The final month of 2023 was positive for investors, with strong returns across most major asset classes. This upturn was fuelled by expectations of central banks, particularly the Federal Reserve, potentially cutting interest rates earlier and by a larger amount in 2024 than previously anticipated. Developed market equities and global aggregate bonds noticed robust returns, while commodities lagged behind.
Global equity markets extended its rally in November, with the S&P 500 and European equities delivering strong returns. Emerging market equities also delivered positive returns despite weak Chinese performance. Returns for the full year were dominated by the ‘magnificent seven’ tech and AI stocks.
Japanese equities lagged for the month but produced significant returns over 2023, benefiting from shifts in central bank policy and solid economic growth.
Global fixed income markets performed well during December, with government bonds delivering strong returns, especially in Europe. Credit markets also benefited from tightening spreads.
The Federal Reserve’s indications of potential rate cuts in 2024 had a pronounced impact on financial markets. Bond yields, including the 10-year Treasury bond, fell significantly, while equity prices surged, and the US dollar weakened against major currencies. This reaction was based on expectations of lower short-term interest rates, decreased inflation, and decelerating economic growth.
US inflation decelerated, with a notable drop in headline inflation. Goods inflation remained dormant, with most inflation driven by services, particularly shelter costs. Retail sales in the U.S. grew unexpectedly strong in November, indicating robust economic activity.
The European Central Bank (ECB) and the Bank of England (BOE) maintained interest rates, with no immediate signals of rate cuts. In contrast to the Fed’s outlook, ECB President Lagarde expected inflation to rebound, necessitating continued tight monetary policy. However, investor expectations indicated a possibility of rate cuts by the ECB starting in April 2024. The BOE remained firm on keeping monetary policy tight until inflation receded further, facing the challenge of a tight job market and rising wage pressures.
Commodity prices have been volatile since the start of the Israel/Hamas conflict. Oil prices fell over 10% in 2023 in a tumultuous year of trading marked by geopolitical turmoil and concerns about the oil output levels of major producers around the world. Gold prices remained resilient in 2023, supported by economic uncertainty and expectations of a Fed rate cut in 2024.
Australian dollar strengthened against most major currencies, driven by a weakening US dollar on the expectation of rate cuts and policy stimulus announced in China to bolster the economic activity.
Emerging market equities performed robustly over 2023. China and Hong Kong stocks ended 2023 as the worst performers among the world’s major indexes, dragged down by geopolitical risks, a sluggish economic recovery and policy uncertainties.
Listed property and infrastructure produced large positive return in December, along with broader equity markets. Over the course of 2023 Australian residential property values held broadly resilient under conditions of climbing interest rates and stretched affordability.