Who made money in 2023?

29 January 2024

2023 was a good year for equities with most major markets posting strong returns.

Many of the fears that caused equities to plummet in 2022 unwound in 2023. It wasn’t a great year for global growth but fears of recession eased, inflation fell and by the end of the year, the talk was of interest rate cuts, not increases.

On average global equity markets returned 18% in 2023. The US did far better, helped by a stellar performance from technology stocks. In Europe, Spanish and Greek equities outperformed partly because of the resilience of their economies in the face of a wider European downturn. Japanese equities had a strong year, helped by loose monetary policy and good growth.

Not all markets did well. Chinese equities were the big underperformer last year, losing 5% of their value on investors’ worries about deflation and poor growth.

The performance of equity markets does not, however, move in lockstep with GDP growth. Many equity indices are dominated by multinationals that do not reflect the makeup of national output in which small and unquoted businesses and the public sector play a large role. Moreover, financial markets respond as much to changing expectations of future growth and interest rates as they do to current performance. German equities returned 15% last year despite the German economy sliding into recession partly on the hope of better times ahead.

Globally the sectors that suffered the greatest losses in 2022 – including financial services, consumer products and industrial goods – saw the biggest rebounds last year. Markets were in ‘risk on’ mode, with cyclical sectors outperforming and defensive ones, including health care, consumer staples and pharmaceuticals, lagged. Oil and gas stocks soared in 2022 but saw much more modest gains in 2023 as energy prices fell.

The biggest swing in performance came from the technology sector. Having lost over a third of its value in 2022, tech stocks returned over 50% in 2023. Falling interest rate expectations and enthusiasm for generative AI were major factors. The Financial Times estimates that the so-called ‘magnificent seven’ comprising Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla accounted for more than 60% of US equity returns last year. Nvidia, a major supplier of chips for the AI sector, saw its share price more than triple in 2023.

The value of America’s tech giants is staggering. Microsoft and Apple vie for the title of the world’s most valuable company, each with a market capitalisation around the $3tn mark, more than the whole of the UK FTSE 350 equity index.

Returns outside the equity market were mixed.

Bonds last year delivered positive, if modest, returns as the inflation tide ebbed, having previously suffered significant losses as inflation soared in 2021 and 2022.

The price of agricultural commodities and base metals fell in 2023 unwinding some of the gains seen after the pandemic. Gold did well, returning 13%, its best year since 2020, boosted by investor demand for a safe haven from geopolitical risks and by central bank purchases.

On the currency side the dollar weakened slightly and the Japanese yen dropped in value for the third consecutive year. In a world of rising interest rates, low Japanese rates have dented the appeal of the yen. (The Economist’s Big Mac index rates the pound and the dollar as being almost 90% overvalued against the yen, testifying to how cheap Japan has become for foreign visitors.)

Last year interest rates in the US and Europe reached the highest levels in more than two decades. This has boosted the return on cash, with deposits in the US and UK yielding around 5.0%. This is a decent cash return by the standards of recent years, but, with US inflation at 4.1% and UK inflation at 7.4%, a distinctly unattractive real return.

House prices weakened in many countries last year, but the scale of the decline was modest. For the year as a whole the indices we follow show that UK and German house prices fell by around 2.0% while US house prices grew by a similar amount. In a possible sign that the worst may be past, the 12-month rate of change in house prices has turned up in recent months in the US, the UK and Germany.

Bitcoin did well in 2023, almost doubling in value. The second largest crypto, Ethereum, gained almost 40%. But these gains need to be set in the context of the large losses seen in 2022 in the wake of the failure of FTX and other crypto-related assets.

Asset markets generally had a pretty good 2023. Much of this reflects the dwindling of worries about inflation and growth, and growing hopes of a soft landing. Institutional fund managers surveyed by Bank of America earlier this month reported growing optimism and said they are running higher than normal holdings of equities. Almost 80% of fund managers expect to see a soft landing for the global economy. What happens to asset prices this year largely hinges on whether that expectation is fulfilled.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index closed the week up 2.3% at 7,635. UK equities performed strongly thanks to better-than-expected economic data showing that the UK may return to growth in the first quarter of 2024.

