THE END OF A (NOT SO) EASY YEAR

FINANCIAL MARKET ANALYSIS

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2023 will have been a turbulent year in economic, financial, and geopolitical terms, but a positive one overall for the main asset classes. The major economies saw their growth slow but managed to delay their entry into recession. Households benefited from a resilient job market and drew on savings accumulated during the pandemic to consume. Businesses managed to maintain their margins, despite the rise in raw material prices and wages. Governments, for their part, have renounced fiscal austerity in order to pursue their relocation, reindustrialisation, and rearmament plans. The banking crisis, which rocked the US regional banks and Crédit Suisse, only lasted a few weeks, thanks to financial aid from governments and money printing from central banks. The conflicts in Ukraine and the Middle East seem to have put an end to the global geopolitical equilibrium of previous decades, without causing energy and agricultural commodity prices to soar. Last but not least, although the extraordinary tightening of monetary policy has led to a credit crunch, nothing in the economy has broken down.

Throughout the year, investors were regularly shaken, but the four main asset classes climbed over this wall of worry to end the year with simultaneously positive performances: +18% for equities, +10% for the ounce of gold, +5% for cash and +3% for sovereign bonds (see Fig. 2). Only China, property, oil, and the Japanese yen recorded double-digit negative performances.

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Given the favourable environment, investors naturally expected their financial investments to deliver strong returns. Reality has dashed their hopes. Balanced portfolios, whose data is collected from British and Swiss banks, generated disappointing returns: 6.22% in euros and 7.39% in dollars (see Chart of the Week). Whose is to blame?

1. Stock selection played a crucial role. The Americans have a way with words: "it's a market of stocks and not a stock market". Unlike 2022, in 2023 only a handful of stocks performed strongly: Apple, Microsoft, Nvidia, Amazon, Meta, Tesla and Alphabet in the United States. The "magnificent seven" generated more than 70% of the S&P 500's performance, with the other 493 treading water until November. Another way of seeing this is to compare the performance of the S&P 500 weighted by the market capitalisation of its components (SPX Index) with that of its counterpart where the stocks are equally weighted (SPW Index). The former has risen by 23% since 1er January, the latter by just 10% (see Fig. 3). Similarly, only the "granolas" have driven the indices up in Europe: Glaxo, Roche, ASML, Nestlé, Novartis, Novo Nordisk, L'Oréal, LVMH, AstraZeneca, SAP and Sanofi. So, in seeking to diversify to "do well", most investors, including banks and renowned investment funds, have suffered from their "poor" selection.

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2. The lack of interest in physical gold was also a determining factor. Regular readers will remember that our analyses have often focused on the robust fundamentals of gold: half commodity, half currency, but above all a safe haven asset among safe haven assets. Its value in portfolio construction is unrivalled. With no or negative correlation with other asset classes, gold helps to improve the efficient frontier for optimal asset allocation. For the same level of risk, the return on a portfolio holding gold is higher. Despite this, gold is regarded by investors as a "barbarous relic", on the pretext that it delivers neither yield nor coupon. 98% of investment advisers have a gold allocation of less than 5%, with 71% holding less than 1% (see Fig. 4). By 2023, this will have been a costly choice. As central banks signalled the end of their rate hikes, the dollar began to show signs of weakness, and as geopolitical tensions escalated, the price of the yellow metal soared. Its annual performance of +9% is two to three times better than that of cash or a sovereign bond.

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In 2024, if the unemployment rate rises above 5%, as our econometric models predict, then the relative performance of gold compared with equities will be very positive. Given the past correlation between these two variables (see Fig. 5), gold could exceed USD 2,300 an ounce. By increasing the weighting of gold in their portfolios to take advantage of this, investment advisors will be able to increase demand for gold, which will further boost its price.

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Gold mining stocks such as Newmont and Barrick Gold are lagging. On the one hand, they are seeing their margins improve with higher selling prices (gold price) and stable production costs estimated at $1,358 per ounce. On the other hand, they are suffering from the poor performance of stock market indices (apart from magnificent seven and granola). The underperformance of the sector as a whole in 2023 means that it will have to rise by 50% relative to the S&P 500 to keep pace with the rise in the price of gold (see Fig. 6).

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Conclusion:

After a (not so) easy 2023, it should be a golden 2024.

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RETURN ON FINANCIAL ASSETS