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Article | 14 December 2023 | Investments
2023 was the year of the plateau, as western central banks declared that interest rates would remain higher for longer. Financial markets eventually eased into this new normal. Equity markets in Japan put in a stellar performance, after many years in the doldrums. We present the pick of the Quick Looks as the year unwound.
After a series of aggressive interest rate hikes last year, the US Federal Reserve (Fed) reined back the pace at the first meeting of 2023. Both the Fed and the European Central Bank (ECB) have promised to ‘stay the course’ on rate hikes, aiming to reduce inflationary pressures. But markets increasingly expect rate cuts before year end. Elsewhere, the Bank of Japan has been fighting a different battle, spending 6% of GDP in defending its ultra-loose monetary policy. For Japan, after three decades of declining prices, a 40 year high in inflation is likely welcomed.
Ford announced significant layoffs at its European operations. The staff involved are mainly designers, engineers and testers. Why now? The auto giant has pledged that all the cars it produces in Europe will be electric vehicles (EVs) by 2030. It seems it’s less complicated to design EV motors than internal combustion engines. And once designed the electric technology is relatively easier to install. Ford promised future technological advances will be ‘made in the USA’. Elsewhere in the EV space, following his massive disposals to fund the Twitter acquisition, index funds now own more Tesla stock than founder Elon Musk.
The European Commission (EC) has agreed an exemption to legislation banning the sale of combustion engines after 2035. This follows objections from Germany, where car production forms a significant part of the manufacturing industry, and it is forecast that up to 40% of jobs in this sector could be lost should the legislation be enacted. The EC will now permit engines that run only on e-fuels, which are viewed as carbon neutral. But e-fuel technology is costly and still in development. Both France and Sweden protested about a potentially massive diversion on the road to electric only vehicles.
Elon Musk announced plans to build a competitor to ChatGPT, as part of his X branded ‘everything app’. The start-up is currently looking for engineers and investors. It has already amassed quantities of the Nvidia chips required to power a large language model capable of producing generative AI. The announcement came just weeks after the tech entrepreneur signed an open letter demanding an immediate six month pause on the development of generative AI technology, warning of a ‘dangerous’ arms race. Meanwhile SpaceX, Musk’s space exploration company, suffered a setback when its Starship rocket exploded minutes after a test launch.
After decades in the doldrums, the Japanese stock market has roared back on to the hot list, hitting a 33 year high. And following six successive weeks of gains, international investors seem keen to join the rally. Veteran investor Warren Buffet has recently paid a visit. Why now? After years spent fighting deflation, the country has finally hit a period of benign inflation, including modest wage increases, which should stimulate the economy. And the head of the stock exchange has publicly called for companies to engage with shareholders, potentially transforming the profitability of corporate Japan and giving a significant boost to shareholder returns.
It has been noted that some ESG portfolios, whose list of holdings is dominated by the tech giants, have started to resemble the S&P 500. Recently Nvidia, the hottest tech stock of the year thanks to its enabling generative AI technology, has replaced Tesla at the top of the ESG wish list. It has certainly helped to drive the outperformance of ESG funds year to date. But why should tech stocks be a match for ESG investing? Tech companies typically have a low carbon impact, despite concerns over issues such as consumer privacy.
After its June ‘skip’, the US Federal Reserve (Fed) resumed the path of rising interest rates, delivering the eleventh hike in twelve meetings and hitting a 22 year high. With inflation recently dipping towards the Fed’s 2% target, could the peak in this rate cycle finally have been reached? As ever, the Fed promised only to remain data dependent. Meanwhile the European Central Bank climbed closer to its own peak even as, after years of ultra-loose policy, the Bank of Japan stepped into a slightly more hawkish phase. The People’s Bank of China left benchmark rates unchanged.
The BRICS nations (Brazil, Russia, India, China and South Africa) gathered for their fifteenth annual conference. The agenda included the expansion of the bloc of emerging economies, as well as increasing trade in local currencies. There was also discussion about a future shared currency, aimed at challenging US dollar dominance. Meanwhile, China’s heavily indebted property sector returned to the headlines, as leading apartment builder Evergrande filed for bankruptcy in the US. Reverberations across the sector, which is thought to represent over 25% of China’s GDP, could prompt further domestic stimulus measures to steady investor sentiment.
After a lean patch, the IPO (initial public offering) market sprang back to life. Three tech companies, Arm, a chip designer, Instacart, an online retailer, and Klaviyo, a marketing software company, were successfully listed. A limited amount of stock was on offer in each case and scarcity kept interest buoyant, if not quite at 2021 levels of exuberance. In Japan, the planned IPO of chip equipment maker Kokusai Electric, will be the biggest for five years. And it’s not only the tech sector. Birkenstock, whose sensible sandals featured in the movie Barbie, also plans to list on the US market.
So said the chair of the US Federal Reserve (Fed) with regard to the US economy. Despite the Fed’s best efforts, having raised interest rates by over 5 percentage points in only 18 months, the US economy appears irrepressible. GDP growth is estimated to top 4% in the third quarter, driven by surging consumer spending. The data dependent Fed could be forced into another rate hike if inflation reignites. This could explain recent bond market jitters. The US 10 year Treasury bond yield hit 5% for the first time since 2007, as prices fell.
The founder of OpenAI, Sam Altman, was abruptly fired by the board of the organisation, for reasons that were not made clear. It’s possible the OpenAI board, whose primary aim was stated as the benefit of humanity, were concerned about the race to commercialise technological advances before fully understanding their consequences. They have now made way for a new board, whose challenge will be to align innovation and profit with safety. Microsoft, OpenAI’s biggest backer, offered to hire Altman to head up their own AI initiative, before he was just as suddenly reinstated as CEO.
As the old year closes and a new one begins, familiar questions continue to fixate the markets. Will interest rates start to fall in 2024? Could the major economies avoid recession and achieve a soft landing? The US presidential election will likely dominate markets as the year rolls on. Only time can tell how events will play out. In the meantime, we wish all our readers a happy and successful 2024!
