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Market Events

A year in review (2023) – an open mind drives increased returns

Chris Weston
Head of Research
Dec 12, 2023
Reviewing the year that was can often be seen as a pointless task and one that can seem to offer traders very little benefit, given we cut our craft pricing the probability of a future outcome and the risk around that view.

I disagree with that notion and feel that review can help understand market psychology and reinforce the idea that it pays to have an open mind to all outcomes. Where we react dynamically to the flows seen in the market, even if you believe the broad interpretation of the outcome was incorrect.

If 2023 cemented one notion, to me it's that 95% of the time major market concerns are resolved positively, despite market participants typically initially pricing the worst-case scenario. Climbing this so-called ‘wall of worry’ often results in higher asset values.

In the process of review, I have listed some of the market moves and key macro themes which have really stood out.

When I think of market expectations and consensus views at the end of 2022, there are some big surprises that have taken place, especially in equity index returns. In fact, even if you had a crystal ball and knew the macro events that have played out beforehand, I’d argue you’d still be shocked at the way the capital markets have evolved in 2023.

Key trading themes of 2023

  • 2023, the year of carry as an FX strategy. Buying LATAM FX, such as the COP and the MXN has seen incredible total returns (i.e. the spot move plus carry) of 38% and 26% respectively.
  • In G10 FX, the GBP has been the best-performing currency (+8.9%), and the JPY has been the worst performer (-10.4%). The consensus at the end-2022 was that 2023 was the ‘year of the JPY’.
  • Many G10 FX pairs have mean reverting – many of the JPY pairs have offered strong opportunities for momentum and trend-based accounts. Traders could trade central bank policy divergence and leverage a lasting capital move and get paid carry (or swaps) to be in the position – the hard part was holding.
  • A year for selling volatility – despite a year of elevated interest rate volatility, hedge funds have been active sellers of vol through 2H23, notably FX vol.
  • In 2023 EURUSD has traded in a meagre 828-pip high-to-low trading range – the second lowest range since the European Monetary Union was created.
  • Despite periods of strong trending conditions, we see the DXY (USD Index) little changed on the year – the DXY’s average exchange rate in 2023 has been 103.55.
  • In equity land, momentum has been the favoured strategy, with traders drawn to what’s strong and outperforming. Solid equity index returns have been seen in the P500 is +20%, NAS100 37.9%, NKY225 +25.7%, and EU Stoxx 50 +19.7%
  • Concentrated leadership have driven US equity indices, with mega-cap tech and AI names (Mag7) driving the index gains. Outside of the ‘Magnificent 7’ stocks, it’s been a stock pickers market, with wide dispersion in returns.
  • Another year of China equity underperformance – the HK50 -18.1% YTD (-15.1% YTD in USD terms).
  • Crypto has outperformed all other asset classes, both on a spot return and on a volatility-adjusted basis. Bitcoin has gained +144% YTD.
  • Despite cash offering compelling risk-free returns, gold is higher YTD in all G10 currency terms. XAUUSD traded to a high of $2143, with a YTD performance of +8.6%

Most memorable macro themes of 2023

  • Central bank policy tightening- In G10 FX, 2023 has been a year of interest rate hikes, with the Fed hiking 100bp to 5.33% and all G10 central banks (ex-BoJ) lifting policy towards a deeply restrictive setting.
  • Cash is king- The return of cash as a compelling investment within a diversified portfolio.
  • A rapid normalisation of headline inflation- Headline inflation has dropped far quicker than most had expected at the start of 2023, with US CPI falling from 9.1% in June to 3.2%. European headline CPI has had a notable move, falling from 10.6% in October 2022 to 2.4%
  • We started the year debating the probability of a US recession and ironically ended the year debating the likelihood of a recession in 2024.
  • A banking crisis in US regional banks- many will recall depositors' exodus from SVB Bank in a matter of 24 hours and the subsequent collapse of SVB Bank. While some will say the Fed are partly responsible for the concerns around banks’ balance sheets, the US central bank came to the rescue, offering liquidity to the banking sector through the Bank Term Funding Program.
  • In June we saw UBS acquire Credit Suisse – an outcome few could have predicted at the start of the year.
  • US economic resilience- The resilience in the US economy was there for all to see, with Q323 growing at 5.2%. For large parts of the year, the USD benefited from this resilience and US economic exceptionalism.
  • China fizzle- China post-COVID reopening failed to really meet expectations and married with further steep falls in property prices, and concerns around the solvency of developers, resulting in sizeable capital outflows and underperformance of Chinese assets.
  • Geopolitical news flow– Conflict in the Middle East was front and centre for markets in September and October, with concerns of an energy supply shock that sent Brent crude to $97.69 before reversing hard through October and November.
  • BoJ/MoF JPY intervention and tweaks to its Yield Curve Control (YCC) policy
  • AI and mega-cap rally– This theme was most prevalent through 1H23 but gained renewed interest in November. YTD Nvidia has gained 221%. In London/Europe, we see Rolls Royce +210%
  • Central bank balance sheet reduction – we’ve seen the Fed’s Quantitative Tightening (QT) program result in the Fed’s balance sheet falling by $813b. While bank reserves have increased 14% in 2023, the broad consensus was that equities would struggle under QT.
  • An incredible November for risk – While equity markets rallied strongly in November, the NAS100 gained an incredible 10.7% (US500 +8.9%), marking the best monthly gain since July 2022. The positive risk backdrop led the DXY to fall 3%.
  • Short duration has worked for most of the year– US treasuries sold off sharply between July and October, with the 10-year rising from 3.72% to 5.02%. This tightening of financial conditions led to push back from the Fed who acknowledged the bond market had done a lot of the work for them.&

We came into 2023 with the consensus thinking the US would go into recession, the USD would underperform, EM FX would face big headwinds and it would be the year of the JPY. Many also positioned for a sizeable rebound in China’s economy and equity markets, while inflation globally was still the number one concern.

As it turned out, many of the consensus views proved to be incorrect or short-lived, and one could even argue many of those views are consensus views for 2024.

We head into 2024 expecting to be surprised once more - An open mind and a humble approach to knowing when you're wrong would have served us all well. It will in 2024 too.

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