, US bank collapses, and conflicts in the Middle East and Ukraine, the US stock market ended 2023 with high double-digit returns; the S&P 500 gained 26.3% and the NASDAQ 100 returned a mammoth 53.81% - its best year since 1999. Albeit the performance of these indices is primarily due to the performance of the ‘Magnificent Seven’, namely, Amazon, Apple, Alphabet, Meta, Microsoft, Nvidia, and Tesla (as seen below) (1).
On the macro-economic front, the U.S. saw a general slowing down in the rate of inflation, a slight rise in unemployment, a mostly contracting manufacturing sector, and fluctuations in the return on 10-year government bonds.
Core Consumer Price Index (CPI) YoY (excluding food and energy prices) was 5.6% in January 2023, falling to 4.0% for its latest November 2023 reading (2). The Fed favours core inflation as a more reliable indicator of fundamental price trends as it is considered to be a ‘barometer’ of sticky inflation, therefore it is more closely watched compared to the generally more volatile overall inflation.
Similarly, the U.S. Consumer Price Index (CPI) YoY reading fell from 6.4% in January 2023 to 3.1% in November and the U.S. Producer Price Index (PPI) YoY declined from 6.0% in January to 0.9% in November. Meanwhile, the US Unemployment Rate increased slightly from 3.40% in January 2023 to 3.70% in December 2023 (2).
Throughout 2023, the U.S. Manufacturing Purchasing Managers Index (PMI), which tells us about the health of the manufacturing sector, showed there were more readings measuring less than 50, suggesting an overall contraction. U.S. 10-Year Treasuries yielded 3.88% at the start of 2023, peaked on October 23rd, 2023, with a high of 5.02%, and ended out the year close to the same way it opened at 3.88%.
The current market pricing of multiple rate cuts in the US seems to suggest a hard landing for the economy and lower growth, rather than the ‘well-documented’ soft landing. Thus, at the current time, we expect lower real growth in the US due to sticky inflation, resulting in a stagflationary scenario.
The strongest performer in the portfolio was the Invesco EQQQ Nasdaq 100 UCITS ETF GBP as it rose by 48.71% in 2023. The rise was primarily attributed to the AI wave led by companies that predominate the ‘Magnificent Seven’ along with an extra boost derived from the market pricing multiple rate cuts in 2024, leading to an elevation of intrinsic valuations.
UK
FTSE 100 returned 3.8% in 2023 (2). The smaller FTSE 250 index of medium-sized companies had a slightly better year, gaining about 4.5% whereas the UK FTSE All-Share rose by 7.9% (2).
Standout annual performances included Rolls-Royce with its shares tripling under
CEO Tufan Erginbilhic’s leadership, and Marks & Spencer which doubled its share value despite a tough consumer environment. Conversely, Anglo American and Fresnillo dragged the index down, facing 40% and 34% declines respectively due to falling commodity prices and concerns about the Chinese economy (3).
The FTSE has a heavy weighting towards commodities-linked sectors such as oil & gas and miners that could benefit from an inflationary or stagflationary environment. This could prompt increases in projected earnings through 2024. Another merit of the UK is cheap relative valuations. Contrasted with tech-centric markets like the US, the FTSE 100’s more traditional structure presents attractive valuations and conceivably lower downside risks. Likewise with the US, the UK will have an election year in 2024 which typically leads to a rise in liquidity levels.
On the economy, the UK saw a slower increase in the cost of living by the end of the year, some growth in its economy albeit less than expected, and earnings growth which remains at elevated levels. The UK Core Consumer Price Index (CPI) YoY, declined to 5.1% by November 2023 after commencing the year at 5.8% in January 2023 (2).
The UK Consumer Prices Index (CPI) YoY experienced a notable decline, dropping to 3.9% in November 2023 from a value of 10.1% in January of the same year (2). Notably, the rate recorded in November 2023 marked the lowest figure since September 2021. In terms of the latest growth statistics, UK Gross Domestic Product (GDP) increased by 0.3% YoY in the third quarter, below analysts’ expectations of 0.6% (2).
The most recent monthly figure for the U.K. Average Earnings Index (including bonuses) was 7.2% YoY for the three months to October 2023, which remains at elevated levels(2). Throughout 2023, the index had numerous upside revisions and is a key element as to why inflation has been slightly stickier in the UK market relative to its European counterparts. We believe the UK should dial back their rate cut expectations as growth has been above estimates, albeit on the low side. It would be a bold move, in our opinion, to sharply cut rates while strong wage growth still bites at the heels.
Europe ex-UK
Germany’s DAX index rallied by 20%, while France’s CAC gained 16.75% and Italy’s FTSE MIB surged almost 30%, as European markets recovered from losses in 2022. The pan-European Stoxx 600, which tracks the largest companies across European markets, gained more than 12%.
