Market update – December 2023

Insights — January 2024

We share our latest observations on global asset markets regarding T8 Energy Vision

During December, increasing risk appetite was evident across all geographies with world equities rallying by 4.9% (in US dollars), following on from +9.4% in November. Europe was again the best performing region (+5.1% in US dollars) followed by the United States (+4.5%), while the Asia Pacific region lagged (+3.5% in US dollars) due largely to the continued weakness in China equity markets.

For the 2023 calendar year, developed world equities finished the year up 23.8% (in US dollars), outperforming emerging market equities (+9.8%), which were dragged down by the large exposure to China.

Hong Kong and China finished the year as the worst performing equity markets (down more than 10%), as the Chinese economy experienced a slow recovery from COVID-19 lockdowns and faced headwinds from its troubled property sector. In contrast, Taiwan finished 2023 as the best performing emerging equity market, posting a return of +26.8% (in local terms) due to its 60% allocation to Technology companies (especially microchips). Entering 2024 Hong Kong is one of the most attractively valued equity markets with a forward price-to-earnings multiple of 8.8x and a dividend yield 4.1%.

Continental European equity markets (excluding the United Kingdom) finished 2023 up 21.7% (in US dollars), with Italy, Spain and Germany posting the strongest returns (greater than 20% for the year). Entering 2024, Europe includes some of the highest growth markets based on forward earnings and sales and at a reasonable price.

The Clean Energy Index followed the equity market higher in December, rising by +11.9% as small cap companies (+12.1%) outperformed the return of large caps (+3.8%). However, in 2023, small cap companies lagged large caps by -15.7% due to their sensitivity to higher interest rates. This underperformance was a major headwind for the Clean Energy Index, which fell by -20.8% in 2023. 

Growth stocks lagged value companies in December (4.4% vs 5.3%, respectively) after posting two consecutive months of outperformance. A large divergence was observed between growth and value stocks in 2023, with growth companies outperforming by 32.6% as high-growth Technology stocks finished the year up over 56%. As a result, the forward price-to-earnings multiple for Technology companies now sits 2.2 standard deviations above its long-term average (32.9x).

At GICS (Global Industry Classification Standard) sector level, utilities stocks, which feature prominently in the Clean Energy Index and are typically associated with low volatility, posted a third consecutive month of positive returns (+1.7% in December) after falling heavily in September due to its sensitivity to rising bond yields. It finished 2023 as the worst performing sector (-10.2%) but one of the most attractively valued (forward price-to-earnings multiple of 17.1x and a dividend yield of 3.5%).

The energy sector was the worst performer for a third consecutive month, falling by another -0.2% (its smallest pullback in 3 months) as the price of oil continued to decline (-7.0% for Brent) due to concerns around a weakening global economy in 2024 and rising levels of supply (characterised by record oil production in the United States). The energy sector is the most attractively valued to start 2024 with a forward price-to-earnings multiple of 10.8x and a dividend yield of 3.3%.

Solar stocks, which also feature prominently in the Clean Energy Index, posted a second consecutive month of strong returns (+16.4% in December) after four consecutive months of negative returns. In 2023, solar stocks fell by -26.9%, their worst annual return since 2016.

One of the main catalysts for the rally in stocks in November and December after three consecutive months of equity market drawdowns was better line of sight that interest rates may have peaked in the United States. Weaker economic data out of the United States and cooling inflation was seen as increasing the likelihood of monetary easing (rates cuts) in 2024. In response, investors continued buying US Treasury bonds in December, increasing their duration, and thus pushing up bond prices into a second month with 10-year and +20-year yields falling by 45 bps and 49 bps, respectively.

The 10-year US Treasury yield finished 2023 at 3.88%, the same place it started the year. Yields moved in a wide range, hitting a trough of 3.30% in April before peaking at 4.99% in October. In seven months during 2023, the move in US Treasury yields breached +/-1 standard deviation and it was close to +/-2 standard deviations for four of these months. The correlation between equities and bonds remained elevated into year-end (99th percentile), as both asset classes posted positive returns for November and December.