Market Review – Quarter ending 31 December 2023

 A macroeconomic recap of the quarter and financial market performance.

11 Jan 2024

6 minutes

Fast view

  • Overall market dynamics - 2023 was punctuated by significant market events, including the Silicon Valley Bank collapse in March, an AI driven tech boom, and higher interest rates causing a major bond sell-off. Though by late October, many asset classes began to rally as declining inflation and anticipated rate cuts buoyed confidence
  • Stocks - Bounced back strongly in 2023 after losses in 2022, especially tech, with the so-called ‘Magnificent 7’ major outperformers
  • Bonds - A significant turnaround towards the end of the year, with November the best month on record for Bloomberg’s global index since 2008
  • Commodities - Gold was the belle of the ball in 2023, while most commodities struggled for investor attention throughout the year
United States

The US economy grew at an annualised 4.9% in the third quarter of 2023 (Q3), revised down from the second estimate of 5.2%. Consumer expenditure (the biggest driver of the US economy) increased less than expected (3.1% vs 3.6% in the second estimate), although it remained the largest increase since Q4 2021. There were notable signs of a slowdown, however, towards the end of the year, as the economy navigated tighter credit conditions, slower jobs growth, student loan repayments resuming and an automotive sector strike which played out until late October. Factory conditions deteriorated over the quarter, with the manufacturing PMI falling below the 50-mark (which separates expansion from contraction) in October and ending the year at 48.2.

Growing concerns that interest rates remain ‘higher for longer’ sparked major selloffs in bond markets compounded by sticky inflation, rising oil prices, and budget deficit concerns. Moody’s shifted its US credit rating outlook to negative. Equities also toiled, with the S&P 500 Index notching a third straight month of declines by end October. Though by late October markets responded positively to downside surprises in inflation, and increasingly dovish-sounding central bankers. The potential for rate cuts in 2024 sparked a major rally across most asset classes in Q4, with November booking the best month on record for the Bloomberg Global Aggregate Bond Index (+5.0%) since the 2008/09 Global Financial Crisis (GFC). The S&P also saw its strongest recovery since the initial COVID rebound, bringing year-to-date gains to 26.3%.

Quarterly equity returns (USD)
S&P 500 11.7%
NASDAQ 13.5%
South Africa

The SA economy contracted by 0.2% in Q3 2023 compared to last quarter, below consensus forecasts of a 0.1% contraction. The weakness in growth over Q3 was largely attributed to ongoing power outages, logistical challenges at the ports, as well as exogenous factors from abroad. Activity on factory floors has improved somewhat in recent months but the manufacturing PMI lingered in contractionary territory over the three months through December – capping 11 straight months of sub-50 readings. We saw some positive surprises in data releases over the December period, with industrial data coming in better than hoped, and mining and manufacturing production also stronger than anticipated. This is a good look for the industrial sector in Q4 and could help stave off a technical recession in the second half of 2023. More negatively, however, retail sales figures were weaker than expected in October.

Consumer price pressures eased, with November’s headline inflation slowing to 5.5% compared to 2022 and down from 5.9% in October. This was a notch below economist expectations of 5.6%, largely driven by the drop in transport inflation (fuel price cuts). Nonetheless, price pressures remain elsewhere in the broader economy, with core inflation (which strips out volatile items such as food and energy prices) still sticky given the move higher to 4.5% year on year. The October figure was 4.4%. While the South African Reserve Bank (SARB) still sees serious upside risks to inflation, the current monetary policy stance is considered restrictive enough within this context. The Bank is widely expected to begin its easing cycle from mid-2024, but unlikely to move ahead of the US Fed.

Quarterly returns (ZAR)
FTSE/JSE All Share 6.9%
Financials 12.4%
Resources 3.0%
Industrials 5.9%
All Property Index 15.9%
All Bond 8.1%
STeFI Composite 2.0%
United Kingdom and Europe

The UK's monthly GDP figures for October indicated a disappointing start to the fourth quarter, with a 0.3% decrease, marking the lowest level since July. Exceptionally wet weather conditions in October, one of the wettest on record, also negatively influenced sectors like construction, retail, and tourism. The latest data coming out of the UK points to a likely contraction in Q4 and a winter recession. While data suggests inflation is declining and wage growth remains strong, households may be altering their spending habits, possibly saving more instead of spending. This change poses questions about the future of retail revenue and consumer behaviour, especially in the context of an uncertain economic landscape with upcoming elections and potential interest rate cuts in 2024.

