2023 was a fairly good year with most stock indices closing the year with double digit gains, primarily delivered by a late rally in November and December on anticipation that major central banks will start cutting interest rates in 2024 as inflation continues to slide, albeit more gradually.

 

In the United States annual inflation slowed from 3,2% in October to 3,1% in November. Core inflation, the Fed’s preferred inflation measure, was unchanged at 4,0%. Meanwhile, GDP growth for Q3 was revised down to an annualised rate of 4,9% from the previous reading of 5.2%. The FED kept the interest rate unchanged for the third consecutive time at 5,50%, but increasingly hints at interest rates cuts in 2024, driving market optimism.

In December the Dow Jones, S&P500 and Nasdaq gained 4,84%, 4,42% and 5,52% respectively. Over the whole year they gained 13,70%, 24,23% and 43,42% respectively. Most of the gains were driven by the Big 7 (Apple, Amazon, Alphabet, Meta Platforms, Microsoft, Nvidia and Tesla) which carry considerable weights in both the S&P500 and Nasdaq index.

 

The main question for 2024 is when will the FED start cutting the interest rate and how many times will it do so? The US GDP growth and labor market still seem remarkably strong despite the Federal Reserve lifting the interest rate. However, most of the growth in Q3 is attributed to expansion of business investment, as well investments by state and local governments, not so much by consumer spending which grew at only around 2,5% year-over-year and continues to steadily slow down. We believe Q3 was a one-off remarkable quarter and that the US economy could be in for a shock in early 2024 in terms of economic growth. The FED however will only respond with a rate cut later in the year once those conditions become more pronounced.

 

Also in the Eurozone stock indices performed well in December and throughout the whole year. In December the Eurostoxx 50, DAX and CAC40 gained 3,18%, 3,31% and 3,18% respectively. Over the whole year they gained 19,19%, 20,31% and 16,52% respectively. Slovenia's SBI index gained 2,80% in December and 19,12% throughout the year. Only United Kingdom's FTSE index underperformed with a modest 3,78% gain over the whole year and only managed to do so thanks to a december rally when it 3,75%.

Likewise also the ECB is expected to cut the interest rate as Eurozone inflation continues to slow down. However, unlike in the USA, Eurozone GDP growth has been struggling around zero for some time now. With Q3 annualized GDP growth at -0,1%, the Eurozone is likely to hit a mild recession in the coming quarters. Also the unemployment rate in the Eurozone is higher than in the US, providing more reasons for the ECB to cut its interest rate sooner, possibly as early as in the Spring.

 

With this in mind, and the fact that European and US indices ended 2023 on a high note, we expect some consolidation on the stockmarket during the first half of this year, followed by a rally in the second half of 2024 to close the year as a whole with gains, boosted by effective interest rate cuts and anticipation of a rebounding economy.

 

In the far east, Japan's Nikkei index gained a solid 28,24% over the year. Chinese and Hong Kong stocks on the other continued faltering with the Hang Seng dropping 13,82% over the year. China's economy is under pressure with concerns and fears that stimulus measures by the Chinese government won't be sufficient to spur growth and the ongoing real estate crisis also weakened sentiment towards Chinese stocks as foreign capital is rapidly being pulled out, driving Chinese stocks lower. Investors are more enticed by the economies of India, Vietnam, Malaysia and others which have more robust macro economics and capital inflow. These markets have been performing remarkably well in 2023 and will likely continue to flourish.

 

With all that said, there are of course always factors that can throw a wrench into analyst predictions. In 2020 a global pandemic broke out and in 2022 Russia invaded Ukraine. In October 2023 the Israel-Gaza conflict started and that now appears to be expanding into the Red Sea area, jeopardizing a critical sea route. And while the Ukraine-Russia conflict is still ongoing, tensions are also simmering between Venezuela and Guyana over the oil-rich disputed Essequibo region. Although unlikely, there is also the chance of China attempting to execute its claim on Taiwan through military force. 2024 is also the year of presidential, House and Senate elections in the US. Geopolitical events could play a major role in market performance this year.

 

For the time being our aim is to stay in defensive stocks such as consumer staples, pharma and such while holding little weight in cyclical stocks. For fixed income investors bonds are now very attractive, especially long-term bonds, as central banks prepare to cut rates.

 

Wishing you a happy, healthy and successful New Year from all of us at Primorski skladi.

 

Rudy Marchant
Fund manager Primorski skladi

 

Monthly reports - December 2023