2023 Review. Markets & strategies brief

Markets/Economics

This time last year, it was hard to find any strategist who had an optimistic view on stocks for the year ahead. The consensus was that interest rates would have to rise further to stem inflation, driving the global economy into a recession. As a result, stock markets worldwide could have another potential 15-20% to fall.

Bears were out to picnic, as investor flows were out of risk assets and into money market funds. As is often the case when sentiment is extreme in one direction or the other, you get a reaction, and the start of 2023 was no exception, as global stocks had the best start for over four years. As the year progressed, economic forecasts continued to be challenged as the US economy outperformed expectations, helped by a resilient consumer. In contrast, China, whose economy was expected to recover from the easing of Covid lockdown restrictions, underperformed. The AI boom gathered pace, and the dominance of “big tech” drove the S&P 500 to further gains. ChatGPT became the talk of the town as investors tried to estimate how much the AI revolution would drive economic growth in the coming years. The indexes less exposed to Amazon and Microsoft lagged, and struggled to make gains. Until early November, many of the world's smaller cap indexes had remained in negative territory, as was the case also for the FTSE 100.

For much of the year, bond markets seem to flag recession in the world's largest economies, which failed to materialise; indeed, as the year has gone on, growth forecasts have generally beat expectations and inflation rates, particularly in the latter half of the year, have fallen faster than expected. As inflation rates have fallen, longer dated yields have likewise fallen back, the last quarter was a strong one for bonds as well as equities. However, as the near maturities moved far less this has led to a rise in real yields.

We are also pleased to share that our investment advisors won the industry award  “Best Portfolio Construction Strategy UK 2023” (CFI).

Strategies

UK Income Strategy

We are very pleased with the first full year performance of our Income Strategy, which has delivered returns in excess of 8% on a low-risk mandate, and outperformed its peer group benchmark.

This has been achieved through a combination of actions; locking in short-term low-coupon government bonds (Gilts) at favourable moments which have then increased in face value as CPI figures show inflation falling. Capital gains achieved on Gilts are free from tax, providing the significant benefit of tax free gains at maturity of the bond. Further, measured positions in preferred blue chip equities are taken to support portfolio income and provide growth potential.

This strategy provides an opportunity to invest assets seeking income in a tax efficient manner, whilst adhering to a low-risk mandate.

Global Macro

We are delighted to have seen continued strength in our Global Macro strategy, which delivered returns in excess of 12% for 2023, taking the three year return to 22.4%.

A disciplined geographic allocation and a strong focus on ensuring frictional costs are kept to a minimum has resulted in continued outperformance of our peers. 

Total Return Balanced

This strategy has had a rather quiet 2023 returning just under 1%  (5 year return 18.7%). The defensive nature of our portfolio benefitted us greatly in 2022. However, it likely hindered performance this year as the world rotated back to tech, communication, and consumer discretionary sectors, and away from healthcare and consumer defensives.

We were able to lock in strong yields at opportune times for the coming years (2026 & 2027) in UK government bonds.

On the equity side, at the start of the year, we added Alphabet to the portfolio, as we wanted to take advantage of the tech selloff from the previous year; the stock gained over 50% in 2023. Hermes, Microsoft, and SAP are other strong performers over the year. The laggards have been Estee Lauder as margins continued to suffer from the overstocking issues. We added to the position after the steep fall and have seen a decent recovery in the past weeks. Likewise, Burberry’s earnings suffered from the weakness in the Chinese economy, but with a well-covered dividend, a strong balance sheet and a new creative director, we recently added to that position, expecting 2024 will prove more constructive.

Smart Alpha

Our quantitative, AI driven US growth strategy is evolving and will be undergoing change. Whilst delivering in excess of 25% in 2023, the strategy will be restructured this year into a fund, and will be available to suitable investors from the 15th January.

The award winning quantitative system has been enhanced, and the investment universe expanded. The strategy will no longer be applied to the S&P 500, but will focus on a global universe of technology and innovation companies, and go under the new name of the Global Innovation Fund.

The simulated (back tested) performance of this new iteration has been very exciting, indicating exceptionally strong performance. We greatly look forward to the forthcoming launch.

