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Uncommon truths 2023: a year in review

Uncommon truths 2023: a year in review

Despite tightening central banks and economic slowdown, 2023 has been a good year for investors. If only the same could be said for my Aristotle List of surprises for the year.  

A year ago, we were expecting less economic growth but the belief that central banks would stop tightening led to optimism about market outcomes. Though economies slowed and central banks tightened more than we expected, assets did well.   

The best performing global assets so far in 2023 are equities and high yield (see Figure 3).  The only asset class to generate negative returns is commodities.  The -16.4% USD total return on our Neutral portfolio in 2022 (-12.9% in local currency) was followed by +12.3% in 2023 (+12.4%).  The Neutral portfolio is a static mix of global cash, fixed income, equity, real estate and commodity assets (see Figure 6 for weightings).

As a reminder of events, here are Bloomberg’s most-read articles during 2023 (paraphrased): 

  1. Goldman trader paid $100m…stepping down (Dec 12)
  2. SVB races to prevent a bank run… (Mar 10)
  3. Goldman to cut about 3200 jobs… (Jan 9)
  4. Stock mood turns ugly… (Jan 18)
  5. US general warns Iran: stay out of conflict (Oct 10)
  6. Fed pivots to rate cuts… (Dec 13)
  7. JP Morgan in fight over client’s losses (Dec 12)
  8. Bond yields tumble as traders dial back Fed wagers (Jan 12)
  9. Citigroup offers partial early bonuses… (Dec 13)
  10. Stock close near lows of day…jobs in focus (Jan 5)

It is usually the case that bad news sells (many of the most read stories in 2022 were about Russia’s invasion of Ukraine).  However, we appear to have been less gloomy in our reading this year.  Views about the Fed dominated the start and the end of the year (according to the most-read list), though there was a fair amount of parochial navel gazing with a lot of interest in news about individual banks.  There was surprisingly little in the most read stories about the situation in Israel/Gaza and the regional banking mini crisis in the US. 

The positive market outcomes suggest to me a willingness to look through the hawkishness of central banks to a time when they will be easing and economies accelerate.  There have also been a range of idiosyncratic factors that have driven various assets (AI, poor real estate fundamentals and geopolitics, for example).  Despite the fact we believe “bonds are back”, equities have outperformed government bonds by a wide margin in 2023 (see Figure 3).  The obvious exceptions among regions shown in Figure 3 are EM and China, with government bonds outdoing stocks. 

Figure 1 shows the results of our annual ranking within asset groups.  As is often the case, emerging markets dominate both ends of the spectrum, though Japanese government bonds appear in the bottom three of that category when expressed in US dollars.  Argentinian assets were doing reasonably well (in USD) until the new government recently announced a drastic devaluation of the currency.  Otherwise, Hungarian and Polish assets have fared well, despite the proximity to Ukraine, but Turkish government bonds have suffered from the dramatic tightening of central bank policy deemed necessary to curb inflation. 

Figure 1 – Top and bottom performers by asset class in 2023 (year-to-date total returns, %)
Figure 1 – Top and bottom performers by asset class in 2023 (year-to-date total returns, %)

Past performance is no guarantee of future results. As of 15 December 2023. Equity data is based on Datastream indices; government bond indices are supplied by ICE BofA; currencies are based on WM/Refinitiv exchange rates. Source: LSEG Datastream and Invesco Global Market Strategy Office. 

As suggested by the most-read list, it is not only in Turkey that central banks have dominated the thoughts of investors and markets.  As the year progressed, we had to adjust to the fact that major central banks (except the BOJ and the PBOC) were going to tighten more than expected at the start of the year.   

This caused a dramatic reversal in bond markets, with US 10-year yields approaching 5% in October, causing some commentators to speculate about yields rising to the 6%-7% range.  However, we were of the opinion that at 5% those yields were attractive (see Can yields go much higher?).  Figure 2 shows how nominal and real 10-year treasury yields had risen to pre-global financial crisis levels, which we think presented a reasonable opportunity, especially since the global economy still appeared to be slowing. 

Figure 2: Chart of the year: rising US 10-year yields meant that bonds were finally back in 2023 (%)
Figure 2: Chart of the year: rising US 10-year yields meant that bonds were finally back in 2023 (%)

Notes: past performance is no guarantee of future results. Daily data from 29 January 1997 to 15 December 2023. “Real yield” is the 10-year TIPS yield. Source: LSEG Datastream and Invesco Global Market Strategy Office 

The more recent decline in bond yields was aided by the continued decline in inflation (and recent hints from the Fed that rate cuts are now on the agenda).  That decline in inflation was foreshadowed by item #1 on my list of 10 surprises for 2023 (published on 8 January 2023 - see The Aristotle List).  Unfortunately, the rest of the list was not so successful, as shown below (with my self-evaluation in blue): 

  1. US core CPI inflation falls below 4.0% (TBD)
  2. The Fed panics & reduces rates in late 2023 (No)
  3. USDJPY falls below 115 (No)
  4. Boris Johnson makes a comeback as PM (No)
  5. Turkey chooses a new president (No)
  6. NYSE FANG+ falls again during 2023 (No)
  7. USD denominated Ukraine government debt outperforms (Yes)
  8. Pakistan stocks outperform major indices (Yes)
  9. Chinese stocks outperform (No)
  10. Ireland wins Rugby World Cup 2023 (No)

Remember, this list does not represent my central scenario but is rather an attempt to identify non-consensus ideas that I believe have a reasonable chance of occurring (thereby surprising most investors).  They must therefore be put in the context of the prevailing sentiment at the start of the year (when inflation was broadly expected to be sticky and EM assets were not as popular as now). 

This was the worst year that I can remember for the Aristotle List and especially hard to take after the success of 2022 (9/10 correct).  I am reminded of the words of Rudyard Kipling: “If you can meet success and failure and treat them both as impostors, then you are a balanced man...”, which I think should be remembered by investors in good times and bad. 

I will publish the selections for 2024 in early January.  I have met many investors over recent weeks and months which helps to judge the prevailing mood.  I am hoping a break over the Christmas and New Year period will provide more inspiration than last year. 

I continue to believe the main driver of returns will be economic and policy cycles.  I think the global economy is slowing, that inflation will continue to fall and that central banks will soon be cutting rates (aggressively).  As outlined in the Big Picture 2024 Outlook document, that led me to be cautious about riskier assets in the short term but to expect that multi-asset returns to the end of 2024 would be among the best since 2019.  However, the recent rally in most asset markets suggests a lot of what I was expecting has already happened, perhaps dimming the outlook for returns.  

On that note, all that remains is for Andras and I to wish you and your loved ones a happy holiday season. 

Unless stated otherwise, all data as of 15 December 2023. 

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