Stocks closed mixed in London on Friday, ending the year with its annual return behind that of its global counterparts.
The FTSE 100 index closed up 10.50 points, 0.1%, at 7,733.24. The FTSE 250 ended down 29.53 points, 0.2%, at 19,689.63 and the AIM All-Share closed down 0.34 of a point at 763.32.
The FTSE 100 ended up 0.2% at 772.47, the FTSE 250 closed down 0.1% at 17,163.49, and the smaller companies index ended up 0.7% at 14,992.05.
At the time of the early London market close, the CAC 40 in Paris was up 0.4%, while the DAX 40 in Frankfurt was up 0.3%, on track to add 15% and 19% respectively this year.
‘The UK stock market has, once again, frustrated those who were convinced it was cheap and lived down the expectations of those who asserted it was cheap for good reason,’ said AJ Bell investment director Russ Mould commented last week.
In comparison to the double-digit returns offered elsewhere, the FTSE 100 offered a paltry 2.4% in 2023.
‘However, that gain is supplemented by a dividend yield north of 3.5%, share buybacks and also mergers and acquisitions, so the total cash return will still be in the low double-digit percentage range. That beats inflation, government bond yields and returns on cash. The takeover activity witnessed in the UK again hints that there is value to be found, especially as many deals have been done at a big premium, and as we enter 2024 the UK market may still feature stocks that could appeal to a wide range of investor requirements and risk appetites.’
Standout annual performances in the FTSE 100 came from Rolls-Royce, with the jet engine maker’s shares tripling in value under the stewardship of its new chief executive Tufan Erginbilhic. Recent returnee to the large-cap index, Marks & Spencer, doubled the value of its shares amid robust trading despite a fairly downbeat consumer environment.
Dragging on the index were miners Anglo American and Fresnillo, losing 40% and 34% respectively. They faced headwinds from falling commodity prices amid a more downbeat assessment for China’s economy, the country being a key importer of commodities.
Among its noteworthy stocks for 2024, AJ Bell points to GSK, with its shares closing the year flat, and Legal & General, which fell 0.1% this year.
Pharmaceutical firm GSK said the firm’s relatively ‘static’ share price over 2023, leads to a ‘tempting valuation’.
‘The relatively predictable demand, high margins and consistent cashflow that can result from a successful drug development model can also appeal at times of economic uncertainty, so GSK may appeal to those investors who fear that an unexpected recession could creep up on the UK equity market next year,’ AJB’s Mould explained.
Meanwhile, life insurance, pensions and investment firm L&G might have its time in the sun, as borrowing costs wind down.
‘The lowly valuation on an earnings basis, and forecast 8.5% dividend yield for 2024, offer the potential for capital appreciation and income generation, and management has a plan to increase its shareholder distribution by some 5% a year. Moreover, the balance sheet is strong,’ Mould noted.
The more domestically-focused FTSE 250 index, adding 2.9% in 2023, proved more resilient than many had expected amid the cost-of-living crisis and stagnant UK economic growth. It shed over 20% in 2022. The AIM All-Share fell 9.0%, after plunging 31% in 2022.
On the UK front, there is expected to be a general election at some point in 2024. In the meantime, eyes will be on the March budget from Chancellor Jeremy Hunt, with analysts forecasting inheritance tax reform, cuts to fuel duty and income tax, and help for first-time home buyers.
All the while, the UK economy teeters on the edge of recession, as the latest official figures revealed 0.1% quarterly contraction for the third quarter. On a brighter note, inflation cooled more quickly than expected, dropping to 3.9% in November. Still, this remains well above the Bank of England’s target of 2%, with Trading Economics forecasts indicating it will only cool to 3.0% by the third quarter of 2024.
The pound finishes the year on a much stronger footing, trading at $1.2747, slightly higher than $1.2741 at the London equities close on Thursday.
This is quite a jump from $1.2054 at the end of 2022, and partly due to the more hawkish positioning of the BoE in comparison to the relatively dovish Fed.
The BoE is expected to begin a slow process of rate cuts from May, at the earliest. Following the Fed’s December decision to keep rates on pause, the market rushed to price in at least 150 basis points of interest rate cuts in 2024 beginning from March. This has put selling pressure on the dollar in recent weeks.
The euro traded at $1.1074, fading slightly from $1.1078 – but firm on $1.0686 at the end of 2022. Against the yen, the dollar was quoted at 141.42 yen, up versus 141.08 yen – making strong annual gains on 131.84 yen, as the Bank of Japan kept its ultra-loose monetary policy in place.
However, market expectations for the path of rates are markedly more dovish than those of the Fed itself. The central bank’s latest quarterly dot plot showed that most officials expect rates to be in the range of 4.4% to 4.9% by the end of 2024. The federal funds rate currently stands at a 22-year high of 5.25% to 5.5%, so the dot plot is showing cuts of 100 basis points or less.
On Friday, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite were all called flat.
The Dow is up 14% so far in 2023, the S&P 500 up 25%, and the tech-heavy Nasdaq Composite is up 45%.
‘The million-dollar question is what will happen next year. Of course, we don’t know, nobody knows, and our crystal balls completely missed the AI rally that marked 2023, yet the general expectation is a cool down in the technology rally, and a rebalancing between the big tech stocks and the S&P493 on narrowing profit lead for the Magnificent 7 compared to the rest of the index in 2024,’ said Swissquote Bank senior analyst Ipek Ozkardeskaya.
The magnificent seven refers to Microsoft, Apple, Amazon, Meta, Google, Tesla and Nvidia – tech firms which generated almost all of the returns for the S&P 500 and Nasdaq 100.
Nvidia stole the show in 2023, amid the explosion of interest in artificial intelligence. Its shares leapt from $147 at the beginning of the year to $495 by the end.
Meanwhile, in commodities, oil prices have operated in a comparatively more stable range this year, after the volatility of 2022 amid the energy crisis prompted by Russia’s invasion of Ukraine.
Brent oil was trading at $77.56 a barrel at midday Friday, lower than $78.70 late Thursday. Brent ended 2022 in London at $83.21, so lost 6.8% over the course of 2023 – its first annual loss since 2020.
Fears of rising oil prices stemming from the conflict in the Middle East have failed to come to pass so far. Further, the waning efficacy of Opec+ alliance production cuts, mounting inventories, and a muted demand outlook continue to weigh on the outlook for oil. London’s BP and Shell, which notched gains of 35% and 37% respectively last year, saw a more moderate performance. BP fell 3.7%, while Shell rose 8.6%.
Unlike the oil market, gold had a stellar 2023.
Spot gold has advanced 14% this year. It soared to an all-time record high of $2,075 an ounce early this month. The precious metal has regained its lustre amid rising hopes that the Fed could pivot to monetary policy easing, and as it benefitted from its safe-haven status, thanks to geopolitical risks.
Gold was priced at $2,065.02 an ounce, lower than $2,075.46 late Thursday.
Dutch bank ING believes that safe-haven demand and the US interest rate outlook will keep gold supported in 2024, expecting the price to remain above the $2,000 level next year. They even predict a new record high in 2024.
In next week’s economic calendar, major financial markets, including the UK, US and Tokyo will remain closed on Monday to mark New Year’s Day.
Tuesday brings the latest series of manufacturing PMIs, with services PMIs to follow on Thursday. On Wednesday there will be the US JOLTS and ADP jobs reports and the Federal Reserve’s meeting minutes, followed by the closely-watched non-farm payrolls print on Friday.
In the UK corporate calendar, there will be a much-anticipated trading statement from Next on Thursday, which will set the bar for the UK retail sector’s festive performance.
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