Sasfin Global Equity Model - Quarterly Review - Q4 2023

Watch below as Sasfin Wealth’s Global Equity Analyst, Jonathan Wernick, and Chief Investment Officer, Craig Pheiffer unpack some of the headwinds currently facing markets: 

Global equity markets did not spoil the festivities as a “Santa Rally” extended gains for the MSCI All Country World Index (“MSCI ACWI”). The index, which represents a broad measure of global equity markets, gained 11.0% during quarter, reversing declines from the prior quarter and then some.

The primary factor driving equity markets higher during the quarter has been the view among market participants that central banks will begin cutting interest rates in 2024. Stock prices tend to exhibit an inverse relationship with interest rates, expectations of lower interest rates typically lead to higher stock prices owing to the lower discount rate used to price future cash flows or profits.

The Federal Open Market Committee meeting held during December appeared to vindicate such a viewpoint. Following the gathering, US Federal Reserve (“Fed”) chairman, Jerome Powell, addressed the public with a dovish tone as the Fed’s outlook now suggests that it could implement multiple rate cuts during 2024. This stands in contrast to the message echoed in September by the Fed, that interest rates would stay higher for longer.

Underlying the Fed’s softening tone has been the continued decline of inflation from levels seen a year ago. While current inflation still remains above the Fed’s target of 2.0%, Fed officials estimate that inflation will continue to trend towards this level. Powell further noted that the Fed did not want to wait for the 2.0% level to be reached before easing on interest rates.

With markets sniffing out the possibility of lower interest rates, the risk aversion experienced in the prior quarter reversed course. As a result, we saw the “safe haven” of the US dollar weaken during the quarter. This was evidenced through the decline of the US Dollar Index, which measures the performance of the greenback against other major currencies, which fell close to 5%. Lower rates, specifically real rates, galvanised demand for gold. Central banks continue to stock up bullion, leading the price of the yellow metal to surge 11.1% during the quarter, closing at $2,078/ozt.

Information Technology ended the quarter as the best performing sector. This sector is regarded as being longer duration in nature. This implies that it is relatively more sensitive than others to changes in interest rate expectations. Adding to the sector’s relative outperformance was the continued positive sentiment towards the potential impact of Artificial Intelligence (“AI”), with technology stocks expected to be the largest beneficiaries at this point.

Perhaps more surprising was the broadening out of the equity rally. Gains made earlier in the year were largely isolated to a small group of stocks expected to benefit from the AI “mania” that swept through the market during 2023, with the “Magnificent Seven” notorious benefactors (refer to “Outlook and Way Forward” section for more detail).

The broader equity rally was evidenced by the majority of sectors registering positive gains during the quarter. After Information Technology, the best performing sectors during the period were Financials, Industrials, Materials and Real Estate. A combination of interest rates expected to fall and the willingness among market participants to take on more risk served as drivers behind the positive moves in these sectors.

The one sector that did disappoint, and the only one to have registered a negative return for the quarter, was the Energy sector. Having threatened to breach the $100 a barrel level at the end of the last quarter, the price of Brent crude fell close to 20% over the last three months, closing out the year at $77 a barrel.

One factor driving the price of oil lower has been the expectation of weaker demand from China. The region continues to grapple with a low-growth environment post covid as well as a mounting debt crisis in the property sector with local governments appearing to be heading towards a similar outcome. Chinese equities were standout underperformers during the quarter. Major bourses registered declines as the ruling party continued to tighten its control, be it over the country’s central bank or its technology sector.

Click here to access the full report.