2024- Looking Backwards and Forwards

Sensible investors can expect above-inflation returns in the long run, this is known. However, shorter-term market returns are anything but predictable. 2023 served as the embodiment of this.

In 2022, a rapid rise in interest rates around the world, contributed, in part, to the fall in global bond and equity prices. With yields far higher than they have been for well over a decade, some investors may have been tempted to hold more in cash. However, those who follow an evidence-based approach would know that equities, or the right mix of equities and bonds, is likely to outperform cash in the end, regardless of inflation or interest rates.

Now the 2023 results are in, we can see that switching to cash would have been a poor decision, even over the short term. Fortunately, 2023 has delivered a much more positive story.

Market Resurgence

All core assets delivered positive returns in 2023. The ‘Magnificent Seven’ US tech giants, having suffered sharp declines in 2022, led the charge. In fact, they contributed around three quarters of the return of the US market over the year. As a consequence, global developed market returns were very strong, given that the US weight in global markets is around 63%.

As investors, we are pragmatists, returns are returns, it does not matter where they come from. However, it is worth noting that having a few, ultra large companies be so influential over market returns means a few things, especially when their returns are fairly well correlated with each other.

Firstly, their outperformance can obscure what is going on in the wider market. This was the case for the first half of 2023, when they propped up the returns of a relatively weak stock market. Global equity markets delivered a return of 7.2% (in GBP terms) in the first half of 2023. Remarkably, just nine companies contributed three quarters of this, with the other 7,000 or so stocks delivering the final quarter (1.9%).

The second thing to be aware of is that headwinds faced by just one sector, in this case tech, or one country, the US, could potentially be quite damaging to an investor’s overall returns, even if the rest of the market is chugging along nicely. This can be solved to some extent by diversification. However, when very few companies make up such a large proportion of the overall market, this is something to take heed of.

Taking a look at the rest of the market, we see value companies underperformed in the US (largely because of the overwhelming impact of the ‘Magnificent Seven’). However, they made a strong contribution outside the US. Both value and smaller companies outperformed strongly in emerging markets. Global commercial property (REITs) also managed a positive return.

On the defensive side of portfolios, high quality, short-dated bonds have recouped over half of the falls suffered in 2022. This is largely on account of the higher bond yields, which caused the pain in 2022 – delivering returns similar to cash.

Figure 1: Global investment returns – 2022 and 2023 compared

Global investment returns – 2022 and 2023 compared
Data: Funds used to represent asset classes, in GBP. See endnote for details.

Amid myriad uncertainties, portfolios strategically balanced with growth-oriented equities and defensive, short-dated high-quality bonds fared well. The 60/40 split, with tilts towards value and smaller companies, yielded approximately 9% returns in GBP terms[1].

Taking a small step back

Looking back through all the news since the start of the decade, we can safely say that the past three years have been eventful. In many ways they were completely unprecedented. Over just a few years, we have dealt with a pandemic, the UK’s exit from the EU, a reversing of globalisation, double digit inflation, interest rate hikes, bank failures, China’s economic slowdown, new major conflicts and leaps forward in paradigm shifting AI technologies.

It is no surprise then, that investment returns have been anything but consistent. However, those brave enough to have remained invested over the past three years have been deservedly rewarded for keeping their nerve.

The chart below illustrates the benefit of remaining invested through tough years. Bond returns have been poor due to starting yields around 0% at the start of the period followed by subsequent yield rises (and thus bond price falls). This was still more than compensated for by strong growth asset returns.

Figure 2: Cumulative global investment returns – three years to the end of 2023

Cumulative global investment returns – three years to the end of 2023
Data: Funds used to represent asset classes, in GBP. See endnote for details.

Looking forwards

The good news is that inflation has come down in the EU (2.4%), US (3.1%) and UK (3.9%) from recent double-digit highs. Despite this, the outlook for the global economy remains a little bleak. Many major economies, including the UK, have still not thrown off the threat of recession. China has deep and wide economic problems that are restraining its growth prospects. 

