David Hambidge, investment Director – Multi-Manager Funds, Premier Miton, considers how the pressures on the market have affected actively managed funds in 2023, and how that may play into equities performance in 2024.
Every year throws up its own unique set of challenges in investment management and 2023 has been no different. Firstly, interest rates in the US, Eurozone and the UK have risen by far more than markets expected, while thrown into the mix has been a banking crisis which resulted in the end of the road for Credit Suisse and Silicon Valley Bank in the US. Meanwhile geopolitical events have also kept investors on their toes with the war in Ukraine showing no signs of ending, while the tragic events in Gaza have increased the risk of wider instability in the Middle East.
Against such a backdrop it is perhaps surprising that 2023 hasn’t been too bad at all for investment returns, albeit this has much to do with a strong rally in both bonds and equities in November. However, as always, the devil is in the detail.
As has been the case for the last fifteen plus years, US equities have once again produced the best returns and certainly the ongoing strength of the US economy this year has been quite remarkable given the speed and magnitude of rate hikes. However, the gain in the US stock market has been very narrow with only a handful of stocks (the so called magnificent seven) responsible for the strong overall gains this year. These conditions have of course again made it difficult for active mangers as has the fact that smaller company shares have significantly underperformed in this period of tighter monetary policy. It is hard to say when the tables will turn in favour of active management, but we believe that an easing in interest rates will help.
In local currency terms, Japan has been the best performing major stock market although much of the gain to overseas investors has been negated by a very weak Yen. This weakness is due to Japan maintaining its zero interest rate policy in a period of higher inflation. However, it seems that this policy is likely to be reversed in early 2024 which should be good for the currency but not so for Japanese stocks.
Elsewhere, there have been reasonable returns in both UK and European equities although like the US larger companies have performed much better than mid and small cap stocks. Meanwhile, it has been another difficult year for Asia and Emerging Markets on the back of a poor performing Chinese stock market. The relatively poor performance of the Chinese economy this year has surprised many following its reopening from Covid earlier this year.
In the bond markets, things are looking a lot better than they were at the end of October as investors have become more confident that we have reached peak rates. Indeed, the market has now brought forward its prediction of rate cuts in 2024 although we think it may be a bit optimistic on this front. However, after a torrid 2022 for both government and quality corporate bonds, the latter at least have now produced a decent return this year while gilts are now broadly flat.
Commercial property has unsurprisingly been one of the most negatively impacted sectors by tighter monetary policy although a fall in capital values is now being offset by higher yields. Our preference remains in the healthcare, care home and to a lesser extent, student accommodation space, all of which benefit from a structural supply/demand imbalance and rising rental income.
As for the next year or so, we expect it to be a better year for fixed income investors, although within the corporate bond sector we remain wary of high yield, preferring the investment grade space that to us enjoys a better risk/reward profile.
As things stand it looks like central banks will be able to start cutting rates in 2024 although there remains much debate around the likely timing of the first cut. Certainly, the Fed and others have made it perfectly clear that inflation must be defeated before they consider cutting rates. It seems likely therefore that we will have to see a meaningful slowdown in economic activity if we are to see a meaningful loosening of monetary policy and equities may not like that, particularly those companies that are priced for perfection.
Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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