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In the final month of 2023, investors witnessed a strong ‘Santa Rally’ across financial markets and there was a growing expectation of a significant reduction in interest rates in 2024. Global equity markets continued the momentum we witnessed towards the end of 2023, with the US stock market reaching an all-time high. As with most of last year, a considerable amount of the market return in January can be attributed to the ‘Magnificent Seven’, with Technology leading the way for global sector contributions.
It was more of a mixed picture for bonds and certain other asset classes. Interest rate changes were kept on hold by major central banks, after strong economic data did little to support the narrative that the fight against inflation is done and dusted. Data from the US reflected healthy GDP growth and strong employment data, the UK and Eurozone also pointed to strong wage growth figures. The revised expectation of fewer – and later – rate cuts in 2024 had a knock-on effect on bonds, which are highly sensitive to interest rates changes, leading to a reversal of some of the strong returns enjoyed in the final two months of the year.
Strategy Returns
For the MPS strategies, returns ranged from slightly negative for lower risk, more bond-heavy strategies, to positive returns for the higher risk strategies.
The drivers of positive returns in the higher risk strategies — which have a larger exposure to international equities (predominately US equities) — did well this month. The gains in the US market were partially driven by strength in the Semiconductor space, where we own names such as AMD and NVIDIA. Elsewhere, the market’s reaction to underwhelming earnings results also worked in our favour; not owning Tesla contributed to relative returns.
Moving down the risk spectrum — where the equity content is more modest — UK bonds had a particularly difficult month. Strong economic data dampened expectations of rate cuts and a growing feeling that the ‘last mile’ on the journey to bringing inflation back to 2% could prove challenging. Longer-dated and index-linked gilts were the largest detractors. We continue to believe that the backdrop is relatively positive for bonds given we’re at the end of a continuous rate rise cycle. In the unfortunate event that the UK enters a recession, our bond allocation is well placed to provide downside protection.
Building Block Activity
UK Equity Fund:
- We further increased our weighting to London Stock Exchange Group, which continues to provide strong revenue growth on a global scale.
- We increased our exposure to the broader UK market via the Vanguard FTSE 250 ETF, with UK stocks continuing to trade on a discount relative to long term averages.
European Equity Fund:
- We exited our position in Prosus, a global consumer internet group and one of the largest tech investors in the world. The majority of the company’s value is via Tencent, a major Chinese online business. Given the headwinds faced by that business and questions over Prosus’ ability to narrow its discount to net asset value, as well as its capital allocation policy, we chose to exit. We reinvested the proceeds in two recently initiated companies – construction chemicals leader SIKA and Danish freight forwarder DSV.
Authors
Antony Webb
Head of MPS Investment Funds