Investment markets had an excellent end to the year. In fact, Global Stock markets had their best December since 2010 and UK Gilts had their best month since Brexit! This built on a very strong month of November which meant for an excellent quarter to end a very strong year. For the quarter, global stock markets had their best quarter since Q4 2021, and global bond markets had their best quarter since 1991!
December also ended an excellent month and excellent year for the Magnus Portfolios. The Portfolios finished the year up by between 9.4% and 11.1%. This represents out-performance vs the ARC indices of between 3% and 5.5%.
Last month
- Investment markets had a really strong month
- Expectations of lower interest rates (in the US) drove markets
- Inflation continued to fall
- UK assets did particularly well (both bonds and domestic equities)
- Bonds continued to bounce back
This week
- US inflation is out on Thursday
- Chinese inflation numbers are out on Friday
- UK growth data for November is out on Friday
- The UK stock market will be driven by some of the big retailers scheduled to give trading updates this week (Greggs, Tesco, Sainsbury’s, M&S and Whitbread) which will give an indication of how much spending went on over the holiday season
- US earnings season kicks off on Friday with some of the big Banks reporting (e.g. Citigroup, Bank of America and JP Morgan)
Equity returns are in GBP, Oil is in USD. Gold is shown in GBP. Bond returns are all shown in GBP. Source Bloomberg.
More detail
- Last month saw global stock markets enjoy their best December since 2010 and their best quarter since Q4 2021. Bond markets also did extremely well. UK gilts had their best month since Brexit and Global Bonds had their best quarter since 1991!
- What drove the returns? The key drivers were:
- Lower inflation (and importantly, the inflation numbers coming in lower than had been expected).
- UK inflation (CPI) came in at 3.9%. This was less than the 4.3% that had been expected and less than the prior reading of 4.6%. The 11.1% reading in November 2022 feels a long way off now and PM Sunak was proved right in his pledge to halve inflation (it started 2023 at a reading of 10.5%).
- US inflation came in at 3.1%, falling from its prior level of 3.2%.
- Lower expected interest rates next year
- The US Federal Reserve met on 13th December and released their “dot plot”. These “dots” represent each of the Federal Reserve official’s projection for short-term interest rates. They release this data quarterly. This latest version showed 1 extra interest rate cut being projected for 2024 (bringing the total number of cuts to 3). This revised dot plot was complemented by some very market friendly language from the Chair of the Federal Reserve (Jerome Powell). Powell said they would be “dialling back the amount of policy restraint in place”.
- The change in stance from the Fed led to a MASSIVE re-pricing of interest rates and bond yields. Bond futures markets moved to price in 7 interest rate cuts by the US Federal Reserve for 2024.
- The Bank of England met the day after and were actually much more cautious. They kept interest rates steady at 5.25%, but 3 of the 9 members actually voted to hike rates. This was pretty much ignored by the markets: with the bond futures markets moving to price in 6 interest rate cuts for 2024, with rates priced to finish the year at 3.75% (hence the big shift down in mortgage rates).
- Continued resilience of the Consumer (particularly the US consumer)
- Retail sales came in better than expected (and showed positive growth: people were out spending) and labour market data was solid.
- The US Consumer is always the one we focus on. Quite simply, the US is the biggest economy in the world and the Consumer accounts for c70% of US growth. The US also makes up c70% of the global stock market hence it matters a whole lot more than the UK!!
- These were the key drivers of markets in December and they were also the key drivers of markets in 2023 as a whole. Very simply, it was the “3 R’s” that drove markets last year:
- Rates: interest rates were hiked to their highest level in 15 years and hiked at their fastest pace in over 30 years! This did the job of bringing down inflation (which has been lapped up by investment markets)
- Resilience: The consumer has kept spending and kept the wheels of the economy turning
- Recession: or rather the lack of it! Corporates went into 2023 braced for a recession. This meant getting in less stock and generally running leaner (cutting costs). Hence profits were higher than expected given the resilient consumer.