 Simulated past performance is not an indicator of future performance.

Outlook

Looking to the year ahead, the sentiment feels almost the polar opposite from 12 months ago. The sharp decline in inflation rates, reinforced by last months better US inflation report, the resilience of the global economy, in particular the US, to higher interest rates, the more significant influence AI will have on economic growth and the gathering expectation that the Fed will start cutting interest rates in the Spring has led to a great deal of optimism for the year ahead.

The S&P 500 is close to its record high, something no one predicted at the start of 2023. The return of the Goldilocks era, low inflation, modest economic growth and supportive central bank policy is much anticipated. There is no doubt that signs of weaker economic activity have accompanied falling inflation in recent weeks. The Citi US and Global economic surprise indexes have fallen, indicating that economic activity has not met expectations in recent weeks. The global economy is expected to grow between 2.5% and 3% in 2024, depending on whose forecasts you wish to use. The IMF currently have 2.9% for the 2024 forecast. Most of that growth is anticipated from emerging markets, as developed economies are only expected to grow modestly.

At their last meeting, the Federal Reserve took a more dovish tone and now anticipates cutting interest rates three times this year, and the market anticipates five. A dramatic change from November when forecasters had predicted one, possibly two, cuts for 2024. The Bank of England is now forecast to cut interest rates in the middle of 2024. Although the ECB maintain a hawkish line at present, the general weakness of the euro area economy could see interest rate cuts sooner rather than later. The real question is how much of a bet are central banks willing to take that inflation is defeated, and that cutting too soon won’t reignite the fire? Ultimately, it will boil down to how confident Federal Reserve members are that inflation is tamed and a soft landing is achievable.

One of the risks for 2024 is that consumer spending will slow. Another is that supply chains could once again be affected by the tensions between Israel and Gaza, which has recently disrupted shipping in the Red Sea. Ten-year to two-year spreads remain negative in Germany, the US, and the UK, which suggests bond investors remain concerned about further weakness in the global economy. As we pointed out above, the decline in inflation rates has resulted in a rise in real interest rates; usually, when this occurs, equity valuations are put under pressure, but at present, that is largely being ignored by investors.

The coming year will also likely be dominated by the US Presidential election and a General election in the UK. In June, eligible voters in the EU’s 27 member countries will choose who represents them in the European Parliament. This year, over 2 billion people are estimated to vote in elections in over 50 countries. Potential government changes could decisively tip the geopolitical balance, affecting Western support for Ukraine, the conflict in the Middle East, trading relationships and the interconnected global economy.

Overall, we are very happy with the performance in 2023. As stated in previous updates, we do not make predications for the year ahead. Rather, we will continue with a rigorous and disciplined approach, focused on the longer term.

We wish you all a happy and healthy 2024

Cube Capital Team

 

 

 

 

 

 

Disclaimer

Performance data as provided by Schroder & Co. Limited (Schroders) and Julius Baer and not independently verified. Performance is gross of 1.25% Cube Capital admin fee but includes 0.9% management fee and custody. As a result of this the net performance data will be affected by these additional costs and charges, see below illustration. 

Portfolio (Nominal) Value £100,000.00

Illustration of 4% growth:

Three years =  £112,682.50  Five years =  £122,019.00  Ten years = £148,886.37

Illustration of 6% growth:

Three years = £119,561.82  Five years = £134,685.50  Ten years = £181,401.84

Illustration of 8% growth:

Three years = £126,824.18  Five years = £148,594.74  Ten years = £220,803.97

Past performance is not necessarily a guide to future performance. The value of investments and the income of any financial instruments mentioned may fall as well as rise, and investors may get back less than the amount originally invested. Fluctuations in exchange rates may have a positive or an adverse effect on the value of foreign currency denominated securities and financial instruments. Certain investments involve an above-average degree of risk and should be seen as long-term in nature. The investment products and services described may have tax consequences. Any tax reliefs referred to are those currently available and their value depends on the circumstances of the individual investor. You acknowledge that levels and bases of taxation may change, and that Cube Capital Limited does not provide tax advice. You should consult your own tax advisor in order to understand the tax consequences of the products and services described.