2023: the year of the acronym

In January 2023 I listened to the predictions from economists and spoke to my clients to see how they were positioning their portfolios for the year ahead.

Many were happy to sit on their hands and not make any drastic decisions, while others were keen to overhaul their portfolios.

In my experience, the losers of the previous year can often come back with a vengeance, and in 2023 anything technology-related exemplified this. Among the various acronyms of the year, AI (or artificial intelligence, for anyone who by some miracle missed that) was surely the most discussed.

Up, up and away

Inflation and the possibility of recession cast a shadow over 2023. Yet barring Germany, the recession didn’t happen, though those in the hard landing camp remain pessimistic about the outlook.

In the UK, stubborn inflation in the first half of the year led to significant rate rises to today’s level of 5.25%. From a client perspective, the old saying ‘cash is king’ proved salient, and interest was sparked in money market funds.

Yet it was gilts that became the hot asset class of 2023, with many clients increasing their allocations. The National Savings and Investments (NS&I – acronym number two) 6.2% fixed one-year bond provided stiff competition, closing to investors in early October with nearly 225,000 customers signing up to the deal.

Where in the world

Japan became a hot topic of conversation in the first half of the year, despite the familiar worries over a potential ‘false dawn’. In the end the bulls were vindicated, with Japan one of the best performing markets over the first six months of the year.¹

The US and global equity markets went on to reward patient investors over the course of the year, though there were concerns from clients about the reliance of the US market on just a handful of dominant stocks.

This led to renewed conversations about the potential value of diversification given potential concentration risks in mainstream indices.

There is an alternative

2023 saw excitement among our fixed income teams, as coupons in developed markets reached levels not seen for years, and clients began increasing their allocations. The difficulty, though, was duration, and with a mixture of views in the markets there were winners and losers throughout the year.

Acronym number three, AT1s (additional tier one bonds), hit the headlines for all the wrong reasons following the collapse of Credit Suisse. However, the fall from grace proved short-lived, banks finding more than enough willing buyers by November.²

The words “It’s been a difficult year” were repeated everywhere I went during 2023, despite equity markets delivering double-digit returns.³ A reminder that the market narrative is more complex than a glance at the end-of-year numbers might suggest.

The story for the asset management industry was decidedly complex. There were some distressing statistics, with flows weak for many groups, and platform data hitting all-time lows. A good time, perhaps, to remember Warren Buffett’s quote: “Be fearful when others are greedy, and greedy when others are fearful.”

What to watch in 2024

On valuations, we believe there are some potentially exciting areas to look at going into 2024.

A few clients have mentioned small caps in both the UK and US markets as being areas of interest, and sentiment towards high yield is also thawing.

The joy of this job is that consensus soon becomes boring, and there’s a wide array of thoughts about what to expect in 2024. For now, it’s time to resole the shoes, re-charge the batteries and focus on the opportunities in the new year!

Sources

1. The MSCI Japan total return index returned almost 20% in the six months to end-July 2023, almost double the gain seen in the MSCI World index over the same period, and besting US and European equivalents. Source: Refinitiv as at 31 July 2023.

2. AT1s back from the brink, but challenges remain | Reuters

3. In the 12 months to 30 November the MSCI World index rose 13.6%, according to Refinitiv.