With everyone talking about their Spotify wrapped playlists and most-listened to artists for 2023 this week, we thought we would create the equivalent of in terms of the most discussed investment topics of 2023, as asked by our clients and expats across Europe.
Here they are:
1. The Magnificent 7
This is the story of how a stock market index can be misleading. In 2023 the US stock market measured by the S&P 500 has had quite a strong year, with double digit growth. But, almost all of that growth can be attributed to just seven companies: Alphabet, Apple, Microsoft, Amazon, Meta, Tesla, and Nvidia. Combined they make up 29 percent of the market’s capitalisation (i.e size).
What the chart below from Goldman Sachs illustrates is that it is these 7 stocks that have done well, not the whole S&P500, and by extension most companies- the remaining 493- have not done that well at all.
We have dedicated quite a bit of time to this usually staid asset class this year as bonds have been through their most volatile period in decades. As interest rates rise, bond returns drop and as we enter the end stages of central bank rate rising cycles, so investors may look to a less volatile future than the last 2 years for fixed interest. This remains an important asset class to diversify, especially for balanced and more conservative investors.
3. Interest rates
We had a period of almost 20 years of low and falling interest rates, and in Europe, 11 years without an official increase in interest rates at all. The graph of European Central Bank official interest rates over the last decade, below, shows how quickly we went from interest rates being a benign non-issue to them being a dominating investment markets impactor.
As interesting as it is to look back, it is more useful to consider what is next. When we look at the last 25 years of activity from the US Federal Reserve for example, it can be expected that after rates go up, they will eventually come down. The questions are how long they wait to start lowering rates, and then how quickly they do it. This links directly to the topic of bonds above, as the timing and speed of any rate reduction, or indeed if the central banks stick to the mantra of keeping interest rates ‘higher for longer’, will be reflected ion bond valuations.
Nearly all our clients report being impacted by the increase in cost of living due to the spike in inflation over the last 18 months. What has been surprising to some, is how fast inflation is now falling. According to the latest figures, inflation in the EU is now back within the European Central Bank’s 2-3% target range. If you have seen a version of this graph in a recommendation report we have provided for you, this may be a useful update.
Whilst inflation is falling, there are two important aspects to remember.
First, the devil is in the detail. Food inflation remains high as most of us will recognise when we make a trip to the supermarket, although energy costs are largely down on last year.
Secondly, and this is important, as long as inflation is a number above zero, it means prices continue to rise. A falling inflation rate does not means prices will come down, it means that prices continue to rise, just at a slower rate.
When you are investing internationally, across markets and currencies, it is true that exchange rates can giveth and exchange rates can taketh away. If the exchange rate moves by 10% as the USD has against the Euro in the last year, that can erode returns you may otherwise have obtained.
As per the graph below from www.tradingeconomics.com, the Euro has appreciated against the US Dollar over the last year from a low when the USD was actually stronger than the Euro up to over 1.10. that is a more than 10% change.
The other aspect of currency that we have spent a lot of time speaking about is the costs in moving money. Our BSCX service has allowed clients to save money when moving between currencies and remember to ask about the margin from your bank or foreign exchange provider.
So that’s our 2023 investment wrapped. What will 2024 have install? Three things we know:
- that the best performing investment in one year is rarely the top performer the following year;
- that we don’t know what will happen from one day to the next, but we do know that markets go up over time, albeit it not in a straight line;
- and that sticking to a plan is the best way to achieve your objectives.
Here is a graph from Bank of America reinforcing these points. It shows how markets do go up in the long run, presenting US stock market returns since 1824.