While 2023 has presented significant challenges for investors, there has nonetheless been much that should help buoy sentiment as we move into the new year.
To touch on the negative first, geopolitical tensions have heightened as the year progressed — in Ukraine, in the Middle East and in Asia — as China’s long shadow falls across Taiwan and the South China Sea. Central banks have fought to stem inflation with higher interest rates, and the potential for recession has loomed over markets.
Despite these clouds, there are reasons to be cautiously optimistic as we enter 2024. Equities have largely surprised on the upside in 2023, while fixed income assets turned a corner after an extremely challenging 2022.
Despite the spectre of a recession spooking markets, most economies, with the exceptions of Germany and Italy, have so far demonstrated healthy growth, the US particularly so, although the expectation is that growth will be more subdued this year.
As central banks pivot from fighting inflation to encouraging growth, the balance between growth, inflation and interest rates is likely to define market performance for 2024.
Central banks continue to view inflation as problematic and remain committed to bring it in check. While inflation has undoubtedly eased, it remains stubbornly above the targets set by most central banks.
Positive inflation data
Recent data sets look more encouraging, with year-on-year inflation in the US and the UK coming in at 3.2 per cent and 4.6 per cent, respectively, in October, healthier than markets had anticipated. Meanwhile, eurozone inflation fell to 2.4 per cent in November. These decreases support the view that the current round of interest rate hikes may be ending, with the central banks in all three of these regions choosing to leave rates steady in November.
The balance between inflation and interest rates weighed on fixed income markets in 2023. Yields rose sharply (and prices dropped) across the board since their lows in 2020; in October, yields on UK and US government 10-year bonds reached levels not seen since 2007-08.
The large losses witnessed in 2022 were not repeated in 2023, implying that much of the valuation readjustment has already happenedHowever, the more positive inflation data in November saw bond yields fall from their peaks. Furthermore, the large losses witnessed in 2022 were not repeated in 2023, implying that much of the valuation readjustment has already happened.
In fact, although October was generally a weaker month, the recent rally in bond prices since has meant that most bond markets, bar UK government bonds, are in positive territory year to date.