As always, risks remain in 2024. Potential conflicts in the Middle East pose risks to energy and supply chains. The final yards to reach central bank target levels of inflation (2% in the UK) will be harder to achieve and vulnerable to geopolitical risks. Interest rates may well remain elevated relative to the low rates that investors experienced up until early 2022. This is good for bond holders.

It is useful to remember that forward-looking views are already reflected in today’s prices.  No-one truly knows what is coming next. The key is to remain highly diversified, resolute in the face of any market set-backs and focused on long-term goals.

And finally…

2024 will prove a huge year for geopolitics. Notable elections include the UK, US, India, Pakistan, Indonesia, Taiwan and within the EU. US politics is as deeply partisan as it has ever been, raising the level of uncertainty about the future. The democratic process is always combative, often messy and sometimes ugly.

If ‘fake news’ was not already enough to contend with, this time round we have increasingly realistic AI generated images, audio and video coming into play. This will almost certainly become a theme in 2024 elections, not least in the US, which, once again looks like it will be a close-run affair.

In the UK, it is certainly possible that the Conservatives will struggle to remain in government.  As Churchill once said:

“Many forms of Government have been tried and will be tried in this world of sin and woe. No one pretends that democracy is perfect or all-wise. Indeed it has been said that democracy is the worst form of Government except for all those other forms that have been tried from time to time.…”

Winston S Churchill, 11 November 1947 

On a brighter note, it is worth remembering that despite the conflicts in the world, seeming discourse in democratic nations and the rise of autocratic and despotic leaders, the world we live in is better in many respects than ever before.  While 659 million of the world’s population live in poverty, despite continued population growth, this is down from 1.9 billion in 1990 and 902 million in 2012[2].  Global under-5 mortality has dropped by 60%, 2.1 billion people have gained access to safe drinking water since 2000 and 40% of board seats in FTSE 350 companies are held by women (even 10 years ago 150 or so of these companies had no women on their boards)[3]. These lesser-known facts are a strongly positive counterbalance to the immediate troubles that the world faces.

From an investing perspective, we remain hopeful for the best in 2024 but remain prepared for the worst, as is always prudent.

All of us at BpH Wealth would like to wish you a happy, healthy and prosperous new year.

Risk warnings

This article is distributed for educational purposes for UK residents. It should not be considered investment advice, an offer of any security for sale nor a recommendation of any particular security, strategy, platform or investment product. This article contains the opinions of the author but not necessarily the Firm. Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.

Past performance is not indicative of future results and no representation is made that the stated results will be replicated.

Data series used

Asset classFundISINWeight in P60/40
Gbl marketFidelity Index World P AccGB00BJS8SJ3427.5%
Gbl valueDimensional Global Value GBP AccIE00B3NVPH219.2%
Gbl small capVanguard Glb Small-Cp Idx £ AccIE00B3X1NT059.2%
EMiShares Emerging Mkts Eq Idx (UK) D AccGB00B84DY6424.9%
EM valueDimensional Emerging Mkts Val GBP AccIE00B0HCGX341.6%
EM small capiShares MSCI EM Small Cap ETF USD DistIE00B3F81G201.6%
Gbl propertyL&G Global Real Estate Div Index I AccGB00BYW7CN386.0%
Short, high qual bondsDimensional Global Short Dated Bd AccGB003377284836.0%
UK 1-5 giltsiShares UK Gilts 0-5yr ETF GBP DistIE00B4WXJK790.0%
UK IL giltsDimensional £InflLnkdIntermDurFI GBP AccIE00B3PVQJ914.0%
More information is available on request.

[1] Refer to table in the endnote for underlying funds and allocations.  This is provided for informational insight only and does not represent any form of advice or recommendation.

[2] https://borgenproject.org/victories-fighting-poverty/

[3] Sunday Times magazine, December 31, 2023. ‘Really, actually, properly excellent things that happened in 2023’

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