Please see below article received from Invesco this morning, which summarises the market-moving events from Q4 2023.
Oil slick
SF: “After a yearlong decline, oil prices enjoyed an impressive recovery from June 2023, to reach highs for the year in September at low to mid $90s for both WTI and Brent. Subsequently, however, and despite the terrifying developments in the Middle East, sentiment turned relatively bearish through the end of December. Though there are many important variables driving the oil price, our analysis informs that price weakness likely stemmed from the market’s reassessment of US supply strength, coinciding with seemingly slowing demand growth.
“Perhaps more positive for US geopolitical clout, yet evidently a headwind for global oil prices, was the upward revisions to US second half 2023 supply, driven by improved drilling efficiencies and oil well productivity in shale. Indeed, according to the International Energy Agency December 2023 Oil Market Report, the US will have been accountable for 2/3rds of the non-OPEC (Organization of the Petroleum Exporting Countries) expansion (Canada, China, Brazil and Russia are other notable names). Simultaneously, OPEC’s output is expected to decline, reducing its global market share to 51% in 2023 – the lowest since the bloc’s creation in 2016.
“A subdued macro outlook heading into 2024 is driving downward revision to global oil consumption forecasts. This will likely be seen most acutely in Europe, whose economy is looking relatively weaker as the old continent suffers the strain of a broad industrial and manufacturing slump.
“Overall, the first three quarters of 2023 saw relative strength for oil as the Russia/Ukraine conflict continued into its second year, delivering ongoing disruption to the supply status quo. However, given the impressive supply response from the US, along with the apparent slowing in demand, the oil price has fallen back.
Moving forward, we would conclude that bold oil price forecasts have a tendency to take reputations to an early grave, so better to take hedges in either direction. To the upside UK equities and their preponderance of oil majors look a sound option. To the downside we would expect the disinflationary narrative to grow more certain, leaving bonds well placed to perform.”
Interest rates reach a summit
DA: “Our central case is that most monetary policymakers have reached the end of their tightening cycles, with the next step likely to be easing across major developed market economies. However, we are mindful that the path towards lower rates will likely be a choppy one. While the recent re-assessment of the market’s rate cut expectations will drive short term volatility, a peak in rates environment has generally been a good one for investors provided that a recession is avoided.
“In terms of what this means for asset allocation, we believe 2024 will be a good year for bonds. While painful, the string of aggressive rate hikes from central banks over the last two years have put the “income” back in “fixed income”. At these levels, it makes sense for investors to increase the maturity of their portfolios to lock in the current high-income levels. Absent a recession, equity markets have also generally done well in the run-up to, and after, the first rate cut. With this said, keeping a close eye on fundamentals and being selective about geographical and sectoral exposures will be key. The BoJ is the exception. We expect a gradual normalising of policy here and yields in Japan to edge higher in 2024.”
Recession fears fade
DA: “Given the more supportive inflation/interest rate backdrop in Q4, fears of recession have faded among market participants, providing another tailwind for financial market performance.
“In our view, any economic slowdown is more likely to be relatively brief and shallow (as opposed to pronounced and prolonged) as inflation continues to moderate and monetary policy tightening eases. Households and corporates are, in aggregate, in good shape having strong balance sheets and are less rate sensitive than they have been in the past. The US will likely continue to engage in fiscal spending as the election approaches further supporting growth. There will continue to be some economic damage, with some sectors and firms feeling the pain of higher rates as they refinance this year. However, we stress that different markets and sectors are at different points in the cycle and will have varying degrees of weaker or stronger activity. An official recession therefore may not occur in most regions, but some sectors and countries will go through technical recessions.”
Return of the Magnificent 7
DA: “The final quarter of 2023 delivered a welcome Christmas present for investors with exposures to Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – the so-called ‘Magnificent 7’. They accounted for c. 80% of the gains of the S&P 500 index in 2023. Excluding these names, the remaining S&P 493 was up only c. 7%, struggling with sharp interest rate rises, cost inflation and weakening economies. In contrast, the Magnificent 7 were up 96% (total returns in GBP). Although these moves were certainly extreme, they need to be viewed in context. In many ways, the Magnificent 7’s stellar performance is a rebound from the large declines of 2022, when they were collectively down c. 40%. They accounted for almost as much of the S&P 500’s decline in 2022 as they did the gains in 2023.
“While returns have been strong, the sheer size of the Magnificent 7 demands special consideration. Collectively, these tech stocks make up almost 30% of the S&P 500 index, the highest index concentration level in years. Apple and Microsoft alone, boast market valuations greater than the entire UK stock market. To evaluate the sustainability of their performance, investors should eschew reliance on charts of share price performance and focus instead on business fundamentals and valuations. While not unassailable these companies have large moats, very strong balance sheets, and many have revenue streams that are far less cyclical than tech companies of the past. They are however trading at lofty valuations which increases risk.”
UK – don’t call it a comeback
BG: “Whether it was the release of a stunning new Beatles’ track, David Tennant’s reprisal of The Doctor, or David Cameron’s return to cabinet, it’s fair to say the final quarter was brimming with UK comeback stories. Though less culturally significant, it was a similar story for investors, as after a tricky late summer selloff, and an equally weak October, UK stocks enjoyed a smart recovery, rounding out a rewarding year for the UK bourse. Despite delivering cash beating returns, however, those close to investment markets will know it has been another year of relative disappointment for the UK stock market. Unfortunately, for our domestic bourse, performance woe stems from a dual narrative, relating just as much to what is ‘not’ in the index, as to what is.
“As is well understood, a key determinant of global market strength this year has been the outsized returns of the mega cap US Technology names (known as the Magnificent 7), particularly given their association with the Artificial Intelligence growth engine. For the UK, however, at first blush there is very little Technology to get excited about, which seems to have contributed to a general disinterest from asset allocators. But beyond a headline categorisation level, such analysis looks a little misguided. Just a modest research effort would reveal several domestic businesses utilising A.I. technology extremely successfully within their businesses, improving the client offering and experience along with. Specific areas of success include high profile names within online retail, online education, and retail financial services. Antipathy towards the UK as ‘Non-Tech Player’ looks misplaced, therefore, rendering the valuation mismatch a little too stretched and representing an opportunity for the patient investor.”
Please check in again with us soon for further relevant content and market news.
Chloe
26/01/2024
