Despite wars in Ukraine and the Gaza Strip, and the collapse of the Silicon Valley Bank in March 2023, the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) rose by an average 111 per cent over calendar 2023. This greatly assisted the performance of the US-based Nasdaq, up 43.4 per cent for the year.

Further excitement came from the halving of the U.S. annual rate of inflation, which slowed to 3.1 per cent in November. Consensus has shifted to the view most Central Banks have completed the tightening of their official cash rates, and some Central Banks are likely to commence easing as 2024 progresses, and their economies slow further.

Other stock market indexes which did surprisingly well in 2023 included the Japanese Nikkei 225 (+28.2 per cent), the U.S. S&P 500 (+24.3 per cent), the German DAX 30 (+20.3 per cent), the Indian Sensex (+18.7 per cent) and the French CAC 40 (+16.5 per cent).

Over 2023, the Australian All Ordinaries Index put on a solid 8.4 per cent, excluding dividends. The Hong Kong Hang Seng (-13.9 per cent) and the Shanghai Composite (-3.7 per cent) disappointed, whilst the NZ50 Gross was hit by the economic effects from the 5.5 per cent official cash rate.

The biggest turnaround came from U.S. 10-year treasury bonds, which breached 5.0 per cent in mid-October and then rallied down to 3.87 per cent by year-end. Despite negative global events and fears of out-sized U.S. budget deficits continuing, this turnaround was a welcome shift. The rally in UK ten-year gilts to 3.56 per cent – post the departure of Prime Minister Liz Truss and her Chancellor, Kwasi Karteng – and the German ten-year bunds to 2.02 per cent, was significant.

On the commodities front, Gold rallied 13.3 per cent to US$2,072/oz. whilst iron-ore jumped 17.9 per cent to U.S.$136.16/tonne, almost guaranteeing the second consecutive small Australian federal budget surplus for Fiscal 2024.

On the currency front, the Australian dollar was relatively flat against the U.S. dollar, after troughing at U.S.$0.63 in mid-October, which coincided with the peak in U.S. ten-year bonds. It was weaker against both the British Pound (-6.9 per cent) and the Euro (-6.6 per cent).

As we head into 2024, the question on everyone’s lips is whether the war on inflation has been won. Central Banks do not want to ease too quickly and then watch inflation bounce. Central Banks cannot control food prices, and white rice, for example, which feeds billions of people globally is up 60 per cent in U.S. dollars in two years, to the highest level in 15 years.

And what happens if Russia successfully blocks Ukraine’s critical grain exports? Vladimir Putin must be reassured with the bitter debates over Ukraine in both the U.S. and EU. The turnaround in sentiment from mid-October, driven by the decline in inflationary expectations and the subsequent sharp rally in the U.S. long bonds, is worth repeating.

6 months and 12 month returns to 31 December 2023