Pete Wasko, Senior Portfolio Manager, Copia Capital

Although it often didn’t feel like it due to continued high inflation and various geopolitical issues, 2023 ended up being a reasonably good year in terms of gains across the majority of asset classes.

A recap of 2023

Quickly recapping 2023, we saw developed markets outperforming emerging markets. US equities were particularly strong, with the ‘Magnificent Seven’ tech giants of Amazon, Apple, Google/Alphabet, Meta, Microsoft, Nvidia and Tesla dominating the year with exceptionally convincing returns. However, their continued outperformance has created a situation where concentration in US stocks is at an all-time high, making it very difficult for fund managers to outperform an index without holding any of these stocks.

UK large companies, which are more global in outlook and therefore less affected by higher domestic interest rates, outperformed smaller companies. However, UK small caps rallied towards the end of last year, making them and the UK market increasingly attractive for investors.

Short-duration bonds generated strong risk-adjusted returns throughout the year. Although cash returns improved over the last 12 months, this section of the market continued to achieve stronger returns than money markets.

Overall, most asset classes ended the year on a strong note, despite some volatility throughout the year.

Opportunities for 2024

Looking forward, recent comments by Federal Reserve Chairman Powell have encouraged the markets that interest rate cuts are likely in 2024; however, the path remains highly uncertain. The good news is that we do expect inflation to continue to slow, but it is likely to remain above the central banks’ 2% target for some time.

Central banks are also beginning to discuss slowing down Quantitative Tightening (QT), where they reduce their balance sheets by selling government bonds or letting them mature. Central banks have been using QT to reduce liquidity since June 2022, so these discussions are a positive sign for equity markets.

Last year was very challenging on a geopolitical front and issues remain elevated with the ongoing conflicts in Ukraine and Israel/Gaza and the attacks on the Red Sea trade route. While this hasn’t been overly problematic so far, these still come with the potential for economic disruption on a global scale and continue to be monitored closely.

The next 12 months will see national elections in 40 countries including the UK, the US, Taiwan and the European Parliament. Changing political leadership may impact international relations and events across the globe.

On a more positive note, we see opportunities for investors in Asian and Global Emerging Market equities, which have, in our opinion, been oversold. We see three key reasons why these markets are attractive for investors:

  1. Growth is superior to developed markets, with expected GDP growth of about 4% – this compares to 2% for the US.
  2. Valuations overall are far more attractive.
  3. Debt levels are much lower, and inflation, particularly in Asia, has been less of a problem than it has been for Europe and the US.

That said, movements in equity markets don’t always mirror healthy economic growth, and changes in market liquidity can easily override macroeconomic changes.   

Outlook for Q1 2024

Looking ahead, we are cautiously optimistic with opportunities continuing to emerge for long-term investors. As a result, Copia continued to take a well-diversified market position.

Our unique Risk Barometer, which takes the data from hundreds of market and economic variables, including equity prices, bond yields, and credit spreads, to generate an overall investment risk score of between +1.0 and -1.0, is reading -0.33 as of 31st December 2023.

The Risk Barometer uses a red, amber and green system to show the level of risk, with green (risk scores between +1.0 and 0.33) indicating that global economic signals are more positive than negative and red (-0.33 to -1.0) the opposite, while amber (0.32 to -0.32) suggests the outlook is more balanced. The Q4 score moves into the amber zone from red, signalling a shift towards a more positive and balanced outlook than early 2023.

In terms of investment style, we continue to have a preference for value and quality over growth. Within fixed income, we have begun to transition portfolios towards market weight duration and we continue to have a deep exposure to Asia and Emerging Markets, where we feel there are investment opportunities.

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