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What drove stock markets in 2023?

2023 has been a year of ups and downs, but what drove stock markets this year, which sectors performed the best and worst, and what could be next?

Important information - This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

From the US regional banking crisis and the expansion of artificial intelligence (AI), to bond market turbulence and conflict in Israel, investors have had to deal with lots of ups and downs in 2023.

However, shares have rebounded strongly after a bruising performance last year. Given the prevailing pessimism at the start of 2023, overall shareholder returns have been remarkably resilient.

But what’s driven these returns? Well, it’s a complicated picture.

Total net returns

Past performance isn’t a guide to future returns.
Source: MSCI, 11 December 2023.

At the macro level, the interaction between inflationinterest rates and economic growth has dominated headlines. A widely-anticipated recession has yet to appear, inflation has finally begun to ebb, and central banks have taken their foot off the interest rate hiking pedal.

We think the improvement in economic sentiment is what’s driven a return of over 18%* from global shares so far in 2023.

This article isn’t personal advice. If you’re not sure if an investment is right for you, seek advice. Investments rise and fall in value, so you could get back less than you invest. Past performance also isn’t a guide to the future.

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Which sectors flourished?

The biggest winner from the improved outlook has clearly been the technology sector.

It’s had some unprecedented structural tailwinds, namely the surge in demand for AI. This has put the wind in the sails of most of the so-called ‘magnificent seven’ (Amazon, Alphabet (Google), Apple, Meta, Microsoft, Nvidia, and Tesla).

Industrial stocks have also performed well. We’ve been particularly impressed by the aerospace and defence sector, where geopolitical tensions and investment in new fleets of passenger aircraft are boosting demand.

Consumer discretionary stocks also had an outstanding year. Demand for tourism and luxury items has been very strong, although for the latter, weakness in the Chinese economy is now casting a cloud over the outlook.

Which sectors floundered?

China’s poor growth is also having a knock-on effect on the demand side for industrial metals and energy. So, the recovery in the oil price has been short lived.

The Energy sector performance has been relatively muted so far this year following a strong run in 2022, and Materials shares haven’t managed to recoup last year’s losses.

As property owners adjust to a world of higher interest rates, it’s not that surprising that the real-estate sector is in negative territory. Again, woes in China have had an effect, but house prices closer to home have seen the worst performance in over a decade.

Defensive sectors have also struggled. After a period of strong price expansion, producers of everyday consumables have seen volumes come under pressure.

But in healthcare, the negative returns at the sector level don’t tell the full story. For those companies behind the boom in weight loss drugs, valuations have gone through the roof. But that’s been offset by poor performances by producers of COVID-19 therapies where sales of these products have fallen dramatically.

Wrapping it all up

The divergence in sector performances over 2023 brings home the importance of a diversified portfolio.

There’s still no guarantee of a soft landing in 2024, so it makes sense to focus on companies that have strong finances, and a strong product offer for their customers.

Unless otherwise stated estimates are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Past performance is not a guide to the future. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 13th December 2023