A 0.1% contraction in Eurozone GDP predicted for Q4 of 2023 would place it into
a shallow technical recession. This can be deduced from especially weak data in unemployment, PMIs (manufacturing and services example shown below) and forecasted GDP growth (2)(4).
According to the OECD, the annual GDP growth rate in the Euro Area was 6.27% for 2023 and is expected to be 3.58% in 2024 (5). The European Commission estimate that consumer confidence is well below its long-term average, likewise for business confidence (6). We are underweight Europe and expect the relative underperformance to continue in 2024.
Emerging Markets
MSCI Emerging Markets index rose by 10.3% last year (2).
China
In 2023, China’s CSI 300 index took a significant hit, plunging by over 11% due to a combination of challenges: a sluggish economy, a liquidity crisis in the property sector, and escalating geopolitical tensions (2). These issues continue to exert pressure on the nation. Within China, there has been a marked downturn in consumption, production, and investment, resulting in a complete erosion of consumer confidence. Adding to the woes are high levels of domestic debt and unemployment, particularly among the younger population (7).
There’s an anticipation of substantial government intervention to provide essential support, although this may not be imminent. Such intervention could potentially
spur a surge in domestic equities and bolster global sectors like mining, energy, and luxury markets. The recent Central Economic Work Conference (CEWC) emphasised ‘development’ as its core focus, prioritising the pursuit of ‘high-quality growth’ (8). China’s new growth model revolves around common prosperity, self-sufficient technology, and carbon neutrality. Combining this with the messaging on stimulus there is a clear preference of fiscal over monetary intervention (9).
India
India’s Nifty 50 index closed the year with a gain of 20.03% and the Sensex has risen nearly 19%(2). 2023 marked the Nifty 50’s eighth consecutive year of positive returns. The surge in the market was driven by sustained inflow of foreign portfolio investment (FPI), strong domestic consumption, IT sector growth, policy stability from state elections, consistent performance of the RBI alongside positive GDP forecasts, and a supportive stance from the US Fed’s FOMC meeting (10). Consequently, India’s market cap soared to $4 trillion, solidifying its status as the fifth-largest market globally (11).
We expect India will continue their positive trend, led by major demographic shifts particularly in labour market dynamics that are in stark contrast to many other countries that consist of declining birth rates and a tight labour supply.
Japan
In 2023, Tokyo’s Nikkei 225 index surged by 28.2%, marking its most impressive annual performance in a decade (2). Unlike several global economies, the Bank of Japan opted to keep the Japanese economy running at an elevated pace throughout 2023, primarily monitoring the potential end of Negative Interest Rate Policy (NIRP). The Bank of Japan expresses confidence in continued strong wage growth in 2024 but seeks more proof of companies passing increased wage costs on to final prices. Moreover, despite already surpassing the BoJ’s 2% inflation target, the central bank remains cautious about rapidly raising interest rates, fearing potential negative impacts on the economy (12). If the BoJ deems that inflation has durably exceeded its target, it may eventually consider tightening its monetary policy. Once monetary policy is tightened, we should expect to see some relative strength in the Japanese yen (JPY).
The iShares MSCI Japan GBP Hedged UCITS ETF GBP returned 33.10% in 2023 - an outperformance of the benchmark due to gains made by hedging to a higher interest rate country like the UK.
Asia ex-Japan
Last year MSCI Asia ex-Japan Index returned 6.3% (2).
By the end of 2023, Taiwan’s TAIEX surged over 24%, marking its second-largest annual increase in history (13). Taiwan Semiconductor Manufacturing (TSMC), contributed significantly to this growth with a 40.2% rise throughout the year on the back of the AI rally (14). The stock market’s momentum was also fuelled by anticipation ahead of mid-January elections, crucial in determining Taiwan’s relations with China. During November, foreign investors injected $7.6 billion into Taiwanese equities, showcasing their preference for chip stocks over political worries. Other notable companies driving this surge included IC designer MediaTek Inc, rebounding by 62%, and Quanta Computer Inc, a major AI server maker, which saw its market capitalisation grow by NT$558.9 billion (14).
We see China’s claims over self-governed Taiwan as another potential soup sandwich peppered with further geopolitical issues. Already poor domestic economic conditions have the potential to worsen in China. Taiwan, being a major producer within the semiconductor industry, could cause material supply chain issues globally, notwithstanding other major global ramifications.
In 2023, South Korea’s Kospi and Kosdaq markets surged by 18.7% and 27.5%, respectively (2). The Kospi Index achieved its highest closing level since June 2022, attributed in part to the country’s decision to ban short selling in local equities in early November. Since the prohibition was implemented, the index gained over 12% (14).
