Welcome to the Quarterly Investment Review for Q4 2023.

Our Investment team have put together a range of resources to update you on what has happened in markets across the fourth quarter of 2023. Here you will find: 

• High-level, global equity performance analysis
• Interviews with our team of investment experts
• An introduction to our brand new podcast 'Capital Alchemy' featuring guest speaker Kobus Kleyn CFP
• A written summary covering the quarter's main market events

Global Equity Performance Analysis:

The graph below shows global equity performance across the quarter and plots world events along the performance line to indicate their impact on markets.

Hear from our team: 

2023 Summary and Outlook

Industrial Equities

New Podcast: Capital Alchemy
‍

Soon to be released across various listening platforms, 'Capital Alchemy' is a brand new, interview style podcast featuring big names from across the financial services industry. Why Alchemy? The podcast aims to bring together leading minds and experts, creating a vibrant concoction of ideas, thoughts and points of view. Whilst the subject matter might sometimes be complex, Capital Alchemy’s laid back format makes it perfect to have bubbling away in the background of your dog walk, your kitchen clean up or your gym session. In the first episode, we were delighted to have Capital International's Tatenda Chikombero and Lerato Lebitsa host Certified Financial Planner, Kobus Kleyn. Watch the teaser below and keep an eye on our social media channels for the podcast's official release.

*Update - Capital Alchemy has now been released! Listen to the first episode here or on your preferred streaming platform.

Q4 Summary and Outlook

The final quarter of 2023 provided welcome relief to investors as major stock indices and global bond markets posted their best returns of the year. This rise in asset prices reflected inflation numbers which fell more quickly than expected; this surprised the market and gave support to the view that central banks have reached the peak of the interest rate cycle.

The S&P 500, NASDAQ 100, and MSCI Europe achieved returns of 11.7%, 14.6%, and 6.5% respectively in local currency terms while the UK main index returned a modest 2.3%. The combination of lower bond yields, healthy corporate earnings, and falling inflation all helped provide support for a broad equity market rally. Growth stocks, especially those in the technology sector, and those that continue to participate in the artificial intelligence trend, outperformed value stocks. Third quarter earnings season in the US concluded with 80% of S&P 500 constituents beating earnings estimates by circa 8% on an average. The global equity rally was welcome but did highlight an issue that 2023 has been a year of poor market breadth as year-to-date US equity returns have been largely driven by the outsized returns of the Magnificent Seven, which combined on an equal weighted basis are up 111% YTD. Nvidia being a major player in AI innovation was the top performer of the 7 achieving a 240% return YTD. UK valuations, which have not become as stretched as US valuations, continue to be viewed as comparatively cheap.

Global government bonds rallied as yields rapidly declined after hitting their peaks in October. The US 10-year Treasury yield, which hit 5% in October, now sits at 3.9%. The UK and EU 10-year Treasury yields sit at 3.5% and 2.0% respectively. The “higher for longer” central bank narrative has been replaced by “lower and sooner” with interest rate cuts now expected to begin as early as Q2 2024. The pivot to a more dovish stance has occurred much faster than initially forecasted. Markets have interpreted the surprise disinflation readings to imply a similarly expedited cycle of interest rate cuts following the sharp cycle of interest rate rises. Renewed hopes of a soft landing gave support to investment grade and high yield bonds as credit spreads tightened.

In terms of macroeconomic figures, the surprise fall in headline inflation brought the most recent readings to 3.1% in the US, 2.4% in the EU, and 3.9% in the UK. On October 7^th news broke of terrorist attack on Israel by Hamas, which sent shockwaves throughout the world and caused the volatility of commodity prices to spike. Brent crude oil prices reached a peak in October of $91, falling to $77 by year end. Gold finished the year rallying 11.6% to $2063. The current positive correlation between stocks and bonds is a useful reminder of the importance of diversifying through alternative assets such as commodities and real estate to hedge against other risks.

Throughout 2023, financial markets have contended with a formidable amount of volatility and uncertainty, but with greater clarity we can now refocus on key dynamic variables like the peaking and unwinding of the interest rate cycle and disinflation. An end to the interest rate cycle brings a sense of stabilisation to markets and forward interest rate expectations. Politically, 2024 is also an eventful year with elections in the US, EU, and UK.

Having avoided a much-feared recession over winter, and with the potential easing of interest rate pressures, consumers may become more confident, especially if inflation continues to decline and stay below 3.0% in 2024. The difficulty will be managing market optimism with the actual level of interest rate unwinding and to prevent valuation bubbles. Global economies must also contest with potential recession, especially in the UK where GDP fell -0.1% in Q3, while the US must contend with the burden of $34 trillion in national debt. Heading into 2024, we remain vigilant on the macroeconomic and geopolitical hurdles that need to be navigated while weighing potential opportunities against potential risks. In this environment we prefer resilient high-quality companies with strong balance sheets, good cash flows, and competitive pricing power.

Disclaimer: The views, thoughts and opinions expressed within the article / video are those of the author / speaker(s) and not those of any company within the Capital International Group (CIG) and as such are neither given nor endorsed by CIG. Information in this article does not constitute investment advice or an offer or an invitation by or on behalf of any company within the Capital International Group of companies to buy or sell any product or security or to make a bank deposit. Any reference to past performance is not necessarily a guide to the future. The value of investments may go down as well as up and may be adversely affected by currency fluctuations. CIG, its clients and officers may have a position in, or engage in transactions in any of the investments mentioned. Opinions constitute our views as of this date and are subject to change.