Who made money in 2023? - The Monday Briefing


2023 was a good year for equities with most major markets posting strong returns.

Many of the fears that caused equities to plummet in 2022 unwound in 2023. It wasn’t a great year for global growth but fears of recession eased, inflation fell and by the end of the year, the talk was of interest rate cuts, not increases.

On average global equity markets returned 18% in 2023. The US did far better, helped by a stellar performance from technology stocks. In Europe, Spanish and Greek equities outperformed partly because of the resilience of their economies in the face of a wider European downturn. Japanese equities had a strong year, helped by loose monetary policy and good growth.

Not all markets did well. Chinese equities were the big underperformer last year, losing 5% of their value on investors’ worries about deflation and poor growth.

The performance of equity markets does not, however, move in lockstep with GDP growth. Many equity indices are dominated by multinationals that do not reflect the makeup of national output in which small and unquoted businesses and the public sector play a large role. Moreover, financial markets respond as much to changing expectations of future growth and interest rates as they do to current performance. German equities returned 15% last year despite the German economy sliding into recession partly on the hope of better times ahead.

Globally the sectors that suffered the greatest losses in 2022 – including financial services, consumer products and industrial goods – saw the biggest rebounds last year. Markets were in ‘risk on’ mode, with cyclical sectors outperforming and defensive ones, including health care, consumer staples and pharmaceuticals, lagged. Oil and gas stocks soared in 2022 but saw much more modest gains in 2023 as energy prices fell.

The biggest swing in performance came from the technology sector. Having lost over a third of its value in 2022, tech stocks returned over 50% in 2023. Falling interest rate expectations and enthusiasm for generative AI were major factors. The Financial Times estimates that the so-called ‘magnificent seven’ comprising Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla accounted for more than 60% of US equity returns last year. Nvidia, a major supplier of chips for the AI sector, saw its share price more than triple in 2023.

The value of America’s tech giants is staggering. Microsoft and Apple vie for the title of the world’s most valuable company, each with a market capitalisation around the $3tn mark, more than the whole of the UK FTSE 350 equity index.

Returns outside the equity market were mixed.

Bonds last year delivered positive, if modest, returns as the inflation tide ebbed, having previously suffered significant losses as inflation soared in 2021 and 2022.

The price of agricultural commodities and base metals fell in 2023 unwinding some of the gains seen after the pandemic. Gold did well, returning 13%, its best year since 2020, boosted by investor demand for a safe haven from geopolitical risks and by central bank purchases.

On the currency side the dollar weakened slightly and the Japanese yen dropped in value for the third consecutive year. In a world of rising interest rates, low Japanese rates have dented the appeal of the yen. (The Economist’s Big Mac index rates the pound and the dollar as being almost 90% overvalued against the yen, testifying to how cheap Japan has become for foreign visitors.)

Last year interest rates in the US and Europe reached the highest levels in more than two decades. This has boosted the return on cash, with deposits in the US and UK yielding around 5.0%. This is a decent cash return by the standards of recent years, but, with US inflation at 4.1% and UK inflation at 7.4%, a distinctly unattractive real return.  

House prices weakened in many countries last year, but the scale of the decline was modest. For the year as a whole the indices we follow show that UK and German house prices fell by around 2.0% while US house prices grew by a similar amount. In a possible sign that the worst may be past, the 12-month rate of change in house prices has turned up in recent months in the US, the UK and Germany.

Bitcoin did well in 2023, almost doubling in value. The second largest crypto, Ethereum, gained almost 40%. But these gains need to be set in the context of the large losses seen in 2022 in the wake of the failure of FTX and other crypto-related assets.

Asset markets generally had a pretty good 2023. Much of this reflects the dwindling of worries about inflation and growth, and growing hopes of a soft landing. Institutional fund managers surveyed by Bank of America earlier this month reported growing optimism and said they are running higher than normal holdings of equities. Almost 80% of fund managers expect to see a soft landing for the global economy. What happens to asset prices this year largely hinges on whether that expectation is fulfilled.