December Global Commentary: 2023 ends on a high note as equity markets continue to rally

2023 ended on a high note for global investors (MSCI World +4.9% MoM), continuing a rally that saw the benchmark rise by 16% since late October as investors became increasingly optimistic about the prospect of US rate cuts in 2024. US stocks ended the year with nine consecutive weeks of positive returns, the longest winning streak since 2004. The early part of the year was dominated by the Magnificent Seven (Apple, Amazon, Alphabet, Meta, Tesla, Nvidia and Microsoft), which were up over 50% in aggregate by late October, while the rest of the S&P 500 shares were down 2% in aggregate over the same period. Still, the latter part of the year saw the rest of the shares keep track with the Magnificent Seven as the prospect of lower rates and inflation and the potential for an economic soft landing is seen as benefitting all companies.

Emerging markets (EMs) (MSCI EM +3.9% MoM and 10.1% YTD) were again held back by Chinese stocks, which struggled in December as regulators announced yet another unanticipated regulatory intervention, the latest one aimed at curbing online gaming. Benchmarks for Chinese stocks listed in the US, Hong Kong and on the mainland defied an otherwise strongly positive year for equities by ending 2023 lower (Nasdaq Golden Dragon China Index -2.5%, Hong Kong Chinese Enterprises Index -10.8% and Shanghai Composite Index -3.9%, all YTD in US dollar terms).

Amongst the equity sectors, the S&P 500 energy companies were the only ones down for the month (-0.1% MoM) as the Brent crude oil price dropped by 7% in December, leaving it down 10% YTD, closing the year at US$77/bbl. The energy sector also ended the year lower (-1.4% YTD), leaving it as the only S&P 500 sector (alongside utility companies) down for 2023 – in 2022, those were the only two sectors to experience positive returns.

The US Federal Reserve (Fed) kept rates on hold at its last meeting of the year, making it the third consecutive meeting without a rate hike. While the median estimate for Fed members suggested that they expect to cut rates by 0.75% in 2024, consensus expectations amongst investors is for double that (1.5% of cuts in 2024), with those expectations having come a long way from the 0.5% cuts that were the consensus in late October.

The latest US inflation data showed headline inflation continuing to trend lower (3.1% YoY) even as core inflation paused at 4.0% YoY (as expected). US 10-year government bond yields, which touched 5% in late October, followed Fed rate expectations lower, ending the year at 3.9% p.a. (exactly where they started 2023). Lower yields meant the Bloomberg Global Bond Index ended the year higher (+5.7% YTD) after posting losses in both previous years. Lower US rate expectations also dragged the US currency down (US Dollar Index -2.1% MoM and YTD).

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