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Nutmeg's head of portfolio management, Pacome Breton, discusses a strong end to 2023 for both equities and bonds, and outlines why interest rate cuts could feature in the 12 months ahead. 

2023 ended on a positive note with strong market performance in December. What was behind this rally?

It was a very strong end to the year in December, a continuation of the market optimism and performance that we saw in November.

Bonds and equities both rallied in these months, a strong reversal to the tougher period that was experienced between August and October. While returns in equities were largely positive, it is probably the fixed Income side that was the most noteworthy with bonds ending the year comfortably in positive territory, something which was seen as almost out of reach as recently as the end of October.

Most developed and emerging equity markets were up in December, particularly in the US, where the S&P 500 rose 4.5%, finishing the year on a very solid note. 

In the UK, Europe, and many emerging markets, indices of large companies (or large caps) performed similarly well, at around 3.5% in aggregate. However, there were two notable exceptions. The strength of the yen restricted Japanese stocks - making exports more expensive for foreign buyers - while Chinese stocks also struggled. 

Smaller listed companies (or small caps) outperformed for the second month in a row in December, especially in the US and in the UK. These companies tend to be more domestically focused, and so have benefitted from more optimism surrounding the health of these economies. 

News that the US Federal reserve may cut interest rates in 2024 had a significant impact on both government and corporate bonds. During November and December, bonds had one of their best two month periods since the 1980s. Most recent comparisons would be to how bonds rallied during the first Covid lockdowns (February to March 2020) and the peak of the global financial crisis (mid-October to mid-December 2008).

Were you surprised to see markets rebounding so positively in November and December?

To some extent. While the strength of the rebound was clearly strong, there were some signs that we correctly anticipated and we increased our position to risky assets toward the end of October.

The earnings season was better than anticipated for the third quarter of the year, especially in the US. Some sectors, like consumer discretionary, significantly outperformed expectations, propelled by the resilience of the US consumer. This resilience, driven by some excess saving that's been present since the Covid period, continues to be a key supporting factor for the economy.

Improving inflation data remains, to our mind, the primary driver of markets. Numbers were in line or below consensus in October and November propelling the chair of the Federal Reserve Jerome Powell to acknowledge that rates have probably peaked and the committee to anticipate some rate cuts in 2024. How fast and how strong these cuts come in remains to be seen, but the pivot by the Fed is very significant news.

Can you share some of your expectations for 2024?

We expect to see some volatility ahead, and think growth will be limited among developed markets. The main focus will be a continuation of how central banks effectively reduce rates, especially in the all-important US economy. 

The prospect that central banks can engineer a 'soft landing' - in that we avoid a prolonged global recession - is becoming a likely scenario which is potentially positive for bonds and, by extension, for risky assets.

The Nutmeg investor update is also available as a podcast. Listen to this month's update below. 

Spotify link to Nutmeg PodcastApple podcasts link to Nutmeg investor update

About this update: This update was recorded on 9th January 2024. All figures, unless otherwise stated, relate to the month of December 2023. 

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. Past performance and forecasts are not reliable indicators of future performance.