January 12th, 2024
January MPS Update
Latest market activity
A renewed ‘Santa Rally’ ensured a stellar final two months of 2023 for investors, capping a particularly bumpy year that swung from optimism to despair, and then back and forth a couple more times for good measure. The final result though was a positive year for equity and bond markets, a rewarding period for multi-asset portfolios of all risk profiles, and a timely reminder of the absolute necessity, come what may, of remaining invested through volatile periods.
November and December were ultimately characterised by growing expectations for a significant reduction in interest rates in 2024, and a backdrop of a slowing but still resilient global economy. Data releases suggesting the successful taming of inflation, as well a series of more ‘dovish’ signals from central banks, meant a pronounced shift away from the mood music that was prevailing as recently as October, when markets believed that rises were largely finished, but that a ‘higher-for-longer’ interest rate environment would prevail, creating headwinds for financial markets.
These developments led to a strong rally in equity and bond markets, ensuring 2023 will be remembered as a good year for multi-asset investors. Global stocks delivered a total return of over 15% in sterling terms for the year, up 9% across November and December alone, with gains throughout 2023 led by the US, Europe and Japan. The UK market lagged but still delivered nearly 8% in 2023, having outperformed other markets in 2022. Meanwhile, emerging markets disappointed, up less than 4%, with China finishing as one of the worst performing equity markets over the year.
Elsewhere, bond markets, and UK gilts in particular, had a very strong final quarter (their best since 2011), with conventional gilts up over 8% in the fourth quarter and 3.5% for the year as a whole. Meanwhile, sterling investment grade credit finished up nearly 10% for the year. And finally, across the alternative investment universe we saw commodities post falls for 2023, listed real estate enjoy a huge rally in the fourth quarter to finish in positive territory, while hedge fund indices posted small positive gains.
Turning to the MPS strategies, and it was pleasing to see these trends translate across to portfolio returns. December’s rally ensured another month of gains, portfolios returning around 3.5% to over 4% across risk profiles in the final month.
November and December had an outsized effect on total returns for 2023, particularly for those portfolios with larger bond allocations, given the strength of the rally seen across fixed interest markets. The fourth quarter also saw strong relative performance across the strategies’ equity, bond and alternative investment exposures, and strong returns for the year as a whole.
- During December we trimmed exposure to Diageo. This followed the company’s profit warning in November, and feedback from the ensuing Capital Markets Day. We retain a positive view on the company’s prospects – consumer trends towards premium spirits continue, while Diageo retains a strong portfolio of brands and distribution capabilities.
However, in the near term we see a lack of obvious catalysts for an immediate re-rating. We deployed the proceeds by adding to our existing positions in London Stock Exchange Group, and the Vanguard FTSE 250 tracker, bolstering our exposure to UK mid and smaller-sized businesses, where we have been underweight for some time.
- Across our Asia Pacific ex Japan exposure, we exited our holding in Matthews Asia ex Japan following changes to the management team, reinvesting the proceeds in the strategies’ two largest holdings in the region: Fidelity Asia Pacific Opportunities and Veritas Asian.
- Elsewhere, we marginally reduced the duration of the gilt exposure held by the medium and medium-higher risk strategies. This follows the extremely strong rally in UK government bonds seen throughout the fourth quarter. We saw this as an opportunity to take a little bit of interest rate risk off the table, while remaining constructive on the outlook for bonds.
- And lastly, we adjusted the strategies’ alternative investment allocations, which proved to be a strong contributor to performance over the final quarter. We exited the small position in music royalty company Hipgnosis Songs Fund, which has been one of the most disappointing performers over its holding period, and currently the subject of a strategic review by its board. We also sold the modest allocation to real estate company LXi REIT. In turn, we added to our position in Assura Group, a leading investor and developer in modern purpose-built healthcare properties. REITs certainly finished as one of the bright spots in the fourth quarter.
2024 will be a big election year with Taiwan, the US, India and the UK set to head to the polls. Across the pond, Donald Trump is currently leading Joe Biden in the polls, and even the most jaded political commentators are expecting quite the display of fireworks in the run-up to the Presidential election.
Whilst election years in the US are often good for markets, signs of economic weakness are becoming more prevalent, and we remain mindful that with interest rates at their current restrictive levels, growth will decelerate unless interest rate cuts are made this year.
The US is the key player for global liquidity conditions, and interest rate futures are now pricing in a reduction in the Fed Funds Rate this year to around 4%, from its current 22-year high of 5.5%. There is a risk that markets have run a little bit ahead of themselves in these expectations – after all they exceed the Fed’s own projected cuts for the year, and with core inflation proving a little sticky, it seems unlikely that we’ll see rates under 4% without employment data having first started to weaken.
If the Fed do manage to engineer a soft-landing then that will prove a benign backdrop for both equities and bonds, and portfolios will continue to do well as interest rates fall. Despite broad-market equity valuations looking reasonable, earnings would suffer in the event of a hard-landing, although there is plenty of policy firepower in the form of potential rate-cuts if a significant slow-down does materialise.
2023 was a good year for long-term investors in risk assets who stayed the course. It was also a year full of surprises. The much-anticipated US recession failed to materialise, we avoided a full-blown banking crisis, while China severely disappointed investors, with the so-called ‘Great Reopening’ trade falling flat on its face. There was plenty to worry investors, and as always, there remains plenty to worry about looking out to 2024.
At the same time, while it feels that the last two months of 2023 were perhaps a little over-exuberant, we still remain constructive in our outlook for multi-asset portfolios. Specifically:
- We continue to see interesting stock opportunities in the market, and retain a modest overweight position to equities across the strategies.
- We continue to avoid going all in on a single sector, theme or style – diversification across sectors, regions and styles, and a clear focus on generating ideas through proprietary research served us well in 2023. We think it will continue to do so in 2024.
- While cognisant of valuations, we are certainly not turning our backs on the so-called ‘Magnificent 7’ and the wider US technology sector simply for the sake of it. Our view holds true that these are some of the very best companies in the world, and exposure to a number of them – but not all – remains wholly merited within client portfolios. The structure of our MPS enables us to be nimble and selective in our approach.
- We also think selective opportunities remain across the investment trust universe, with a number of names trading on material discounts following a difficult 2023. These are trading opportunities for consideration within our alternative investment ‘Building Block’ funds.
- Lastly, with bond markets stabilising, lower-risk portfolios look well set to weather any potential storms ahead. We remain constructive on the outlook for developed sovereign debt, both as a shock-absorber should growth underwhelm, and a source of income with yields now at more attractive level. High quality investment grade credit also retains its appeal.
You can find out more about our MPS strategies, and how we executed them, on our YouTube channel.