Equities Market Overview
Equities made a strong start to 2023 but pulled back midway through the first quarter as a result of the US Regional Bank Liquidity Crisis, which saw the collapse of Silicon Valley Bank (SVB) after encountering liquidity issues following a surge in treasury yields. A large portion of the bank’s clients were venture capital (VC) and private equity (PE) backed businesses. As investment into VC and PE funds has grown significantly over the last 15 years due to near zero interest rates and therefore a more fertile investment environment, SVB’s client base grew materially over that period. Due to the speed of that growth, the bank was unable to lend at the same rate as deposits were being made by clients, and therefore opted to hold surplus cash in treasuries. However, when yields began to surge as central banks hiked interest rates, the value of these treasuries, and therefore bank assets, declined. This resulted in a run on the bank from clients and the threat of contagion to other regional lenders, many of which also experienced mass withdrawals. This resulted in falling valuations across the industry and dented broader investor confidence in risk assets over the period.
As investor nerves settled, markets began to recover from their March lows. UK stocks then peaked in April, however slid for the remainder of the year as investors grappled with the prospect of recession later in 2023 amidst slowing growth. The FTSE 100 Index returned 3.8% over 2023. European stocks on the hand continued to gain in what was a strong 2023, with German and French benchmarks advancing 20.3% and 16.5% respectively over the year.
US stocks also performed well, rallying from March into July, with the S&P 500 reaching a year-to-date return of almost 20%. This was driven by key economic data remaining robust despite the Federal Reserve continuing with its rate hiking cycle, which resulted in a material reduction in inflation from 6.4% in January to 3.4% in December. US equities then slid over August, September and October, giving up the majority of their gains as hawkish rhetoric from central banks and the prospect of higher rates for longer caused risk-off sentiment. Following the October/November Fed meeting, where rates were left unchanged, markets switched momentum and recovered strongly into yearend at the prospect of an end to further rate hikes, and were buoyed further in December by the possibility, albeit small, of a rate cut as early as Q1. This resulted in the S&P 500 Index generating a 24.2% return in 2023.
Sector Performance
Technology, communication services, and consumer discretionary stocks outperformed the market, with the two formers returning 56.4% and 54.4% respectively for the year, whilst the latter gained 41.0%. This strong performance does come on the back of a poor 2022, where tech contracted 28.9%, whilst communication services and consumer discretionary fell 40.4% and 37.6% respectively. Drilling further down, much of the surge from tech stocks was driven by the ‘Magnificent Seven’ (Apple, Amazon, Microsoft, Alphabet, Nvidia, Meta, and Tesla), and their exposure to what was potentially the most dominant invest theme of the year in artificial intelligence. Nvidia was by far the biggest winner of all the S&P 500’s constituents, increasing over 230% as the chipmaker experienced a huge rise in demand from the AI industry. These sectors also found support from broadly positive macroeconomic data, including robust GDP growth, falling inflation and low unemployment, and therefore the likelihood of a “soft landing” in the Federal Reserve’s fight against inflation. The end of rate hikes and prospect of a rate cut at the beginning 2024 also provided these sectors with a tailwind in Q4.
Utilities, energy, and consumer staples were the only three sectors to generate a negative return over 2023, falling 10.2%, 4.8%, and 2.2% respectively, after generating returns of -0.7%, 33.7%, and -3.2% the year prior. The biggest loser, utilities, fell after what was a solid year on a relative basis in 2022, where the sector mitigated losses whilst broader markets sold off. It was also helped by the increase in energy prices during the year. However, as energy prices retreated in 2023, the sector was negatively impacted. Furthermore, being one of the more defensive sectors, it was less in focus as growth areas of the market outperformed.
Conclusion
Upon review, 2023 was mostly a strong year for equities across developed markets. A combination of the continued recovery from the COVID-19 pandemic, resilient economic performance despite aggressive interest rate increases from central banks fighting inflation, and forward strides in artificial intelligence (AI) saw US and European stocks rally. By comparison, UK performance was subdued, as it faces the issue of more persistent inflation as well as structural challenges such labour supply shortages. Looking ahead to 2024, markets must contend with the impact of the highest interest rates in over a decade and how the rapid rate hiking cycle will impact economic growth. In addition, other factors impacting the market (equities) in the year ahead include continued geopolitical tensions, such as those in the Middle East and in the East China Sea, and more sector specific issues such as the advancement and regulation of AI.
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