Q4 Market Commentary 2023

Over the final quarter of 2023, inflation and interest rates expectations flipped from the view of ‘higher for longer’ to possible hold or easing. November’s inflation data came in lower than forecast and the main central banks held rates unchanged, which fuelled the change in sentiment. This gave a strong boost to markets and, particularly the more interest rate sensitive sectors, such as technology and real estate.

The UK’s domestic market

The Bank of England members voted with a clear majority to maintain rates at 5.25% in December. The economic data was supportive of this, with the consumer price index (CPI) inflation number falling sharply from 6.7% in September to 3.9% in November. This has raised hope that the market rate hiking may be near or at its peak. The CPI data sent government bond yields lower increasing the capital as a result.

The UK market was up 3.14% over the final quarter as measured by the MCSI UK IMI index. Sentiment appears to have turned on, improving rate expectations and inflation numbers. The recovery was prominent in the small and medium indices as risk appetite increased across the market as a whole.

What about the USA’s financial markets?

In the USA, equity markets were relatively strong with some comparative outperformance among the medium and smaller sized companies. The Federal Reserve in the USA also kept rates steady over the quarter in the target range 5.25%-5.5%. Inflation data continued to show improvement – the core inflation numbers fell, which in turn boosted market sentiment. The USA also benefited from growth in the economy as the quarterly growth numbers surpassed expectation. This demonstrates resilience in the USA, as the economy is growing despite higher interest rates. The unemployment level remained low at 3.7% and slightly lower than forecast.

Are we seeing similar financial market trends in Asia?

In the Far East, property worries continued to dent consumer confidence, which lowered growth forecasts at the margin as consumers chose not to spend. Despite this, the International Monetary Fund (IMF) raised its outlook for the region given the broad package of government support in the region. The comprehensive impact across the region should help stimulate the markets over the next few months. More specifically, the equity markets in Taiwan, South Korea and India increased as technology assets performed, focusing in part on the rise in artificial intelligence. The geopolitical tensions in the Middle East weighed negatively on the emerging markets. However, from a holistic perspective, Asia’s markets were strong because the prospect of rate cuts in the USA in 2024 aided returns.

ASAM’s outlook

We always aim to consider long-term strategy in our investment approach. With this in mind, our focus remains set on fundamentals (such as companies’ earnings, share price, dividends, growth and debt levels to name a few) and companies which have adaptability within their business models, meaning they can respond to ever-evolving market conditions. We view these as more robust and likely to be able to cope with unforeseen change.

Over the last twelve months there have been lots of indiscriminate moves across markets, sectors, and individual companies. While we feel the rate cycle has likely peaked in the USA, UK and Europe we cannot rule out further volatility in the short term. Many market changes are sentimental and reactionary, without long term consideration of how individual companies are performing and adapting to the economic environment. The dislocation in share price movements around a market event (such as Russia, Middle East conflict or the USA technology bank that went bust in March 2023) often presents opportunities for active management. Not all things or businesses are equal, despite often being knocked down in share price the same initially.

Corporate earnings so far remain supported and encouragingly the USA consumer remains in good shape. Employment levels in the USA remain in focus and the job market tight. We don’t envisage a deep recession in the USA but will continue to keep a close eye on economic developments. A characteristic of any recession is increasing unemployment. This would dampen consumer spending, which is a key component of the USA economy. While inflation remains generally above central bank targets, we continue to focus on the companies that can build this into their business models and pass through the additional costings. On the equities allocation we continue to focus on three main areas which drive returns over investment time frames: the share price, earnings, and dividends.

This information is obtained from sources considered reliable, but its accuracy and completeness is not guaranteed by Anderson Strathern Asset Management Limited. Neither the information nor any opinions expressed constitute financial advice. Investments can fluctuate in price, value and/or income and may return less than the original amount invested. Past performance is not necessarily a guide to future performance. Anderson Strathern Asset Management Limited is authorised and regulated by the Financial Conduct Authority.