2023 in review

How many days before/after ‘The Big Day’ is it appropriate to wish someone a Happy Christmas? This article has the misfortune of being both too early and too late. It’s being written on 21 December, but will be published on 28 - such is the way with publishing deadlines around the festive season. Regardless, I hope you are all having a wonderful time celebrating.

Something I am already celebrating at the time of writing is the solstice. We’ve finally made it the shortest day of the year. Where I am writing from, the sun ‘rose’ (if it’s there behind the clouds) at 08:06 and will have set by 15.54. Bleak. But today marks a very welcome turning point. Spirits will soon be lifted by Christmas and New Year and then we’ll be back on the road to longer days.

This restrained optimism is being reflected in the markets as we close out 2023. Last week (or two weeks ago by the time you read this), the chairman of the Federal Reserve suggested that there might be as many as four interest rate cuts in the US in 2024, perhaps signalling the end of a very challenging economic period which has been felt by private investors.

But before we turn our attention to the opportunities of the new year, the post-Christmas stupor is a fun time of year to sit and remember. And with that in mind we’ll be bringing you a pair of articles to help prompt recollection of 2023. Tomorrow we will be digging through the statistics and data - helping you remember the stocks, sectors and markets that thrived and those that didn’t. But first, we’ll turn our attention to the stories and events that defined 2023 and the lessons we can take from them.

A banking crisis that wasn’t

It has been 15 years since the last time major bank failures prompted global meltdown and March proved it was just about time for another go.

As many had expected, rising interest rates (enforced by central banks around the world in an attempt to quell rampant inflation) finally caused trouble for the banking sector, starting with Credit Suisse, which collapsed in the middle of March.

Then came the turn of the US banking sector, which was undermined by the fall in bond prices as interest rates continued to rise. With customers queuing (digitally) to take their cash out, banks were forced to stomach steep losses to maintain liquidity and three failed to stay afloat. Silvergate, Silicon Valley and Signature Bank all collapsed within the month, sparking widespread panic about the state of other banks in the US and beyond.

But it turns out that that lessons were learnt in 2008, meaning central banks and regulators could deal with the situations before they became calamitous. The Bank of England put a floor under the gilt markets, the Federal Reserve didn’t let the run on regional banks impact more than three lenders and Credit Suisse was gobbled up quickly by its better financed peer, UBS. And so, as 2023 comes to an end, the events which seemed to be paving a path to disaster at the start of the year have been largely forgotten.

Banking collapse confined to a handful of poorly financed lenders. Crisis averted.

Bleak in Britain

But while in March, British investors were feeling pretty smug about the banking sector and resolve of the financial markets, things are looking somewhat less sunny as the year closes.

The economic dynamics which disrupted the US banks in March caused similar havoc for many funds in the UK in the summer. High interest rates and sliding bond prices, meant funds with treasury exposure saw unexpected and unwelcome declines in the value of their assets. June marked the worst month for fund outflows since the pandemic.

But the fund outflow story is not a new one, nor did it end in the summer with a stabilisation of interest rates. Equity outflows have existed since 2016 (according to Morningstar data there have only been ten months in the last seven years which have seen equity fund net inflows in the UK), but they kicked up a gear in 2023, especially for equity income and small-cap funds.

These trends are especially troubling for asset managers in the small cap space, where underlying assets are less liquid and not so easy to sell. The problem has been compounded by the free-falling prices in the small cap space, suggesting there aren’t too many buyers in the market.

The tide of capital sweeping out of British equities is starting to lead to a viscous cycle. Less available capital means less appetite for high quality listings, leading to poor returns for investors and… less capital.

Arm Holdings is a prime example of the fallout from unloved markets. When the Cambridge-based chipmaker was bought by Japanese conglomerate Softbank in 2016, tempers flared at the loss of home-grown tech talent. And so Softbank’s decision to float its purchase back into the public markets this year, provided a good opportunity for British investors to claim back what was rightfully theirs. Rishi Sunak was reportedly part of the cheerleading team sent to try and woo Arm back to Britain.

But no such luck. In September Arm floated on the New York Stock Exchange and opened trading up 10% - no doubt cementing management’s decision that floating in the US rather than its domestic market was a good idea.

On the other end of the spectrum, the lack of love for UK equities (combined with an exceptionally strong US dollar) has provided a fertile hunting ground for foreign takeovers. The most dramatic of which came in November when Hotel Chocolat received a bid at a 170% premium. Hotel Chocolat is not the highest quality of British companies and has spent the last few years looking increasingly desperate for cash to fund its ambitious expansion plans. But the premium offered suggests that perhaps the British market was undervaluing it a little.

A round-trip lead by the Magnificent Seven

But while the UK (and especially the small-cap space) have been looking unloved, 2023 has brought much joy to investors with exposure to the US and especially Nvidia.

The company - which is the only leading chipmaker with expertise in the types of data centres required to power AI - has been the top performing stock in the US. Its shares have risen more than 200% in the year to date and its market capitalisation has galloped through the $1trn barrier. Meanwhile Microsoft, which in January, threw more of its weight behind OpenAI, has climbed to even greater heights. Despite its age and heft, it was the third best performing stock on the Dow Jones in 2023.

These are two of the so-called ‘Magnificent Seven’ stocks in the US tech space, which have lead the charge in pulling the S&P 500 back to its 2021 highs. In the last two years, the leading index in the US has spent one year crashing downwards and one year climbing back up to where it started. The AI narrative which has driven this return to growth in 2023 still looks like it’s at the start of its journey. Let’s hope 2024 brings with it some British opportunities to join the party.

…

After a year of mixed fortunes, there are signs that the markets might present more reliable opportunities in the new year. Following the Fed’s announcement in December, the Volatility Index (VIX) dropped to its lowest point since early 2020 (i.e. before the pandemic). And after three years of economic turmoil, hopes are being raised that major economies might sidestep all-out recession and maybe even stick a soft landing. As countries in the northern hemisphere turn towards the sun again, investors have reasons to be optimistic.