The following reflects the general views of our Treasury & Investment Office (T&IO) and should not be taken as a recommendation or advice as how any specific market is likely to perform.
These views are as at the end of December 2023.
The value of investments can go down as well as up. Investors could get back less than they put in.
Please remember that past performance is not a reliable indication of the future performance.
Inflation steadily declined in the fourth quarter, following a year dominated by tight monetary policy. In the UK, headline inflation slowed to a two-year low, falling to an annualised rate of 3.9% in November. In the US, the Consumer Price Index rose 3.1% on an annual basis in November. The eurozone also reported a drop in inflation, with annualised inflation reaching 2.4% in November.
Major central banks maintained a halt on rate hikes. The Federal Reserve kept rates unchanged at the current range of 5.25%-5.50%, while revealing that policymakers expected three rate cuts next year. The Bank of England held interest rates at 5.25%, while outlining a gradual decline to 4.25% by the end of 2026. The European Central Bank also preserved its key rate at 4%.
The trajectory of economies continued to diverge in the quarter. With a strong labour market supporting consumer spending, the US economy grew at its fastest pace in nearly two years between July and September. Over the same time period, however, both the eurozone and UK economies contracted by 0.1%, fuelling concerns over recession as consumer spending and manufacturing activity continue to stagnate. Meanwhile, Japan’s economy shrank from the previous quarter, amid weak demand and high inflation. In emerging markets, China’s economy expanded with exports growing for the first time in six months. Overall, global economic growth, despite demonstrating resilience this year, remains subdued and is expected to weaken in the year ahead, amid an environment of tight monetary policy, inflation and geopolitical tensions.
The UK stockmarket ended 2023 on a positive note. However, it was one of the weaker regions globally, trailing the US and Europe, over concerns about its subdued economy. Inflation fell to 3.9% in November and expectations that the Bank of England might cut interest rates in 2024 helped shares climb from late October. Real estate and utilities registered healthy gains. Industrials and information technology also rallied.
US equities ended the year with a powerful rally. After declines in October, share prices soared as investors become optimistic that the Federal Reserve had ended its interest rate hiking cycle. With annual inflation falling and the economy remaining resilient, the S&P 500 Index climbed towards all-time highs.
European equities rallied as hopes of interest rate cuts lifted sentiment. Europe was one of the best-performing regions globally and the gains helped European shares deliver an annual return of around 18% (in euro terms).
The Japanese stockmarket rallied strongly from late October but over the quarter, lagged other markets
UK government bonds (gilts) returned 8.1%, outperforming both US government bonds (Treasuries) and German government bonds (bunds). Gilts were supported by increased expectations of interest rate cuts by the Bank of England, as annual inflation eased to 3.9% in November; the market is pricing in six cuts for 2024.
Global bond markets avoided a third consecutive year of losses as the quarter saw a two-month rally in bond prices driven by increased expectations of interest rate cuts by major central banks in 2024. Bond yields fluctuated throughout – the US 10-year Treasury yield reached 5.0% in October, its highest level since 2007, before retreating on the back of falling inflation figures and the prospect of interest rate cuts.
UK corporate bonds also rose, returning 7.3% in the fourth quarter.
Declines in capital values of UK commercial property accelerated in the three months to November (the latest month for which data is available). According to property consultant CBRE, prices fell by 2.0%. Performance over the period was most challenging in the Office and Retail sectors. In the Retail sector, sizeable falls in capital values were seen across each of the sub-sectors – retail warehouses, standard shops and shopping centres. Capital values in the Industrial sector were broadly flat. Rental value growth was strongest in Industrials, although some growth was seen in Offices and Retail as well. UK government bond yields have fallen sharply (and prices risen) since the end of October, which may provide some support for commercial property values going forwards.