- Lower inflation (and importantly, the inflation numbers coming in lower than had been expected).
- How did the markets respond?
- Pretty much all areas of investment markets did well in December. The perceived promise of lower interest rates breathes life into Companies (they can borrow for less) and lower inflation takes the heat off the Consumer (they can spend more).
- The biggest beneficiaries were:
- UK government bonds: which rose by 5.4% in the month
- Companies that benefit from lower interest rates. Specifically:
- UK domestic stocks rose by 8.2% on the month
- The banking sector rose by over 7% on the month
- “value” markets (like the UK) generally performed best
- How did the Magnus portfolios do?
- Very well!
- The portfolios rose by between 3.4% (Magnus Cautious portfolio) and 4.7% (Magnus Adventurous portfolio) in December.
- This took returns for 2023 to between 9.4% (Cautious) and 11.1% (Adventurous) for the models that we run.
- This represents out-performance vs ARC of between 3% and 5.5%.
- Key return drivers for the Magnus portfolios in December:
- Premier Miton (our US value manager) was up by 9.5% on the month.
- Our UK managers did a great job. In particular:
- Liontrust Special Situations was up by 7.4%
- Gresham House was up by 6.7%
- This manager was put into the Portfolios in June 2023. They are up nearly 10% since their inclusion and are in the top decile of UK managers over the last year.
- Ninety One Global Environment Fund was up by 7.8%
- This is our “clean energy” manager. They saw a big bounce back in some of their wind-power names such as Vestas and Orsted, which rose by 13.6% and 16.7% on the month respectively.
- Blackrock Corporate bond fund was up by 5%
- They own longer dated bonds which rallied hard in December.
- This manager rose by 10.9% in 2023.
- All our other funds pulled their weight!
- What is ahead for this year?
- “The X-Factor”: Front and centre will be National Elections: 40 take place this year. There will be a lot of scrutiny over which box the “X” gets placed and what it means for markets. We will cover this in detail in our outlook, but in short, we expect populist policies to take precedence over the key longer-term issues; namely debt piles and deficits! We expect interest rate cuts to come to the aid of markets and economies in event of slowdown: good news for investment markets, bad news for savers..
- As always, long-run future returns will be driven by valuations and earnings. To that end, we’d note that valuations don’t look stretched and earnings have begun to come out of their trough (stock markets are forward looking and we’re just coming out of a corporate earnings’ recession).
Equity Valuations by region:
NB – if we strip the “Magnificent 7” (which trades on about 37x earnings in aggregate) out of the US market valuation, then the US market trades on about 18x earnings. This is around the 10-year average level (of 17.6x) for the US market.
Earnings:
- US corporate earnings “turned the corner” in late October / early November
- The Q3 earnings season was much better than expected
- Corporate earnings grew at 4.3% Year-over-Year. This might not sound massive, but it was a lot better than the contraction of -0.3% that analysts had been expecting.
- Q3 represented the first positive quarter of earnings growth since Q3 2022. This is significant as we had been in an “earnings recession”. Stock markets are forward looking and companies had effectively factored in a modest recession for 2024 into their earnings numbers.
- Q4 2023 earnings will be out later this month. Analysts are expecting a growth rate of 1.3% year-on-year. This has been heavily revised downwards (so should be easy to beat).
- Analysts are expecting earnings growth of 0.8% for the full year of 2023.
- For the year 2024, analysts are expecting earnings growth of 11.8%. This is a fairly standard growth rate.
- I have focused here on the US market on the basis that it represents 70% of the global stock market and is the one that will set the tone for other indices.
The value of investments and the income from them can go down as well as up and you could get back less than you invested. Past performance is not a reliable indicator of future performance.
The content of this article should not be relied upon when making investment decisions, and at no point should the information be treated as specific advice. The article has no regard for the specific investment objectives, financial situation or needs of any specific client, person, or entity.
