Insights / December 2023

A top quartile year in review

Quick recap of 2023

The year started strong, after extraordinary employment figures were published. This topic remained an important one throughout the year, sometimes generating short term volatility events and one of the reasons growth remained so resilient this year.
Artificial intelligence became a hot topic, following the announcement of a large collaborative deal between Microsoft and OpenAI, and remained the most prominent investment theme of the year.
Let us not forget the “little” scare of a great financial crisis 2.0 in March, when multiple American banks, with bad risk management, failed and the US government had to intervene to prevent bank runs and further damage to the industry. This contagion spread across the pond, resulting in a forced takeover of Credit Suisse by UBS and a large correction on Deutsche Bank’s share price. This was the start of a dry spell in bank’s risk appetite and the ongoing credit crunch experienced since then.
The end of Q1 marked a significant drop of inflation in the US to 5%, leading the Fed to start slowing down its’ interest rates hiking cycles.
Q2 had all of us covered for the summer when a new medication came out to treat not only type-2 diabetes, but also weight loss. This new type of drugs called “GLP-1” caused healthcare stocks such as Novo Nordisk and Eli Lilly to skyrocket.
June could have been the catalyst for a bad second half of the year, had a deal on the debt ceiling not been reached. This only postponed the problem to January 2025 though, and prompted, a couple of months later, Fitch to downgrade the US from AAA to AA+.
This brings us to Q4, which began with the start of a war between Israel and Hamas and the ensuing oil price volatility, followed by an unsurprising surge in the share price of defense companies.

December was just an extension of November, albeit at a slower pace. The latest Fed meeting encouraged investors as it started to take a softer tone, anticipating a pivot in central banks’ interest rates. Aside from the above, not much has changed, with disinflation continuing, and PMI’s (Purchasing Managers Index) remaining relatively stable (slightly better in the US and slightly worse in Europe). Volatility came from the credit side mostly, with treasury rates down at month end, the 10yr closing at the exact same level as the previous year end.

Our summary recommendations

What everyone got wrong coming into 2023 was the forecast of an unavoidable hard landing of the US economy, which later turned into a soft landing to finally no landing. This story may just be postponed by a year according to some strategists. This view could fit into the narrative we have been mentioning in our insights letter over the months:

- Savings accumulated over the Covid years have just about dried out
- The various fiscal stimulus (Covid stimulus, inflation reduction act, infrastructure bill) are maturing
- Credit cards are nearly maxed out and the associated increasing delinquency rate
- Interest rates are at much higher levels than we have gotten used to

In light of the above, we try to remain fully invested when possible, but position ourselves rather defensively within each asset class, with the decorrelated alternative investments being our most favored and overweighted asset class. Following the early redemption of several structured products, we keep a decent level of cash (fortunately well remunerated on short term papers), representing dry powder for good opportunities when volatility rises again.

The second certainty which disappointed many strategists and investors this year was the China reopening story. Having reopened at the end of 2022, China was supposed to bring the needed boost in growth to keep the world economy out of a recession, especially in Europe, and drive performance. It turned out to be the worst performing market of 2023. Sadly, China is not out of the woods yet, with its real estate still in shambles, growth still relatively low, loss of confidence as a result of internal political decisions to destroy certain industries, leading foreign capital to flee the country. For these reasons and the geopolitical tail risk identified, we stay out of China for the moment.

At the time of this writing, the homepage of CNN headlines 3 stories:

1. Fears are rising of a widened Middle East war

2. Ukraine claims it destroyed Russian tank landing ship

3. China’s Xi claims ‘reunification’ with Taiwan ‘inevitable’ as election looms

In 2024, attention could shift from inflation, which remained an obsession throughout the year, and could make way for geopolitics as the main culprit of instability and volatility.

Chart of the month

The chart shows the yearly performance of the S&P500 index since it started. Vintage 2023 is positioned in the top quartile.

Data sources: Macrotrends.net, Bloomberg

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