With 2023 in the rear-view mirror, it’s time for us to reflect on the year that was and focus on the year that lies ahead for investment markets.

At the beginning of 2023, there was a noticeable sense of caution about equity markets as the Russia-Ukraine conflict was approaching its’ first anniversary and Central Banks around the world were mid-way through one of the most aggressive monetary tightening cycles in history in an attempt to tame runaway inflation.

Fast-forward a few months to March 2023 and these concerns were further exacerbated by the failure of several US Regional Banks (Silicon Valley Bank, Signature Bank and First Republic), followed shortly thereafter by the collapse of Credit Suisse bank (acquired by UBS). Adding to these challenges was the Geo-Political crisis that arose in the Middle East as an armed conflict broke out between Israel and Hamas in October 2023.

Despite these headwinds, equity markets continued to climb throughout the year, defying concerns that sky-rocketing interest rates would weaken consumers and corporate earnings. By the end of December 2023, the S&P/ASX 200 recorded a 12.4% increase, the MSCI ACWI returned 21.45% and the S&P 500 returned 24.89%.

Turning our attention to 2024, uncertainties persist regarding the possibility of the US entering a recession. In the last quarter of 2023, US GDP rose at an unexpectedly strong annualised rate of 3.3%, raising suggestions that US policymakers may delay cutting rates as they wait for further evidence that inflation is settling at their 2% target rate.

This robust economic performance has been supported by oil prices that have steadied around US$75 per barrel, along with unprecedented fiscal stimulus by the US federal government. It remains to be seen whether this level of stimulus is sustainable, especially considering the record size of the US budget deficit. Notably, 2024 is a Presidential election year in the US.

As share market indices like the S&P/ASX 200 and S&P 500 continue to reach new heights, we continue to critically analyse whether market conditions are supportive of equities, or whether a more defensive stance is appropriate considering the circumstances. Pleasingly, defensive assets such as Bonds continue to deliver strong income as we reach the peak of the rate hiking cycle and offer the potential for capital growth as rates begin to ease.

There is no way of knowing whether share markets will continue to rise from current levels, but we do know that there are currently investment alternatives such as Bonds and Fixed Interest that offer attractive returns with significantly lower levels of risk than equities. We therefore maintain a cautious view on growth assets such as shares but will continue to monitor investment markets and economic conditions closely to ensure we deliver the best risk-adjusted returns for your portfolio.

For more information, get in touch with your Findex adviser or contact our Investment Advice team.

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