Quarter 4, 2023 Market Commentary

• Published on January 8th, 2024

Quarter 4, 2023 Market Commentary

Past performance is not indicative of future results. The information mentioned is for illustrative purposes and should not be considered a recommendation to buy or sell.

Global shares experienced a strong quarter as the US Federal Reserve hinted at potential interest rate cuts for 2024. Developed markets outperformed emerging markets due to ongoing concerns about China's real estate sector. Crude oil prices fell despite output cuts.

US

US shares registered significant gains in the final quarter, driven by expectations of imminent interest rate cuts. The S&P 500 index nearly reached its record high set in early 2022.

US annual inflation (CPI) slowed from 3.7% in September to 3.1% in November. The core personal consumption expenditure index, the Fed's preferred inflation measure, rose only 0.1% month-on-month in November. Q3 economic growth was revised down to an annualized rate of 4.9% from 5.2%.

This data reinforced market expectations that the Fed has concluded its rate hiking cycle and will move towards cuts in 2024. Fed Chair Jerome Powell acknowledged the risk of maintaining restrictive rates for too long. The Federal Open Market Committee's latest policy meeting minutes indicated an expected rate range of 4.5%-4.75% by the end of next year, down from the current 5.25%-5.5%.

US shares rallied on the anticipation of rate cuts. Top-performing sectors included information technology, real estate, and consumer discretionary. The energy sector posted negative returns due to weaker crude oil prices.

Eurozone

The final quarter saw strong performance in eurozone shares, driven by expectations of no further interest rate hikes. The MSCI EMU index advanced 7.8%. Top-performing sectors included real estate and information technology, while healthcare and energy lagged with negative returns.

Shares were supported by lower inflation figures in both the eurozone and the US, raising hopes for potential rate cuts in 2024. Euro area annual inflation fell to 2.4% in November from 2.9% in October, compared to 10.1% a year earlier.

Higher interest rates impacted the eurozone economy, with Q3 GDP falling by 0.1% quarter-on-quarter. The HCOB flash eurozone PMI dropped to 47.0 in December, suggesting likely Q4 contraction.

Most sectors rose amid optimism over future rate cuts. The real estate sector benefited from the prospect of lower debt costs, while IT stocks also performed well. Economically sensitive sectors like industrials and materials saw strong gains, but the energy sector fell due to weaker oil prices and stock-specific factors weighed on the healthcare sector.

UK

UK equities rose over the quarter, with small and mid-cap indices outperforming due to strong domestic stock performance. This was driven by hopes that interest rates had peaked and continued inbound bids for smaller UK companies.

Internationally exposed and economically sensitive market areas, particularly in industrial and financial sectors, also performed well. However, larger companies were held back by sterling's strength against a weak US dollar.

UK inflation moderated more than expected, with the ONS reporting a drop in the consumer prices index to 3.9% in November. This raised hopes that the Bank of England had concluded its rate hikes. Revised ONS data showed a Q3 GDP fall, previously indicating zero growth.

Chancellor Jeremy Hunt's Autumn Statement contained more policy measures than expected, including the extension of the 100% capital expenditure allowance, allowing companies to deduct plant and machinery expenditure from taxable income.

Japan

The Japanese equity market posted a positive total return of 2.0% for the TOPIX Total Return index in Q4 despite some weakness in October and December. Market sentiment improved in November due to weaker-than-expected US macroeconomic figures leading to expectations of US rate cuts.

In December, Japanese equity markets lagged due to concerns over yen appreciation. Growth stocks outperformed value stocks, and small caps recovered from previous underperformance against large caps.

Corporate earnings for the first half of the fiscal year were strong, supported by yen weakness and effective pricing strategies. More companies disclosed plans to address lower valuations, and there was steady progress in unwinding cross-shareholdings.

Japan's overall macroeconomic conditions improved, with the BOJ tankan survey indicating better business sentiment. Capital expenditure plans suggested continued strong demand for machinery and IT services. The BOJ took steps to normalize its monetary policy and hinted at further actions in early 2024.

Asia (ex Japan)

Asia ex Japan equities gained in Q4, driven by hopes that US interest rates had peaked, renewing investor appetite for risk assets across the region.

All markets in the MSCI AC Asia ex Japan index ended the quarter positively except for China, where shares fell due to concerns over weaker economic growth and inadequate government stimulus. The ongoing real estate crisis and regulatory uncertainty also weakened sentiment towards Chinese stocks.

Taiwan, South Korea, and India were the strongest markets, driven by gains in technology stocks and chipmakers due to continued enthusiasm for artificial intelligence. Malaysia, the Philippines, and Singapore also saw strong growth, while gains in Indonesia, Thailand, and Hong Kong were more modest.

