• January 9th, 2024
• By Midsilver Investment Limited

The recent quarter witnessed robust performance in global stocks and bonds, spurred by indications from the US Federal Reserve that interest rate reductions might be forthcoming in 2024. Stocks in developed markets eclipsed those in emerging markets, with the latter affected by concerns over China's property sector. This period saw a decrease in crude oil prices, despite some production cuts.

In the US, the stock market saw notable gains in the last quarter, driven by expectations of nearing rate cuts. The S&P 500 nearly reached its record high from early 2022.

US inflation, measured by the consumer price index, showed a slowdown from 3.7% in September to 3.2% in October and further to 3.1% in November. The Fed's favored inflation gauge, the core personal consumption expenditure index, rose less than anticipated, at 0.1% month-over-month in November. US economic growth for the third quarter was adjusted down to an annualized rate of 4.9%, from an earlier estimate of 5.2%.

These figures bolstered the belief that the Fed may have concluded its rate-increase cycle, shifting towards reductions in 2024. Fed Chair Jerome Powell acknowledged the risks of maintaining high rates for an extended period. Federal Open Market Committee minutes suggested an expected rate drop to 4.5%-4.75% by next year, down from the current 5.25%-5.5%.

US stocks surged, especially in sectors sensitive to interest rates like technology, real estate, and consumer discretionary, whereas the energy sector declined with falling oil prices.

Eurozone stocks also had a strong quarter, fueled by expectations of no further interest rate hikes. The MSCI EMU index climbed 7.8%, with real estate and technology sectors leading gains, while healthcare and energy lagged.

Softer inflation data from both the eurozone and the US raised hopes for impending rate cuts in 2024. Eurozone inflation dropped to 2.4% in November from 2.9% in October, a significant decline from 10.1% a year earlier.

The eurozone economy, burdened by higher interest rates, contracted slightly in Q3, as indicated by Eurostat. The HCOB flash eurozone PMI fell to 47.0 in December, signaling a potential contraction in Q4.

Most sectors saw gains with optimism for future rate cuts. Real estate and IT stocks performed well, while the energy sector declined due to lower oil prices. In contrast, healthcare faced individual stock challenges.

UK stocks rose over the quarter, with small and mid-cap indices outperforming, buoyed by stronger domestic focus and increased foreign investment in smaller UK firms. Larger UK companies were restrained due to a strong sterling against a weakening US dollar.

UK inflation fell more than expected, with the ONS reporting a drop to 3.9% in November. This fueled expectations that the Bank of England might halt further rate hikes. UK GDP figures were revised to show a decline in Q3.

The UK Chancellor announced an Autumn Statement with more policy measures than anticipated, including extending the 100% capital expenditure allowance.

Japanese equities saw a modest Q4 gain of 2.0% in the TOPIX Total Return index. October concerns over US interest rates and geopolitical tensions were offset by expectations of US rate cuts following weaker US economic data. The Japanese market underperformed in December due to worries about yen appreciation. Growth styles and small caps performed better over the quarter.

Japanese corporate fundamentals remained strong, with solid earnings and ongoing unwinding of cross-shareholdings. The BOJ's business sentiment survey showed improvement, and capital expenditure plans indicated strong demand for machinery and IT services. The BOJ hinted at further policy adjustments in early 2024.

Asia ex-Japan equities also gained, except for China, where concerns over economic growth and the real estate sector dampened investor sentiment. Taiwan, South Korea, and India led the gains, with strong performances in technology and chipmaking sectors.

Emerging markets had a strong Q4 overall, though China's performance was weaker. Political changes in Poland and economic trends in Brazil, Taiwan, and Korea influenced market performances. Turkey, however, lagged due to high inflation despite rate hikes.

Fixed income markets experienced their best quarterly performance in over two decades. The shift in monetary policy expectations, with anticipated rate cuts in 2024, drove this rally. Government bond yields dropped, and credit markets outperformed government bonds.

Major currencies saw varied performances, with the Swedish krona leading amid a pause in rate hikes. The Fed's shift towards rate cuts affected the US dollar.

Convertible bonds benefited from equity market gains, with strong activity in the primary markets.

The S&P GSCI Index fell, with declines in energy, agriculture, and livestock outweighing gains in precious and industrial metals. Oil prices dropped despite OPEC+ output cuts.

Digital asset markets saw significant growth in Q4, with Bitcoin and Ethereum leading the gains. Altcoins like Solana and Avalanche also performed exceptionally well. Market speculation over a potential US Bitcoin ETF approval drove this positive trend.

2023 marked a transitional year for crypto, with advancements in regulated custody and settlement solutions and increased regulatory clarity.