Year-end thoughts and what to expect in 2024

The year of extremes and divergences

Just as one could not imagine equities to be crazier it did happen in 2023. It is always difficult to summarize a year in all its details but below are some of the key events to reflect on.

• Consensus was clearly in the recession camp but the global economy proved to be resilient against aggressive monetary policy hikes.
  
  
• Monetary policy lags have turned out to be historical long this time most likely due to the extended period the economy was in an ultra-low interest rate environment.
  
  
• There were great hopes for China, but the year proved to be the year of many false starts and the once unbeatable country is facing serious structural growth issues.
  
  
• The rapidly rising interest rates caused for a brief period a banking crisis that was quickly contained and isolated to a few weak banks. Silicon Valley Bank went bankrupt and UBS took over Credit Suisse.
  
  
• The market was convinced that the central bank would cave in during 2023 but instead central banks were steadfast and bolstered the “higher for longer” narrative pushing the US 10-year yield to 5% before aggressively falling back to the levels where they started the year.
  
  
• Generative AI became the talk on Wall Street and investors rushed to get in on the action as Nvidia delivered two monster earnings releases on a level never seen before in history.
  
  
• The technology hype cycle over generative AI pushed US equity markets to new historical highs in terms of index concentration with the “magnificent seven” stocks outperforming the S&P 500 by a factor of four.
  
  
• Hopes were high for a geopolitical breakthrough in Ukraine that could force Russia to negotiate peace but instead the war transcended into a WWI style war of attrition with no end in sight.
  
  
• To make matters worse in geopolitics a new hot spot emerged in the Middle East with Hamas attack on Israeli civilians and subsequent brutal invasion of Gaza by Israeli forces. Recently the conflict has led to attacks on ships in the Red Sea forcing ships from Asia to Europe to reroute around Africa at increased costs.
  
  
• As much as technology was the winner in the global equity market, so was the green transformation stocks the biggest losing theme driven by an industry crisis in wind turbines and inventory glut in solar panels.
  
  
• COP28 ended with the promise to start the era of declining consumption of fossil fuels. The rapid adoption of energy efficient solutions and in particular fast adoption of electric vehicles is already causing significant impact on oil markets. This trend will be hugely important for Saudi Arabia and Russia in the years to come shaping geopolitics.
  
  
• While central bank policy was more or less synchronized Bank of Japan held on to its negative policy rates and yield-curve-control of the 10-year maturities government bonds. The divergent policy with the rest of the world left JPY to absorb all pressures leaving the financial market wondering when Bank of Japan will come back to the real world.
  
  
• The strong USD and high interest rates had a negative impact on emerging market equities which once again underperformed and has moved to the dustbin of history, at least for now. Global investors seem increasingly uninterested in emerging markets.