Global Market Overview – December 2023
After an extremely positive November for most financial markets, there was some apprehension that December 2023 would prove to be a damp squib (or worse). As it turned out, the good vibes from November continued…
The major global central banks kept policy unchanged – and although the European Central Bank and the Bank of England did their best to communicate a lingering sense of caution, markets largely ignored their comments, preferring to focus on the Federal Reserve’s implication that the battle with inflation might be coming to an end.
As such, 10-year US government bond yields fell under 4%, continuing their decline from a high of 5% in October. The UK gilt market followed a similar course, with 10-year bonds now yielding less than 3.5%.
Of course, falling yields are difficult to get excited about; we need to see the price movement to feel the real impact and get the context. The most vivid example is the UK Gilt maturing in 2061, which has seen a 25% gain in value over the last month! As we’ve been saying for most of 2023, bonds look like a good investment at this point of the economic cycle, with yields at these levels. We’re starting to see why.
Equity investors also had a good time of it. The large cap US equity market rose 5%, but in a shift from the prevailing narrative of this year, this wasn’t all down to the Magnificent Seven. Small cap US stocks have sprung back into life, the Russell 2000 index rose 14% as investors started to see the opportunities available to them. For many of the positions in the US – equal weight, climate transitions, healthcare innovations – this is what we’ve been expecting to see for some time. It’s not all about the big tech stocks – there are thousands of other great businesses to invest in!
One notable laggard in the equity space during December was Japan. Rather than anything being wrong with the businesses though, this was largely to do with the strength of the Yen as investors started to reconsider the direction of travel for interest rates next year (likely higher in Japan, and lower in the US).
As we look ahead to 2024, we don’t see a need to change portfolios. Many of the stories which have started in December are likely to continue into next year – and we’re already well placed to benefit.
Core Views
Over the next twelve months, we think that the global economy will slow down - prompting bouts of volatility. In this environment, it is important to rely on a stable identity. Economic uncertainty creates fear and investor sentiment tends to overreact to economic turning points. Going forward, we believe that:
• Inflation is coming down: Across the developed world, inflation has peaked, and is mostly falling. Supply-chain disruptions have eased, energy prices are a little more settled, and companies are no longer reporting issues with finding workers. Of course, slower inflation still means rising prices –so the cost of living pain isn’t going away quickly.
• Interest rates are high: We’re now over a year into the rate hiking cycle. Interest rates are unambiguously high when compared with the past decade. The impact of higher rates is always the same – although time-to-effect changes in every cycle.
• The economy is slowing: For consumers and companies, day-to-day life is getting harder – whether it’s rising costs or increased debt, there’s less money left at the end of the week or month. As the flow of money around the economy slows, strong growth is more difficult to achieve. The world may or may not slip into a ‘technical’ recession in the next three months, but a sluggish growth environment is already here.
In such an environment, investors will start to worry about what’s next for financial markets. Economic data isn’t likely to stabilise until next year. Equity markets are unlikely to perform well in the medium term.
Source: 7IM
Summary
Investors should try to focus on the fact that investing in the stock market over the long term, is a powerful tool to preserve the purchasing power of their wealth and on ensuring that they have an appropriate asset allocation for the level of risk with which they feel comfortable. A disciplined approach to asset allocation and identifying good active managers who can navigate these conditions successfully remains of the utmost importance.
December 2023
With thanks to Seven Investment Management LLP for their views and market thoughts. RiverPeak Wealth Limited