Economics

The US economy grew by 3.1% in 2023, well in advance of expectations at the start of the year with activity remaining strong in the fourth quarter
US manufacturing and services activity improved unexpectedly in January thanks to easing price pressures and strong demand, according to the S&P Global PMI flash index 
US core inflation fell to 2.9% in December, dipping below 3% for the first time since 2021, increasing the chances of a soft landing and potentially opening the way for interest rate cuts this year
US secretary of the Treasury Janet Yellen stated that the strong economic growth in the US at the end of 2023 will not lead to another bout of inflation
US president Joe Biden indefinitely paused approvals for new liquefied natural gas export terminals in a victory for climate change campaigners
The UK economy showed signs of recovery as the S&P Global Flash UK PMI Composite Output index rose faster than expected in January and private sector activity gained momentum
UK consumer confidence reached a two-year high in January
The Office for Budget Responsibility warned the UK government that it has a “tiny” margin for error in its debt-reduction rules, despite lower-than-expected public sector borrowing in December
The International Energy Agency warned that geopolitical conflict in the Middle East could lead to volatile gas prices this year as it could disrupt the shipping of liquefied natural gas
The European Central Bank kept interest rates unchanged at 4%. Markets expect the first interest rate cut to come in April despite ECB president Christine Lagarde insisting that it is “premature to discuss rate cuts” 
The euro area economy continued to slow in January, albeit at a marginally slower rate – a decline in services activity offset an improvement in manufacturing activity, according to the S&P Global PMI flash index 
Euro area consumer confidence fell unexpectedly in January and remains well below its long-term average
German business confidence unexpectedly fell to the lowest levels since the start of the pandemic as the economy seems “stuck in a recession”, according to the Ifo Institute
China’s central bank signalled a loosening of monetary policy as it eased reserve requirements by 0.5 percentage points in a bid to boost its economy
China’s commerce minister Wang Wentao warned that rising protectionism, geopolitical trade disruptions and soft demand would threaten global trade this year

Business

NextEra Energy, the biggest US renewable energy producer, beat expectations and posted record revenues of $7.3bn in 2023 despite supply chain disruptions and higher interest rates
The UK government announced that a stake in the telecom firm Vodafone held by Emirates Telecommunications, also known as e&, poses a national security risk and ordered the companies to take steps to mitigate it
UK estate agents Foxtons announced that 2023 profits will beat expectations and predicted strong performance in 2024 as lower mortgage rates spur demand
Airline Wizz Air disclosed that the conflict in the Middle East widened losses in Q4 2023 as it had to suspend flights to Israel
South Korean chipmaker SK Hynix beat expectations by returning to profitability after a tough year following a surge in demand for high-end AI memory chips
Electric carmaker Tesla announced sales would be “notably lower” in 2024 as demand for electric vehicles appears softer than forecasted
Video streaming service Netflix outperformed estimates by announcing an additional 13m new subscribers and $1.5bn operating income in Q4 2023
Bank of America sent a “letter of education” to employees not returning to the office and warned them of disciplinary action

Global and political developments

Former US president Donald Trump won the New Hampshire Republican primary, beating Nikki Haley who vowed to carry on the contest and after Ron DeSantis dropped out of the race and endorsed the former president
Hungarian prime minister Viktor Orbán committed to ratifying Sweden’s bid to join NATO after the Nordic country also secured Turkey’s approval
The US military struck three facilities used by Iranian-backed militias in Iraq in response to escalating attacks against US and coalition bases in Iraq and Syria
The UK and Canada halted negotiations on a post-Brexit trade deal after a dispute over tariffs on agricultural exports

And finally… an American scientist risked a trans-Atlantic rift with his unconventional advice on how to make the perfect cup of tea. Bryn Mawr College chemistry professor Michelle Francl says the key to a perfect cup of tea is adding a pinch of salt - steeped in controver-tea

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