Australia
The ASX 200 advanced 7.8% in 2023 (15). The Australian index largely consists of Financials and Materials which explains the reason behind the subdued returns in comparison to other developed markets. January 2023 was optimistic for Australia, due to the expected reopening of China on the back of the abolition of the Zero-COVID-19 policy, however, a slower-than-expected economic recovery halted an advance of the ASX and weighed heavily upon commodity prices. Banks experienced Net Interest Margin (NIM) compression into a slowing economy well into Q3 2023 which raised expectations that bank earnings had peaked and downgrades could follow (15).
However, the index bolstered in Q4 with lower-than-expected readings of inflation and the expectation of rate cuts to follow. If China can conjure up some meaningful stimulus in 2024 it should bear fruit for Australia.
The UBS (Irl) ETF plc MSCI Australia UCITS ETF returned 14.69% in 2023 and we expect it to remain a good pick into 2024. Similarly, to the Japan ETF a weaker Australian Dollar led to an outperformance from our GDP hedged share class.
Commodities
The Bloomberg Commodity Index rose 16.1% in 2022 but fell 7.9% during 2023 primarily due to strong equity markets, a lacklustre Chinese market, and key consumer price indices indicating disinflation from the higher levels of inflation experienced in 2022 (16). Among the various commodities, oil and uranium stood out as notable exceptions. Oil prices surged due to concerns about potential production reductions by OPEC and escalating tensions in the Middle East.
However, there are other factors that speak in favour of commodities. Traditionally, these are commodity companies that distribute a large share of profits in the form
of dividends. A consistent dividend return can help overcome phases in sideways or downward markets, just like the current one. Moreover, current valuations and financial positions seem robust, boasting moderate debt levels and strong cash flow generation.
We believe commodities can bounce back in 2024 contingent upon the absence of a deep recession. Oil demand looks on track to expand past the highest annual levels which would provide a major tailwind for commodity prices. Furthermore, there is a risk in the supply-side due to shipping delays and the costs associated with it, including the risk of reinflation.
Bonds
Following on from a bruising 2022 where global bonds lost nearly 17% in value, 2023 returned a total return of 4.3%, according to the Bloomberg Barclays Global Aggregate Index - a measure of global investment grade debt from twenty-four local currency markets (16). ICE BofA’s global broad bond market index, rallied roughly 7% over the last two months of 2023 - its strongest eight-week period on record (17).
Schroder Strategic Bond Fund enjoyed a strong 2023 as it returned 11.05% and ranked in the top decile of the Sterling Strategic Bond universe, according to Citywire (18). Moreover, the Royal London Short Duration Global Index Linked Fund returned 5.47% and was ranked in the top quintile of the ‘Global Inflation Linked’ Universe, according to Citywire (18).
Alternatives
In terms of alternatives, the AQR Systematic Total Return Fund enjoyed a strong 2023 returning 12.53% and ranking in the top decile of its relevant universe of ‘Multi-strategy’ according to Citywire (18). Meanwhile, Jupiter Merian Global Equity Absolute Return returned 9.36% and ranked in the top quintile of the relevant universe of Market Neutral (18). Alternatives provided strong returns during the sideways-moving market that was experienced through the first 3 quarters of 2023. We expect these alternatives to have similar utility going forward into 2024.
Money Market
The abrdn Sterling Money Market has returned 4.65% over the year which we still deem to be good value coupled with its low-risk characteristics, especially as we do not expect rate cuts to be imminent. Although, if sentiment changes through 2024 this could be mobilised to optimise returns.
Allocation Shifts
In November, we increased our allocation to Inflation-linked bonds by trimming our allocation to Commodities and Europe ex-UK equities. Moreover, we remain positioned in factors such as quality, large over small, low volatility, and maintain weightings in alternatives, preserving our focus on superior risk-adjusted returns.
Disclaimer:
This document is intended to be communicated solely to persons that fall within the FCA classification of Professional Client.
This document is for information and discussion purposes only and does not constitute an offer to sell or a solicitation of an offer to purchase interests in any portfolio managed by Sturgeon Ventures LLP trading as London Tyne. Nothing in this document should be construed as a recommendation, representation of suitability or endorsement of any particular security or investment. Prospective investors should seek their own legal or tax advice.
The information contained in this document has been compiled from sources believed to be reliable, but which have not been independently verified. Forward looking information is provided for illustrative purposes only and is not intended to serve as and must not be relied on by any investor as, a guarantee, an assurance, a prediction or a definitive statement of fact or probability. Past performance is not a reliable indicator of future performance.
All marketing materials are distributed in the United Kingdom to professional investors by London Tyne, a trading name of Sturgeon Ventures LLP utilised under license. Sturgeon Ventures LLP (FRN: 452811) is authorised and regulated by the Financial Conduct Authority (FCA).
References
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