The final month of 2023 delivered a rally in almost all major asset classes, as the market began to price in a greater likelihood that central banks will begin an interest rate cutting cycle in mid-2024. This narrative shift is important, as previously the market was expecting rates to remain ‘higher-for-longer’ to stifle any possibility of persistent inflation.
Inflation figures in the US came in line with expectations, at 3.1% YoY, this marks a significant normalisation from much of 2023. The labour market continues to be robust, and whilst job openings were lower than expected by economists, both the unemployment rate and average hourly earnings continued to be strong. December also saw the completion of the COP 28 conference in Dubai, which whilst promising explicitly to shift away from fossil fuels was also controversial in both its location and commitments to several key tenets of de-carbonisation efforts.
Equities were positive over the course of the month, with little in the way of regional dispersion over the month, but after a period of relative underperformance of sustainable strategies versus convention equities, December saw a large reversal of this trend. Holdings in several sustainable UK Equity funds outperformed their benchmarks over the month, including the Janus Henderson UK Responsible Income fund.
Bonds continued to rally across the curve, as they had through November, as market participants moved to price in rate cuts. Positions in longer dated US Inflation linked bonds performed strongly over the month.
Alternatives were the standout performers in December with holdings in UK commercial property and UK Solar infrastructure rallying sharply. Many of these securities were up nearly 10% over the month and continue to trade at a significant discount to their underlying net asset value. Finally, diversifying assets were mixed during the month, continuing to exhibit low correlations to bonds and equities.