2023 : In Green and Against all Odds

DEspite the many obstacles (inflation, rising interest rates, fears of recession, war in Ukraine, conflit in Israel) and sometimes violent movements, the financial markets rose in 2023.

Inflation is the economic phenomenon most feared by central banks. Act too aggressively by tightening rates to curb it and you cause a major recession, dragging equities towards a catastrophic year. Or react too laxly, and inflation quickly degenerates into hyperinflation, setting off a vicious circle of rising wages, falling margins and so on. This was the dilemma facing the major central banks in 2023. The job of central banker can be likened to a balancing act.

After achieving inflation of 9.1% in the United States in August 2022, it is reassuring to note that the problem has been dealt with rigorously to bring price rises down to just over 3%, while avoiding recession. The year 2023 therefore ends tidally.

US Inflation Trend

Unfortunately, the year did not go smoothly. After an initial rebound across all asset classes, interest rates rose sharply in the spring as the Fed continued its aggressive stance. It was not until the end of the year that the Fed's rhetoric calmed down, pointing to the end of the rate hike cycle, or even to rate cuts as early as mid-2024. In addition to rate movements, the US economy has been helped by the "Inflation Reduction Act" to combat inflation.

In geopolitical terms, the war in Ukraine has really created a rift between the Western world and the BRICS countries. The BRICS organisation has expanded to include other countries (UAE, Egypt, Iran, Argentina, etc.) and is looking more and more like a meeting of commodity-producing countries, particularly energy-producing countries. These countries are increasingly determined to emancipate themselves from the US dollar. Each of the BRICS countries is engaged in multilateral discussions to use their national currencies for trade. Russia even announced in July that it wanted to peg its currency to gold.

Switzerland remains relatively unaffected by geopolitical tensions and inflation, thanks to its strong currency. But the country has been rocked by the collapse of its second-largest banking group, Credit Suisse.

Rising interest rates are regularly accompanied by banking crises. And there was no shortage of them in 2023. In addition to Credit Suisse, the United States saw regional banks such as Silicon Valley Bank, Signature Bank and Siver Bank collapse, undermining the US and global economies.

In terms of equities, the year saw most indices rise. The leading Swiss equity index was up, but with massive divergences between stocks and sectors.

Change in SMI in 2023

Banking stocks, with the exception of Crédit Suisse (down 66% in the first quarter), benefited from the rise in interest rates. UBS was also buoyed by the cheap takeover of its main competitor. The SMI, on the other hand, was heavily penalised by two of its leading stocks: Nestlé and Roche.

Performance of the main SMI stocks

The SMI pales in comparison with the other stock market indices. It is the Nasdaq that finishes top of the league table, with an increase of more than 40%, a far cry from its last place in 2022.

Trends

European equities had good year. Finally, China is lagging behind. The Chinese property market is unable to emerge from the crisis, and demographic decline seems to have set in, leading to fears about growth.

One striking fact is that the main stocks in the world index, the MSCI World, now represent more than certain countries. Apple and Microsoft, for example, outweigh Britain, France and Germany. These companies now have quasi-state power.

Weighting of the MSCI World's main stocks on the main equity indices

Weight of the countries in the MSCI World

In a positive year for equities, we might have expected a balanced trend in currencies. However, 2023 saw a completely different story, with massive buying of CHF as a safe haven. Only the Mexican peso appreciated against CHF in 2023. As every year, the worst currencies are the Argentinian peso and the Turkish lira.

Currency movements against CHF

The USD lost almost 9% against the CHF. This is a significant figure, reflecting the FED's intention to lower interest rates in the long term, as well as the desire to de-dollarise major economies such as Russia and China. China, for example, converts its US dollars every time it redeems US Treasury bonds, rather than refinancing the US government.

USD/CHF exchange rate in 2023

The EUR also slid sharply against the CHF to 93 centimes. These are levels for both the EUR and the USD that have not been seen since 2015, just before the introduction of a floor rate.

EUR/CHF exchange rate in 2023

After two very good years, commodities are taking a breather, shedding 4% overall..

Trend in the commodities index in 2023

Fears of recession have weighed all year on oil, which is down by 10% in 2023. The 2022 pressure on all energy products and on power generation has gradually eased.

Oil prices in 2023

Fears of recession have weighed all year on oil, which is down by 10% in 2023. The 2022 pressure on all energy products and on power generation has gradually eased.

Gold prices in 2023

Interest rate movements will therefore have been the highlight of 2023. The Fed helped push the US 10-year yield up to 5% in October. More lenient rhetoric at the end of the year allowed a rapid return to 4%, enabling global bond indices to end the year in positive territory.

US 10-year yields in 2023 (%)

Switzerland had a slightly different year, with interest rates easing throughout the year on the back of an ever-stronger currency, ending the year slightly above 1%.

Swiss 10-year interbank in 2023 (%)

Switzerland had a slightly different year, with interest rates easing throughout the year on the back of an ever-stronger currency, ending the year slightly above 1%.

SBI performance in 2023

After a disastrous 2022, the property sector has once again come under pressure from investors. The SWIIT index had a rough time of it until November, but it was only thanks to an excellent December that it ended in the green.

Swiss property market in 2023

2024 will open with very different conditions to 2023. Interest rates are higher and the talk is now of rate cuts.

There can be no doubt that current events in the US and the November elections will guide market trends. Traditionally, it is the American "consumer" who is elected.

The behavior of the BRICS in their bid to emancipate themselves from the hegemony of the USD will be one to watch, against a backdrop of geopolitical tensions.

The end of the war in Ukraine and the conflict in Israel could restore optimism in a world that sometimes lacks it.