SSFS Market Commentary – Q4 2023

 

Emerging Markets – Chinese stocks continue to struggle:

China’s economic recovery in Emerging Markets remained uncertain despite Q3’s estimated 1.3% growth. Low inflation dented investor confidence while property investment, a key growth driver, dropped by nearly 10% year-on-year in October. China shifted spending habits towards services over goods, which negatively affected their heavy manufacturing economy. This caused real estate market strains on expenditure and lending, heavily impacting a society where 70% of family assets are tied to property. Throughout the year, Chinese stocks struggled, mirroring earlier declines in Q4 in contrast to the surging global markets. The CSI 300 index recorded a fall of 11.8%, marking it as the worst-performing Asian market of the year. China’s economy has been confronting substantial challenges since their economic reopening.

US Markets. The S&P 500: 

The fourth quarter of 2023 commenced with subdued expectation as increased long term interest rates extended the S&P 500’s late summer downturn, resulting in declines in asset and portfolio values. Investor sentiment faded and we observed increasing struggles towards late October across both stock and bond markets.  However, a shift occurred with the release of positive third-quarter economic data and increased business activity that surpassed pessimistic forecasts.

Also, due to inflation data easing faster than anticipated, investor confidence flourished, which was later enforced by Federal Reserve’s announcement to maintain interest rates. From October 2023 until the end of the year, S&P 500 rose continuously resulting in the longest winning streak since 2013, concluding the year with around 18.58% increase. This is mostly thanks to the ‘magnificent seven’, rising as much as 238.9% since the beginning of the year, as shown in the following chart:

Company	2023 gain
Apple	48.2%
Microsoft	56.8%
Alphabet	58.3%
Amazon	80.9%
Nvidia	238.9%
Meta Platforms	194.1%
Tesla	101.7%
S&P 500	24.2%

Figure 1. Magnificent Seven stocks (Investors.com, 2023)

UK Inflation in 2023: 

UK Consumer Price Index (CPI) inflation figures started the year at 10.1%, a slight decrease from the 2022 high of 11.1%. However, inflation subsided throughout the year due to the interest rate hikes occurring over the past 2 years causing significantly lower disposable income. Despite this, energy prices have gradually fallen due to eased supply constraints, primarily causing reduced inflationary pressures.

This was illustrated in the latest CPI annual inflation figures, as of November 2023, with 3.9%. This has taken a huge step in the right direction towards the Bank of England’s 2% target rate. Although we saw the biggest fall of inflation between September and October from 6.7% to 4.6%, decreases in the inflation rate has somewhat plateaued. With constant rising geopolitical tensions, and sticky inflationary rates, there is potential for the Monetary Policy Committee to raise rates again to further dissipate inflationary pressures.

UK Interest Rates in 2023:

In January 2023, the Bank rate was at 3% after the Monetary Policy Committee voted to increase it. At the following MPC meetings, bank rates increased continuously until reaching and maintaining its peak of 5.25% in August 2023. Since August, the bank rate has remained unchanged leaving a ‘higher for longer’ mantra, highlighting the MPC’S intention to keep the bank rate the same until more significant changes towards the BOE inflation target of 2% occur.

Overall, 2023 has seen the fastest annual increase in the bank rate we have seen in the last 30 years, however, the Bank of England’s consensus, and investor sentiment, indicates rates to start falling in the latter stages of 2024. This suggests that we aren’t going to see any changes in the bank rate in the immediate future and the decline will be one of a gradual nature, the opposite to the sharp increases we saw across 2023.

Strategic Solutions’ Centralised Investment Proposition (CIP)

The table below has taken the average fund performances in each risk range. We saw positive performance for each risk range as follows:

Risk Profile	Performance	Highest performing	Lowest performing
Defensive	6.03%	7.37%	4.68%
Cautious	6.89%	9.06%	4.64%
Balanced	8.42%	10.94%	5.43%
Moderately Adventurous	8.99%	12.58%	5.52%
Adventurous	10.07%	14.36%	5.72%
FTSE 100	7.93%
S&P 500	18.58%

 

The LGT WM MPS range underperformed the rest of our investment strategies across majority of the risk ranges as they had limited exposure to the magnificent seven (as mentioned above), which outperformed the rest of the market. Furthermore, LGT prioritised high quality businesses and thus reduced their exposure to basic materials and energy (of which Oil, Dollar & Gold performed well during the year). This lack of exposure to industries which performed well in 2023 meant they missed out on some of the best performing assets. Consequently, they missed out on the potential for upside growth within their portfolios. However, LGT remain confident that their investing ideology of investing in good quality companies with strong fundamentals will pay off, especially if there is a potential recession.

The Columbia Threadneedle Universal MAP Multi-Asset range outperformed the rest of our investment strategies across the majority of the risk ranges. Their global team had overweighted equity positions (for example, in Builders FirstSource, Robinhood Markets and Broadcom), which experienced strong performance during 2023. In addition, their UK team generated positive returns from their overweight positions to the consumer discretionary and industrial sectors which flourished during the latter stages of 2023. More recently, CT are favouring fixed interest investments, namely government bonds, given the attractive yields on offer caused by the recent interest rate hikes of late.

Strategic Solutions’ outlook:

2023 has been a volatile year for investments as evidenced by the commentary above. The market has been driven by the expectation of interest rates effectively managing inflation, leading to a resurgence in 2024 as inflationary pressures begin to dissipate. However, this has not been the case as early data has indicated that UK inflation for December 2023 year on year has increased to 4%. This comes as a shock given the positive global views, as such, markets in early 2024 have tumbled whereby the FTSE has fallen around 4% since the beginning of 2024. In addition, global economies are also experiencing similar shocks as US inflation rates have equally risen to 3.4%, from 3.1%. Despite markets reacting bad to the news of sustained inflation, curbing inflation remains a priority of the MPC and Federal Reserve, as such, the markets have priced in the expectancy of ‘higher for longer’ and the potential for a rate rise.

If you have any immediate concerns surrounding anything written in this commentary or would like to further understand anything discussed in our investment reports, please contact your adviser. Otherwise, we look forward to seeing you in our next meeting.

 

Past performance is not a reliable indicator of future returns. The value of investments and the income from them can go down as well as up, so your clients may not get back what they invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Changes in currency exchange rates may affect the value of an investment in overseas markets. Investments in small and emerging markets can also be more volatile than other more developed markets.