Join our charity investment specialists for a quarterly market review. The update covers a range of areas including the bond markets, oversees equities, and why there is a reason to feel more optimistic. 

 

Join our charity investment specialists for a quarterly market review. The update covers a range of areas including the bond markets, oversees equities, and why there is a reason to feel more optimistic. 

 

 

 

Additional content
  • Read a transcript of the webinar

    John Hildebrand: Good morning and welcome to our video on the final quarter of 2023. My name is John Hildebrand and I'm one of the investment managers on the Charities desk. I'm joined by Andy Maxwell, who's another investment manager on the Charities desk. Good morning. And today what we'd like to do is talk about what happened in the last few months of 2023.

    And you'll remember if you go back to October, bond markets have been pretty poor. UK equities have done very little. Overseas equities, if you hadn't been in what's regarded as the magnificent seven or the top seven tech stocks, you'd have also had a very mediocre return from the market. However, by the end of the year, if you look at returns, they've been pretty strong. So what changed in markets over that period?

    Andrew Maxwell: Yeah, you make a very good point, John. Investors would have been forgiven for feeling rather pessimistic at the beginning of November of last year. After all, it had been a difficult 2022 and a rather underwhelming first 10 months of 2023.

    Indeed, most of the bond markets were underwater. UK equities at an index level were flat at best, and the US equity market was up, but largely as a result of the strength of that small number of concentrated tech stocks that you mentioned - the Magnificent Seven. But so came November, and there was a particularly positive inflation print in the US. In fact, after inflation having trended in the high single digits in the US, the year-on-year inflation number in November fell to 3.2 percent - lower than estimates. And if you strip out shelter or rent, as most of us know it, that rate of year-on-year inflation fell to 1.5 percent.

    The significance of that change in inflation was that it allowed central banks more flexibility in terms of how they set their policy. For many months leading up to that point, it had been a case of hiking interest rates, and then the debate was how long would they keep interest rates at a high level. Now, though, with a lower inflation print, the door opens to the conversation on reducing interest rates. And ultimately equities perform better when interest rates are low, broadly speaking, traded and rallies fairly heavily on the back of that lower inflation print.

    And there were certainly some sectors that fared better than others. I'm pleased to see that the strength of the rally was broader than just the concentrated number of stocks that would seem benefiting up until that point. In fact, some of the sectors that performed particularly well were those interest rate-sensitive sectors, such as infrastructure and long-duration bonds, both of which we held in the majority of our portfolios. And that was certainly to our benefit.

    The S&P 500, the most prominent US equity index, delivered its second best November since 1980, up 9 percent on the month and 20 percent on the year. UK equities had a good couple of final months of 2023, but it's all relative. Over the year, UK equities and index level were up somewhere between 8. 5 percent, but compared to the US at 20 percent, it really does lag fairly meaningfully. And this sort of return profile is a fine example of how equity markets can behave. They do not represent a steady stream of returns, but rather can be lumpy and uneven, benefiting those investors who are willing and able to ride out the short-term uncertainty.

    And finally, a year ago there were headlines that the 60-40 equity bonds portfolio was obsolete. In November, that same strategy posted its highest return in over 30 years at an index level. So certainly appearing, at least for now, far from obsolete. John, enough of the good news. What should investors be thinking about in terms of risks moving into this year?

    John Hildebrand: Thanks, Andy. I think there are two main risks. The first risk is that economic growth is weaker than expected. And I think we think this is actually quite probable, particularly because you've had interest rates going up. And why would this be bad? Revenue would be disappointing, which would impact then on margins and ultimately on earnings.

    And at the moment, analysts forecast in the US are that they'll have earnings growth of 11%, which is quite typical of a normal economic background. So if they have a much weaker economic background, there's quite a lot of scope for earnings disappointments. We've already seen quite a few companies announce profits warnings.

    Possibly the bigger effect on markets, and we think this is slightly less likely, is if the economy stays really quite strong. So you get what's called the 'no landing', I think you call it. In the 'no landing' scenario, economies stay quite strong. Therefore you have fairly full employment, wage growth is strong and people worry about inflation. Inflation isn't coming down. In that scenario, the authorities won't cut interest rates and I think that would be quite disappointing for markets.

    Andrew Maxwell: But John, isn't that close to the Goldilocks scenario, where growth is neither too strong nor too weak that markets are so keen to reach?

    John Hildebrand: You're right that sometimes that's called the Goldilocks scenario, but I think actually, as I said, I think markets really have been anticipating interest rate cuts. And if they don't get them, I think they'll be quite disappointed. And let's not forget, the Goldilocks story wasn't actually such a great scenario.

    You have someone who doesn't follow the orders they were given, they go into a house they're not meant to be going into, they steal the food, they end up breaking some of the property, they get chased out of the house, and their exit followed by bears. I'm not sure this is the sort of scenario that everyone wants.

    Andy, if we look into 2024 what do you, do we think is going to be happening?

    Andrew Maxwell: An excellent question. In fact, Tom Quick, another of the investment directors on the desk, has interviewed our head of strategy, John Wyn-Evans, and I think that they will be best placed to answer that particular question.

    And thankfully, we have a link to that video contained in the same email. It's of a similar duration, so I would encourage you to check that out. And with that, John and I wish everybody a happy and prosperous 2024. And we look forward to speaking with you all again in the not-too-distant future. Thank you.

Speakers in this update

John Hildebrand
John Hildebrand

Senior Investment Director

Andrew Maxwell
Andrew Maxwell

Investment Director

John Hildebrand
John Hildebrand

Senior Investment Director

Andrew Maxwell
Andrew Maxwell

Investment Director

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