What has happened over the last 12 months…
As we bid farewell to 2023, we take stock of another year packed full of geopolitical, macroeconomic and market surprises. War in Ukraine continued to rage through 2023 and a new threat to global stability broke out between Israel and Hamas following the terrorist atrocities in October. This remains a dreadful situation for the civilians caught up in the fighting. At the time of writing the war has not escalated and spread to the wider Middle Eastern region which would otherwise have potentially pushed the world closer to a more global conflict. Politically, the recent set of elections in Argentina and The Netherlands has shown those countries electorates prepared to vote out incumbent governments in favor of more extreme populist parties on the opposite ends of the political spectrum; an important trend to monitor as 2024 will see elections across the world including the US presidential Elections and the General Election here in the United Kingdom.
To date markets have mostly shrugged off these geopolitical tensions instead focusing on monetary and fiscal policies as well as economic and corporate results. Investors came into 2023 with a negative outlook given the high expectations for a recession, as concerns about the unprecedented speed in the hike in interest rates filtering down into the real economy could act as a bulldozer, breaking sensitive parts of the economy. In March 2023 a handful of US regional banks began to buckle and eventually collapsed as the rise in interest rates and the effects on their own long-term investments broke their balance sheets. However, contagion was swiftly contained as central bankers and treasury officials stepped-in almost immediately with guarantees and swift fire sales to alleviate the pressure on the financial system. It also became apparent that the economy is not as sensitive to interest rate hikes (yet!?) as fixed rate mortgages have so far insulated the impact on residential property owners, whilst consumer and corporate balance sheets were in good shape post the pandemic lockdowns. We continue to keep a close eye on these positive factors, looking for early signs of deterioration, especially the data on consumer and corporate debt defaults, which for now have understandably risen marginally, but remain contained.
Meanwhile, in the first quarter of 2023, the world was introduced to OpenAI’s ChatGPT-4 model and the opportunities for artificial intelligence (AI) not just in the future, but in the here and now, which swiftly led to the resurgence of US big tech company shares – no longer under the dated FAANG pseudonym but now known as the ‘Magnificent Seven’, not in reference to Yule Brynner and his band of gunslingers riding into to town to save the day, but the seven largest technology companies leading the way in all things AI. In fact, it was the strong and ongoing rally in these tech companies that effectively saved the day or rather held up the broad US S&P 500 index due to their sheer market capitalization size, representing a staggering near 30% of the index. The other 493 companies in the index, collectively had a rather lackluster year until the start of November, since when there has been a broader recovery and a gradual shift for investors towards those company shares offering greater value.
The summer months proved to be more volatile for the broader markets, driven mostly by ongoing resilience of the US economy, with a strong consumer and the healthy job market, threatening to derail the battle against inflation. Investors grew increasingly concerned that the Federal Reserve would be forced to continue on the monetary policy tightening path to effectively strangle the US economy into a recession once and for all, to combat inflation. However, despite ongoing rhetoric by central banks that the fight against inflation has not yet been decisively won, inflation growth continues to slow, and the market has already begun to price in interest rate cuts for mid-2024. Although, the market pricing rate cuts should be taken with a pinch of salt as we saw the same occur in December 2023 – as we now know, these cuts did not materialize. Nevertheless, at the time of writing the stock market is determined to end the year on a high note with a ‘Santa Rally’ possibly ignoring the warning signals out there that we are not out of the woods yet.
Outlook…
We believe that there are still risks out there that could see a return of inflationary pressures, whether through geopolitical factors or a central bank policy mistake by easing monetary conditions too early. The much-anticipated recession could still arrive should consumers slow down their spending and along with businesses begin to feel the higher interest rates on their borrowing costs. We therefore anticipate some volatility ahead over the first quarter or two of 2024, which we expect will present us with some excellent investment opportunities at much improved pricing levels, especially after the sharp rally over recent months that has seemingly pushed valuations to more expensive levels. The Pound Sterling has rallied recently, especially against the Dollar which makes our targeted US equity purchases more attractive. We are looking to purchase direct equities across sectors including healthcare to bolster exposure to our demographics key theme as well as looking for pick and shovel opportunities in technology. We believe that at the right price small and mid-sized companies could present interesting medium to long term opportunities for investors following a difficult period for the cohort since the end of 2021. We will be looking at potentially purchasing a best-in-class fund to provide such exposures to small and mid-cap companies. We will also be looking to invest into direct equities that will further bolster portfolio yields, through investing into sectors such as utilities that include high quality companies that are engaged in another one of our key themes of energy transition.
And finally…
2023 has been another challenging year for investors with ongoing uncertainties. However, we believe the Casterbridge investment approach has continued to show strength as our diversified approach whilst taking advantage of opportunities through the course of the year, have been positive for portfolios. We look forward to a positive 2024 and wish all our clients and advisors a Happy New Year and best wishes for a successful year ahead.
Important Information
This article is for information only and does not constitute advice or recommendation and you should not make any investment decisions based on it. The views and opinions of this article are those of Casterbridge at the time of writing and may change without notice. Any opinions should not be viewed as indicating any guarantee of return from investments managed by Casterbridge nor as advice of any nature. It is important to remember that past performance and the value of an investment, and any income from it, may go down as well as up and the investor may not get back the original amount invested.
