A Wrap for 2023, Looking Ahead to 2024
Financial markets posted a strong 2023, bouncing back from a tough 2022.
A strong final quarter for bonds and equities
After an extremely challenging 2022, where rising interest rates caused re-valuations across the fixed income and global equity markets, 2023 provided a bounce back year. However, it was not a smooth ride across the board.
The final quarter of 2023 saw strength from areas of weakness through the first nine months of 2023, in what had largely been a mega cap technology driven market. We saw a broadening equity market, as evidenced by the returns of equal weight indices’ returns versus their market cap weighted counterparts during the final quarter of the year.
We also saw a change in the dynamics of interest rate curves, and subsequently, the bond market. Bond market participants began to price in the belief that rates would trend lower in 2024, as inflation pressures in headline numbers continue to abate from their highs in 2022, albeit they remain above central bank policy targets. The US 10 year touched 5% during the final quarter of 2023 before falling to end the year below 4%, and long rates in the US ended 2023 at very similar levels to where they entered the year.
The longer end of the yield curves in the US and Canada fell because of this changing market expectation, and led to the final quarter of the year being a strong one for fixed income returns. After almost two years of pain, it paid investors to have some duration exposure in their fixed income portion of portfolios. As a reminder, duration is a measure of sensitivity and risk to a change in interest rates. If rates go down, then longer duration fixed income instruments experience a stronger price move up as a result than an instrument with less duration.
As such, as we wrap up 2023, global financial markets ended the year with gains across equities and fixed income, led by large technology and growth, which was weak in 2022, while commodities which had been winners in 2022 were laggards in 2023. Developed economies experienced easing inflationary pressures along with moderating economic growth. 
Chart 1- Snapshot of Asset Class Returns in Equties, Canadian Bonds, and Commodities over Q4 and Full Year 2023
Chart 2- US & Canada Yield Curves. Pink line versus Green line shows the significant change in the long end of the curve over Q4.
Chart 3- Snapshot of returns for segments of Fixed Income. Longer Duration segments were biggest benficiaries of falling rates.
Chart 4- G7 CPI. We can see that broadly speaking, inflation pressures are receding from the 2022 highs.
Chart 5- G20 GDP. Economic Growth is broadly muted, adding to speculation that rates may have peaked for this hiking cycle.
Looking Ahead to 2024: Geopolitics, Elections, Rates
As we move into 2024, there remains plenty of areas globally that have the potential to create volatility across financial markets.
- Geopolitics
2024 begins with two active military conflicts on going, both of which are in areas of the globe that are significant commodity producers. As such, there remains potential for rapid shocks to prices of certain commodities that would cause ripples through the global supply chain, and could reverse the trend of easing inflationary pressures quickly.
While admittedly, there appears to be less risk of a sudden change in Ukraine, with both Ukraine and Russia seeming to settle in for a longer conflict at this point in time, the situation in the Middle East is far more dynamic. There remains the risk of the conflict between Isreal and Palestine spilling over more broadly to their neighbors. As well, the conflict is beginning to cause issues in global shipping, with attacks on commercial and civilian ocean vessels disrupting global trade flows. As we have seen in the recent past, issues in the global shipping complex can lead to quite significant turmoil down global supply chains and can cause significant inflationary pressures.
We expect that the continuation of these sorts of attacks will be met with naval assistance from the US, although heading into an election year in the US, that cannot be counted on fully. Moreover, should the US commit to re-allocating naval assets from areas such as the South China Sea to the Middle East, that could have consequences with respect to China and Taiwan and any deterrence to action in that arena.
To conclude, the geopolitical arena is elevated, and has the potential to quickly shift the discussion and dynamics around global inflation, trade, and supply chains, not to speak of the ongoing human cost associated with the conflicts currently ongoing.
- Elections
Another area that has to potential shock global markets is elections globally. In 2024, there are at least 65 countries holding elections, covering about half of the world’s adult population, ranging across countries such as the US and Mexico, Venezuela, South Africa, India, Russia, Taiwan and South Korea. It certainly appeared that voter preferences shifted in 2023, as evidenced by surprising results in Argentina and the Netherlands. Overall, voters are expressing a desire to control inflation and increase affordability for living, as well as exhibiting less of an appetite on immigration in developed countries.
These issues will be front of center in the upcoming United States election, where it appears President Biden and former President Trump are headed for a rematch of the 2020 election, however uninspiring that sounds on paper. Regardless, the US election, along with the other major elections globally, have the potential to cause re-orientation in financial markets to potential new realities.
- Rates
We would argue to how the two points above develop will inform us around the path forward for interest rates in 2024. As noted above, markets began to price in interest cuts in countries like Canada and the US this year. Equity markets rallied on this, as lower rates implies a higher justified market valuation. However, there remains significant global catalysts for an inflationary shock that would require central banks and investors to re-assess their positioning around interest rate policy.
Portfolio Considerations
Overall, given the global investment landscape, we remain satisfied with how our portfolios are positioned. Within fixed income, we benefited from adding duration exposure to benefit from rates falling, while yields overall remain attractive compared to the past decade, allowing us to roll maturing bonds over the year out the maturity spectrum while locking in strong returns.
Within equities, our core focus never waivers, where we seek to own high quality, cash flowing businesses in areas of the global economy that we believe have strong long-term growth prospects that these businesses can capitalize on. As the breadth of the equity market strengthens, this enables both more and varied areas of the portfolio to drive returns. Given the strength of our technology investments over 2023, we would expect other areas to be leaders into 2024 in a deeper equity market, and we are positioning portfolios to that effect.
Within alternatives, we continue to cultivate and invest in a diversified mix of asset classes and strategies to provide return enhancement, risk mitigation, and portfolio diversification to our public equities and bonds.
While it seems likely that the news flow over the year will center around global elections, it is worth noting that broadly speaking, elections and government have less direct impact on global financial markets then assumed by the general investor base. Policies can certainly affect incentives and warrant evaluation at the margins, however, owning great businesses at reasonable prices does not change with a change in government leadership.