Market Review – December 2023

As 2023 draws to a close, markets are showing continued signs of optimism and growth. Inflation is almost at a manageable level and discussions around interest rates are now focused on when rates can be cut rather than whether they should be increased again.

However, some of the challenges of this year are likely to continue into 2024, with themes such as energy production, the wealth gap, dependence on technology (including AI) and global dominance of technology companies looking significant for the year ahead.

Reflecting on 2023

Despite recent volatility and uncertainty in the markets this year, global stocks have seen their strongest returns since 2019. The consensus seems to be that central banks have ended their campaign of rate rises, and that smoother sailing is ahead.

2023 certainly felt like a turbulent year. Some of the key themes in the global market included:

• The ongoing battle to bring inflation under control and uncertainty around interest rates.
• The threat of a banking crisis with the collapse of SVB (Silicon Valley Bank) and Credit Suisse.
• Escalating conflict between Israel and Palestine.
• Fluctuating oil prices and a continuation of the energy crisis.
• A rise in the use of AI across multiple industries, fuelling the increasing dominance of the tech sector.
• Increase in regulation and criminal charges for fraud and money laundering brought against several high-profile CEOs.

It is tempting to look at the New Year as a tangible milestone, seeing out one era while welcoming another. Of course, some of the challenges that defined 2023 might have eased slightly, particularly now that inflation is returning to a more normal level. But far from approaching 2024 with a clean slate, we should reflect on the past year and consider where future challenges may lie.

Some of the themes which may define 2024 include:

• Whether global economies achieve a ‘soft landing’ and avoid a full-blown recession.
• If and when interest rates are cut – this could potentially have implications for savers, borrowers, and investors.
• The increasing wealth gap in the wake of the cost-of-living crisis.
• Geopolitical conflict in Ukraine and the Middle East.
• Elections in the US (definite) and UK (possible, although early 2025 is more likely).
• Technological advances and improvements in renewable energy.

The Magnificent Seven

While markets have showed strong returns in 2023, the growth has not been evenly distributed. It’s important to remember that the US makes up around 60% of the world economy by market share, and that this is dominated by a handful of massive corporations. This has never been more apparent than in 2023.

The ‘Magnificent Seven’ is made up of the following companies:

• Alphabet (Google)
• Amazon
• Apple
• Meta (Facebook)
• Nvidia
• Tesla
• Microsoft

These companies have collectively returned around 100% in 2023, and as they make up around 30% of the S&P 500, account for around half of the overall growth in the index.

This means that whether you invest in a global tracker fund, a diversified portfolio, or indirectly via your pension fund, it is highly likely that your financial future is closely tied to these seven companies.

This is a significant concentration risk, particularly as all seven companies operate in the tech sector and are exposed to many of the same issues. However, ignoring them means potentially missing out on returns. There is no guaranteed solution, but investing across a diverse range of assets continues to be the most sensible option.

COP28 – 28th Conference of the Parties

The global environmental summit concluded in Dubai early this month. It was eventually agreed that all countries should move away from fossil fuels, targeting net zero emissions by 2050. This is believed to be key in ensuring that global temperatures do not increase by 1.5C.

This could potentially have significant implications for the oil and gas industry, clean energy projects, and ultimately, investors.

While the agreement is a positive step forward, we are yet to see any clear deadlines or concrete plans. Nothing is certain, particularly with the upcoming elections in the next two years.

The UK Market

The UK All Companies sector has returned 5.2% in the last month with the FTSE 100 trailing behind at 2.8%. 2023 has shown significant volatility, although returns appear fairly flat over the course of the whole year. This recent rally has provided a welcome boost, taking the overall returns for 2023 to over 7%. This is still behind most global markets on a 12-month basis, but the gap is starting to narrow.

Some of the top performers this month include car retailer Motorpoint and holiday provider On the Beach Group.

The worst performing companies include Dr Martens and Auction Technology Group, all of which have yet to see a positive return over a 5-year period.

The Global Outlook

All of the main global indices have shown similar levels of growth to the UK over the last month, in the region of 4% – 5%.