GDP in the euro zone experienced a marginal contraction in Q3, primarily due to decreased activity in France and Germany, while Italy and Spain saw growth. The outlook for Q4 is one of stagnation, hindered by rising interest rates and diminishing savings. However, there was a more significant than expected drop in inflation during this period, which could potentially bolster household spending. Following a more dovish stance from the Fed, the European Central Bank’s (ECB’s) position at its 14 December meeting, took a more hawkish posture, mirroring the Bank of England (BoE) just hours earlier. The Bank reaffirmed its commitment to a three-pronged, data-dependent approach for determining appropriate policy rates: There has been progress in all three criteria: improved inflation forecasts, a general decline in underlying inflation measures, and effective transmission of the policy stance to rates and lending volumes. However, ECB President Lagarde emphasized that it was too early for the ECB to consider rate cuts, in contrast to the Fed's approach, and clarified that rate cuts were not yet a topic of discussion.

Quarterly equity returns (local currency)
FTSE 100 2.3%
DAX 8.9%
EuroStoxx 600 6.8%

China’s economy grew 4.9% year on year in Q3, and the IMF upgraded 2023 growth forecasts to 5.4%. While Q3 growth was still ahead of consensus forecasts of 4.4%, the world’s second largest economy is still not running at full steam. Ongoing volatility, a sluggish property sector, relatively weak domestic demand, deflationary pressures, and ongoing trade frictions with the Western world continue to impact growth. Industrial output and retail sales rose in November, but from a low base which failed to quell doubts on the country’s growth prospects. Activity on factory floors improved over the course of Q4, with the manufacturing PMI trending above the 50-mark level in both October and November. Authorities spent most of the year grappling with the myriad of headwinds facing China’s economy post-COVID, but the slow drip of measures rolled out during the first half of 2023 (including loan rate cuts and targeted funding) could not stem the weakness, especially in the property sector. This spurred authorities to ramp up more support measures in the second half of the year. In December alone, the People’s Bank of China (PBoC) allocated c.US$50 billion in low-cost funds towards policy-oriented banks.

The PBoC has also vowed to step up existing monetary policy measures in efforts to boost consumer prices, which have fallen at the steepest pace in nearly three years. Instead of using broad monetary policy instruments like interest rate cuts or reserve requirement reductions that affect the entire economy, the PBoC has increasingly relied on targeted structural tools to channel credit towards specific sectors. This shift aims to steer the economy away from excessive debt dependence, particularly in the property market.

Quarterly equity returns (local currency)
TOPIX 2.0%
Nikkei 225 5.2%
Hang Seng -3.9%
Shanghai Composite -4.2%

The Bloomberg Commodities Index ended the quarter down 4.6%. While China appears to be falling out of love with property, the country’s demand for commodities is as healthy as ever. Iron ore traders have cause for optimism, as Chinese imports for the steel-making ingredient grew in 2023 (China is responsible for 70% of global seaborne iron ore), suggesting more infrastructure spending plans are on the cards for Beijing. Copper, which is critical to the world’s energy transition, also enjoyed a surge in demand over Q4 on the back of winter restocking and the expansion of new Chinese smelter capacity. Brent crude oil ended the quarter down 19.1% and ended the year in the red for the first time since the onset of COVID, as OPEC+ production cuts failed to offset stronger-than-expected output from the US and growing fears of weaker global demand. Gold’s appeal glittered in 2023, as the yellow metal booked an 11.6% gain for the quarter to finish the year up 13.1% – propelled by increased demand from central banks to diversify away from the dollar following Russia-related sanctions, a falling dollar and real rates, and the ‘safe-haven’ appeal for the metal as geopolitical tensions intensified in the wake of the Israel-Hamas war.

Resources – Q4 2023 (US$) % change

Resources – Q4 2023 (US$) % change

Source: Bloomberg, as at 31 December 2023.

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