Emerging Markets

Emerging market equities performed strongly in Q4 2023, although they lagged behind developed markets. Rising bond yields and Middle East conflict pressured EM returns early in the quarter. Signs of a “soft landing” for the US economy and expectations for 2024 rate cuts supported the market, but China's performance remained a drag.

Poland was the top performer, with markets welcoming Donald Tusk's election as prime minister. Peru, Egypt, and Mexico posted strong double-digit returns in US dollars.

Brazil outperformed due to disinflation signs and central bank rate cuts. Taiwan benefited from strong tech-related stocks, while Korea also rallied on tech performance. Hungary, Colombia, Greece, and South Africa saw gains, the latter due to eased electricity blackouts. India gained amid moderating inflation and strong state election results for the ruling Bharatiya Janata Party.

Saudi Arabia slightly outperformed the index, while Kuwait, UAE, China, and Turkey generated negative returns. China's mixed economic data suggested a lackluster recovery, with limited stimulus measures. The ongoing real estate crisis and potential tech regulation weighed on sentiment. Despite multiple rate hikes, Turkey was the worst performer, with inflation over 60%.

Global Bonds

Q4 was highly positive for fixed income markets, marking the best quarterly performance in over two decades according to Bloomberg Global Aggregate indices. A perceived shift in monetary policy direction toward rate cuts drove the performance, with government bond yields falling sharply and credit markets rallying.

The Fed maintained rates throughout the quarter, adopting a more dovish tone in December. The revised dot plot indicated three rate cuts for 2024, up from two. Encouraging news on PCE inflation helped the FOMC feel more comfortable with progress towards the inflation target.

Other major central banks held rates steady but remained cautious about inflation. The ECB made progress in unwinding Pandemic Emergency Purchase Programme support while highlighting domestic inflation concerns. The market priced in several rate cuts for next year despite relatively healthy labor markets and a pessimistic growth outlook indicated by the PMI.

The BoE's MPC remained divided on further tightening. A downside inflation surprise extended the gilt market rally. The BOJ's minor yield curve control policy adjustments fell short of market expectations.

Government bond yields fell across the board, with the US 10-year Treasury yield dropping from 4.57% to 3.87%, the UK 10-year gilt yield from 4.44% to 3.54%, and the German 10-year Bund yield falling by 0.81% to 2.03%.

Corporate bonds rallied impressively on hopes of averting a deep recession as financial conditions eased. High yield markets outperformed investment grade in the US and Europe. Quarterly returns in US and European investment grade credit markets were the best since Q3 2009. The rally was broad-based across all sectors, with securitized credit, covered bonds, and quasi-government bonds performing strongly.

In the FX market, the Swedish krona was the top performer among major currencies, benefiting from the Riksbank's FX hedging operations. The Fed's pivot toward rate cuts weighed on the US dollar.

Balanced convertible bonds, as measured by the Refinitiv Global Focus index, gained 6% in US dollar hedged terms, benefiting from the equity market tailwind. Convertible primary markets were active, with $22.4 billion of new issuances in Q4, bringing the annual total to $90 billion, about double the volume of 2022.

Commodities

The S&P GSCI Index declined in Q4, with price gains for precious and industrial metals failing to offset weaker prices for agriculture, energy, and livestock. Energy was the worst-performing component, with sharply lower prices for natural gas, crude oil, and gas oil. Oil prices fell despite output cuts from Opec+.

In agriculture, higher prices for coffee, cocoa, soybeans, and wheat were offset by declines in sugar, cotton, corn, and Kansas wheat prices. Industrial metals saw mixed performance, with nickel and lead prices falling while zinc, copper, and aluminum gained. Precious metals, including gold and silver, achieved robust price gains.

Digital Assets

Digital asset markets performed strongly in Q4 after a quiet period in Q2/Q3. Bitcoin and Ethereum returned +57% and +37% respectively, bringing their yearly returns to +155% and +91%.

Altcoins performed exceptionally well, with Solana (SOL) and Avalanche (AVAX) returning +399% and +320% respectively, bringing their 2023 returns to +917% and +254%. These alternative smart contract platforms saw increased usage and potential integration with traditional financial institutions.

Speculation about a US spot Bitcoin ETF approval by the SEC drove the market, with the consensus placing the approval date in January. Improved probabilities were supported by multiple meetings between SEC officials and ETF issuers, demonstrating a positive working relationship.

2023 was a transition year for crypto, with more regulated custodians building out offerings, off-exchange settlement solutions ramping up to address counterparty risk