What's ahead for markets and investors in 2024?
The world's largest asset manager and our investment partner, BlackRock, has identified 3 key themes that will impact markets in 2024. In this short video, we explore these themes and how we look to position our portfolios for this outlook.
2023 was a very good year for global share and bond markets which finished the year higher, delivering healthy returns for investors and the customers in our AMP diversified funds.
This market performance translated into strong returns for customers over the year. For the 12 months ending 31 December 2023, the AMP KiwiSaver Scheme diversified funds produced the following returns (after fees and before tax):
• AMP KiwiSaver Conservative Fund: 7.92%
• AMP KiwiSaver Moderate Fund: 9.25%
• AMP KiwiSaver Moderate Balanced Fund: 10.64%
• AMP KiwiSaver Balanced Fund: 12.07%
• AMP KiwiSaver Growth Fund: 14.15%
• AMP KiwiSaver Aggressive Fund: 14.94%
In the first half of the year, share market returns were largely driven by a select number of large technology companies in the US, benefitting from the widespread enthusiasm for artificial intelligence (AI) following the meteoric rise of Chat-GPT. The increased interest in AI saw the US technology-heavy NASDAQ index surge over 31% for the first half of 2023; its best first half return in 40 years.
In the second half of the year, investment returns were more linked to inflation expectations, expected changes in interest rates, and the economic outlook for 2024. Despite higher interest rates impacting share markets, other diversified portfolio sectors such as cash investments and short-term bonds offered attractive returns for diversified investors benefitting from the higher interest rates offered.
Overall, investors had a lot to be happy about in 2023. The US share market finished the year with a gain of more than 24%, while in Europe the share market was up nearly 17%. Closer to home, the Australian share market finished 2023 with a 12% increase, as New Zealand lagged somewhat, up approximately 3% over the year.
Returns from emerging market economies lagged that of developed markets, as China failed to experience the economic recovery it had anticipated. Lower than expected global trade demand, ongoing tensions with the US, and concerns over debt levels in the property sector saw the China share market fall over 10% for the year.
For the AMP diversified funds we manage, the asset allocation decisions we made at the beginning of the year have overall made a positive impact for our customers. Overweight exposure to global shares benefitted our returns in 2023, as did our allocation to New Zealand inflation-linked bonds. Having greater foreign currency exposure in our portfolios also benefitted returns due to the drop in the New Zealand Dollar during the year.
Investment outcomes in the second half of the year were largely centred around the inflation and interest rate story, and how it all looked heading into 2024. Globally, the latest inflation numbers show that the rate of price increases for key goods and services has possibly reached its peak and is now slowly starting to return to target levels – a hopeful sign for investors.
As inflation pressures in the economy begin to subside, so too has the aggressive stance central banks have taken on interest rates. In most major developed economies, central banks have indicated that interest rates may have peaked or are near their peak, as the conversation shifts away from when the next interest rate increase will be to when central banks may start cutting rates. Higher interest rates often put downward pressure on the value of companies, so this change in rhetoric has been supportive for investment returns in the second half of the year.
Whilst the ongoing uncertainty over the direction of interest rates has confused share markets in 2023, it has more directly impacted the bond market, which investors often look at to make judgements about the economic outlook. As an example, in 2023 we saw the yield on the 10-year US Treasury bond, which is often regarded as a proxy for many other important financial matters like future economic growth, jump to levels not seen in 15 years, putting downward pressure on bond and company valuations. In the later part of 2023, as central banks began discussing cutting rates, the yields on these bonds declined. This has benefitted the performance of the share and bond markets, and ultimately returns for customers.
2023 has been a great year overall for investment returns across the board, but that doesn’t mean returns have all been in one direction. There have been several events during the year that caused short-term disruption to markets, but in the end, the overall impact of these events was minimal, with most markets performing better than expected. This is why we regularly remind our customers to avoid getting caught up in the short-term news or emotive responses, and instead focus on the long-term.
As displayed in this chart, there were a multitude of events throughout 2023 that had to be traversed by the markets, but the overall trend of the chart is upward. Markets experienced the collapse of some regional banks in the US, surprise interest rate decisions by central banks, war breaking out in the Middle East, and bond yields hitting 15-year highs, but looking at the year, the global share market returns were still strong.
Although it can be unsettling to see your investment balance move around, short-term movements are normal and a part of investing. Although it is only one year, this chart is a good reminder of the ups and downs in investment markets, and why it is important to always focus on your longer-term savings and investment objectives, and avoid getting caught up in the short-term news and market events.
2024 will no doubt bring its own set of challenges and opportunities, as does any other year in investment markets, so having a well-diversified portfolio and focusing on your long-term objectives will be just as important. If you want to learn a little more about what we expect to see in investment markets in 2024, please watch our latest 2024 outlook video here.
Thank you for continuing to read our market commentaries. We look forward to bringing these to you regularly in 2024, and as always, if you need a little help with your savings goals or have any questions, please contact your adviser or AMP for a little help.