Introduction:
The financial narrative of 2023 was as dynamic as it was unpredictable. The year started with pervasive recession fears, shifted to a phase of resilient growth, and finally closed with a focus on potential future rate cuts. The final quarter has been a testament to the resilience of global markets, with falling inflation and dovish signals from central banks like the Federal Reserve reversing the previous quarter’s worries.
The positive correlation between stocks and bonds, favouring investors by the year’s end, marked a significant shift from earlier trends. Such a scenario, where both asset classes rise in tandem, is a rarity and symbolises a period of recalibration in investor sentiment and market dynamics.
As we step into 2024, investors must remain vigilant and adaptable. The lessons of 2023, particularly the final quarter, underscore the importance of a diversified and well-considered investment strategy. Investors can navigate the evolving financial landscape and capitalise on its opportunities by staying informed and agile.
Part 1: Global Perspective
The final quarter of 2023 has been nothing short of a Christmas miracle for investors worldwide. After a sobering third quarter, this period has witnessed robust returns in most major asset classes, painting a hopeful picture for the future.
Treasury yields, a critical indicator of investor sentiment, saw a notable decline in December, with investors shifting their focus to equities. This shift is especially pronounced in long-term instruments, where we observed a 52 basis-point drop in 20-year yields and a 51 basis-point fall in 30-year yields. This movement underscores a growing confidence in the equity market, a sentiment echoed by the 8.7% surge in the iShares 20+ Year Treasury Bond ETF (TLT).
The labour market also showed signs of robust health. The unemployment rate in November dipped to 3.7%, coupled with an encouraging rise in labour force participation to 62.8%. Adding 199,000 jobs, slightly surpassing expectations, further bolsters this positive outlook.
Apple’s dominant position in the S&P 500, with a staggering 7% weighting, marks a significant moment in market history. This concentration of influence in a handful of firms is a rare occurrence. It could signal an opportunity for other constituents to catch up in 2024, propelled by stable economic growth and interest rates.
Part 2: US Markets
The US markets have emerged as a powerhouse in the final quarter, with indices like the Dow Jones, S&P 500, and NASDAQ posting gains of 4.9%, 4.5%, and 5.6%, respectively. The small-cap sector, represented by the Russell 2000, outperformed with a remarkable 12.2% rise in December alone.
Yearly figures paint an even more impressive picture. The Dow Jones registered a 16.2% gain, while the S&P 500 and NASDAQ soared by 26.3% and 44.6%, respectively. Interestingly, about two-thirds of the S&P 500 constituents experienced positive returns, a testament to the breadth and depth of the market recovery.
Commodities, however, remained the outlier, closing the year with a -4.6% return. This performance starkly contrasts with the asset class’s exuberance in 2022, highlighting the volatile nature of commodities.
Part 3: UK Markets
While showing a positive trajectory, the UK markets lagged slightly behind their global counterparts. The final quarter saw a 3.2% increase, primarily due to the high exposure to underperforming energy stocks and the impact of sterling strength. However, small and mid-cap indices outshone the broader market, benefiting from a surge in domestically focused stocks.
Interest rates and inflation in the UK have been a focal point. The Bank of England’s potential cessation of interest rate hikes and the drop in the consumer prices index to 3.9% in November signals a shift in economic policy and investor sentiment.
Part 4: European Markets
The final quarter of 2023 brought a robust performance for Eurozone shares, with the MSCI EMU index climbing 7.8%. This growth was fueled by the dual catalysts of softening inflation figures and the anticipation that interest rate hikes may have reached their zenith. Notably, sectors such as real estate and information technology led the gains, while healthcare and energy lagged.
Investors’ hopes were further buoyed by the Euro area annual inflation decline to 2.4% in November, a sharp decrease from the previous year’s high of 10.1%. This decline in inflation, coupled with similar trends in the US, fostered a belief that not only might interest rates have peaked but that there might even be rate cuts on the horizon in 2024.
Part 5: Emerging Markets
Emerging markets (EM) presented a mixed bag in the final quarter of 2023. While they faced challenges early in the quarter, such as rising bond yields and geopolitical tensions in the Middle East, EM equities overall exhibited strength, closing the quarter with a 7.9% gain. This performance, however, trailed behind that of developed market equities.
The Chinese market, grappling with growth concerns, saw its equities dip by 4.8%. However, robust returns in other regions, particularly in Latin America, where the MSCI EM LATAM Index soared by 17.8%, balanced out these losses. This divergence highlights the varied economic landscapes and investment opportunities within the emerging markets.
Part 6: Asia
The Asian markets, particularly Japan, experienced volatility during the quarter, with some weakness in October and December. Nevertheless, a strong performance in November led the TOPIX Total Return index to a positive return of 2.0% for the quarter. The broader Asian region, excluding Japan, also witnessed gains, largely driven by investor optimism that US interest rates might have peaked.
All markets within the MSCI AC Asia ex Japan index, except China, ended the quarter positively. This regional performance underscores the burgeoning investor appetite for risk assets, even amidst concerns over economic growth, particularly in China.
Part 7: South Africa
South Africa’s financial landscape was a mix of highs and lows. The FTSE/JSE Capped SWIX Index saw a modest increase of 2.9% month-over-month, culminating in an 8% growth year-to-date. However, compared to the MSCI World’s performance, the local market appeared somewhat lacklustre.
A significant factor in this underperformance was the South African market’s reliance on the struggling Chinese market, which exerted a downward pull on the local bourse’s overall performance. On the other hand, the SA All Bond Index fared better, with a 1.5% month-over-month increase and a 9.7% year-to-date growth. This success can be attributed to the higher yield and the global trend of declining interest rates, allowing the bond market to outperform the local stock market for the first time since 2020.
Conclusion:
As we reflect on the final quarter of 2023, it is evident that the period has been a beacon of optimism in a year marked by fluctuations and uncertainties. The quarter, culminating in a heartening Christmas season has showcased resilience across various sectors, setting a tone of cautious optimism for 2024.
