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Markets: Quarterly review Q4-2023:

We saw developed markets outperform as emerging and developing markets continued to be weighed down by concerns over geopolitics, Middle-East tensions, and China’s real estate sector. We saw the US Federal Reserve take a more dovish stance as it signalled that rate cuts could be on the way in 2024, helping send major markets higher, the USDollar lower, and push sovereign bond yields lower.

US equity markets delivered a strong Q4-23 on the back of expectations for multiple rate cuts through 2024, as the S&P reached near record highs toward the end of the quarter. US inflation (CPI) continued to trend lower through the quarter from September’s 3.7% to 3.1% in November. Conversely, the Core PCE unexpectedly rose MoM in November by 0.1% alongside annualised GDP being revised downward to 4.9% from the previous 5.2%; giving some pause to market exuberance. While Jerome Powells’ more dovish commentary did help broader sentiment across US markets, Fed minutes were suggesting a more modest 50-100 basis points rate reduction in 2024; considerably less than many market pundits have suggested. IT, real estate, and consumer discretionary sectors were driven higher by optimistic expectations whereas energy sectors posted declines on the back of weaker energy prices.

The Eurozone delivered a stronger-than-expected Q4-23 performance as expectations grew that the ECB were now less likely to increase interest rates further. November inflation fell to 2.4% from October’s 2.9%, adding to expectations that the Zone could see rate cuts sometime in 2024 particularly if the Fed starts to cut rates. Conversely, EU GDP Q3-23 was -0.1% and is expected to be similar for Q4-23, alongside December PMI falling to 47.0; which collectively made the broader market performance for Q4-23 notable. IT, industrials, materials, and real estate sectors gained whereas energy and healthcare sectors fell.

UK markets gained through Q4-23, led by small and mid-cap sectors, much driven by more positive sentiment that BOE rates may have peaked. In-bound M&A interest and activity from overseas also helped drive markets forward too. The UK Treasury Autumn statement added more policy initiatives aimed at accelerating FDI through 2024. Financial and Industrial sectors fared well domestically as GBP moved higher against the USD whereas the larger international conglomerates fared less well in the face of a weakening USD and supply-chain risks as the Middle-East conflict continues. UK GDP for Q4-23 is expected to marginally decline again, on the back of the now-revised Q3-23 decline. UK inflation fell to 3.9% for November as the downward trend continued to fuel more favourable rate expectations through 2024.

Japanese markets posted a modest gain for Q4-23 despite weakness in October and December, much driven by underlying trend volatility throughout the quarter, and geopolitical spillover. October saw sentiment concerns that USD rates would remain higher-for-longer due to elevated US inflation, which in turn would impact rate pressures on Japanese monetary policy. Those concerns dissipated somewhat in November as weaker US data pointed toward rate cuts. Contrarily, December volatility was driven more by the appreciating Yen as the Japanese economy showed signs of improvement as the BOJ indicated some gradual steps and measures toward normalisation of their easy monetary policy through 2024. The December BOJ Tanken survey added constructive sentiment to manufacturing and service sectors improvements into 2024 and bolstered by recently published structural plan announcements from major Japanese conglomerates.

Asia (ex Japan) delivered a positive quarter, albeit marginally in many cases, and much helped by the expectation that US interest rates likely have peaked. Chinese markets suffered another negative quarter on the back of on-going geopolitics and investor concerns over weakening economic data amid fears that stimulus measures would be insufficient to spur growth; despite delivering 5% GDP for 2023. Q3-24 sentiment soured further on the back of uncertainty over China’s regulatory regime alongside their ongoing real estate crisis. South Korea, Taiwan, Singapore, Malaysia, and The Philippines outperformed over the quarter whereas China, Hong Kong, Thailand, and Indonesia underperformed.

Many Emerging Markets outperformed through Q4-23 despite the impact of high USD rates, the Middle-East conflict, and the ongoing collateral impact from geopolitics. Signs of a US soft-landing and increased expectations for US Fed rate cuts through 2024 helped investor sentiment shift positively for Q4-23. However, negative sentiment toward China kept that upward impetus somewhat muted. Donald Tusks’ election as Polands’ new prime minister helped Polish markets rise notably. Brazil outperformed as their Central Bank reduced rates amid signs of disinflationary momentum. India had a strong quarter as inflation continued to moderate and the ruling BJP did well in State elections. South Korea and Taiwan performed well on the back of robust IT exports. Mexico, Peru, Hungary, Greece, and Egypt also delivered strong returns too. Turkey underperformed as inflation passed 60%pa despite changes to monetary policy and rate increases.

Global bond markets had a strong Q4-23. Indeed, the strongest in two decades. However, such accolade should be tempered by the knowledge that rates were at near zero for 12 of those years, plus the rates and inflation turmoil this past 2 years. So, the ‘bar’ was already historically low. In Q4-23 we saw a pronounced shift in broader perception of monetary policy from ‘higher-for-longer’ to the anticipation of substantial rate cuts through 2024. Consequently, yields fell rapidly and credit markets rallied as investors aimed to lock in currently higher rates. Such a sentiment shift was driven by moderating PCI data, a more dovish-tone in December by the US Fed, and the revised FOMC ‘dot-plot’ now suggesting more than two rate-cuts in 2024. Conversely, most other Central Banks continued to express caution for 2024, citing inflation data remaining elevated for the nearer term and weakening economic data. US 10Y Treasury yields moved to 3.87% from 4.57%; UK Gilts moved to 3.54% from 4.44%; and the 10Y German Bund moved to 2.03% from 2.84%. Corporate bonds rallied strongly despite slowing growth indicators much in the hope that a US recession can be averted. High Yield outperformed Investment Grade and Government. Convertible bonds also outperformed on the back of strong issuance levels throughout 2023.

Commodities struggled through Q4-23 to deliver positive performance, much on the back of declining demand as global manufacturing continued to trend weaker. Despite OPEC+ output reductions, energy prices fell through the quarter, much offset by the expansion of US shale production. Wheat, coffee, cocoa, and soybean prices did gain over the quarter, but sugar, cotton, and corn prices declined, effectively balancing each other. Similarly, nickel and lead prices fell whereas aluminium, copper and zinc rose. Both gold and silver made gains through the quarter, albeit with elevated volatility.

Digital assets performed strongly through Q4-23, particularly Bitcoin and Ethereum. A number of Alt-Coins (alternative smart contract and transaction platforms) also performed well as they progress toward integration with traditional financial institutions. Recent speculation for a US spot-ETF being approved by the SEC in January added interest and momentum to this sector through December. However, the SEC and other US Government bodies remain cautious regarding this asset class, especially in light of FTX.

Andy Blandford