In 2023, the stock and bond markets came out of the tunnel and saw the light, recovering most of the losses of 2022.
As of the close of Friday, December 15, the MSCI ACWI index shows a year-to-date advance of 15.3 percent (index price in USD), while the major developed market government and corporate bond indices, both IG and HY, show returns between +5 percent and +10 percent.
Driving the fortunes of financial markets in 2023 were mainly expectations about the outlook for monetary policies of the world's major central banks and estimates of their potential effects on economic growth and inflation trends.
Monetary policies needle in the balance
"Much of the upward movement in both stock and bond prices occurred in the latter part of the year, thanks to the growing belief among traders that central banks were now close to defeating the inflationary dynamic that has characterized the world economy since 2021," comments Generoso Perrotta, head of Financial Advisory at Banca Generali.
Supporting this hypothesis were inflation data in both the United States and the Eurozone. Indeed, consumer price growth in the U.S. fell to 3.1 percent in November 2023 from its peak of 9.1 percent in June 2022, while in the Eurozone, in the same month, it rose to 2.4 percent from its peak of 10.6 percent in October 2022.
"Such evidence has led, in recent months, to sharply revised forecasts of future central bank moves in favor of sharp interest rate cuts in both macro areas (the U.S. and Europe). Similar outlooks, in favor of a benign soft landing of developed economies, have pushed up stock markets, sharply declining core yields (rising bond prices) and sharply narrowing corporate spreads," the expert further comments.
Despite a positive environment for equity markets, the performance of the major international indices has been characterized by pronounced variability.
On the top step of the podium is Nasdaq, Nvidia +240%
Among the major global equity indices, the strongest performance was recorded by the Nasdaq, up more than 37 percent (index price in Usd). The index particularly benefited from the boom of the seven largest-capitalization stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla), which investors have focused on because of expectations that these may be the major players in the development of artificial intelligence. The rise in the shares of these companies offset the weakness of the rest of the list, evidenced by the weak performance of the S&P500 equal-weighted index (Usd price index +6.2 percent since the beginning of the year versus +19.9 percent for the Usd price index based on market capitalization).
Not only that. "In the U.S., expectations on the development of artificial intelligence have allowed Nvidia to register an advance of more than 240 percent. In fact, the company has gained a dominant position in chips used in the segment," Perrotta further explains. Very strong performance also for Meta (+186%), which is investing in the artificial intelligence sector, while Uber technologies (+150%) is emerging as a leader in its target sector thanks to economies of scale. In contrast, the year is about to end on a negative note for Enphase Energy (-53%), which was affected by investors' fears about the outlook for the renewable energy sector due to rising interest rates and production costs. FMC corp and Moderna also lost more than 50 percent: the former, which specializes in the production of agribusiness products, posted negative results due to the destocking process by customers, while the latter paid for the lower global concern over Covid.
Eurostoxx positive despite concerns over Eurozone growth outlook
"The Eurostoxx index is also poised to close out 2023 with a positive performance despite concerns about the outlook for Eurozone economic growth and a less expansive short-term monetary policy stance from the ECB. Among European stock exchanges, Italy's was particularly notable, advancing more than 28 percent. The strong presence of banking stocks, which benefited from the rate hike, is behind the outperformance of the FTSEMIB," the Head of Financial Advisory further illustrates.
Italian stock market shines with big banks leading the way
Leading the performance of the index of Italian largest-capitalization companies are, in fact, Unicredit (+82%) and Bber (+60%), whose results were boosted by the jump in net interest income. Very positive performance also for Stellantis (+58%), thanks to good sales performance particularly in the US. On the other hand, the worst performance was recorded by Diasorin (-30%), which had to cope with the sharp contraction of business in the Covid testing sector. Cnh Industrial (-29%) suffered from a decline in investment in the sector as a result of falling agricultural commodity prices. Finally, Finecobank retreated more than 10 percent due to a decline in deposits as government yields rose, boosting investment in these instruments.
In EU exploits Novo Nordisk and shadows of Worldline and Teleperformance
At the European level, however, companies in the semiconductor sector stood out, with Be semiconductor at +143% and ASM at +103%. These companies matched the positive trend of their U.S. competitors because of expectations that the development of artificial intelligence will boost the entire industry. Performance above 80% also for construction company Hochtief, which is not being affected by the industry slowdown.
A big surprise is Novo Nordisk, which has performed brilliantly on the stock market in recent days thanks to press rumors about an agreement in India with one of the largest e-commerce portals to end illegal sales of its most famous product, the slimming drug Wegovy. The stock of the Danish pharmaceutical group, Europe's largest by market capitalization, has gained 44 percent since the beginning of the year. Novo Nordisk and IndiaMart jointly developed a protocol to identify and remove unauthorized listings of Wegovy on the Indian online marketplace.
The worst performer was Worldline (-56%), whose profit warning sent a wake-up call on the entire digital payments industry. Other companies that lost the most ground included Alstom (-46%), due to slowing investment in the railway sector, and Teleperformance (-43%) whose turnover may be affected by the development of artificial intelligence.
Two-speed currency markets
"The year 2023 is about to deliver very diversified performance in terms of currency markets as well," Perrotta further notes. From the beginning of the year to the Dec. 15 close, the EUR managed to appreciate against most developed country currencies, losing ground YTD only against the CHF and GBP, which appreciated against the single currency by 4.5 percent and 3.2 percent, respectively.
Worst currency, the JPY, penalized by the ultra accommodative monetary policy adopted by the Bank of Japan while major Western central banks, including the Federal Reserve and ECB, remained restrictive throughout the year. From the beginning of the year to mid-December, the Japanese currency depreciated by more than 9 percent against EUR.
Generoso Perrotta, Head of Financial Advisory at Banca Generali
Much of the upward movement in both stock and bond prices occurred in the latter part of the year, thanks to the growing belief among traders that central banks were now close to defeating the inflationary dynamic that has characterized the world economy since 2021.
