A habit of Higher: VanEck’s 2023 Q4 Summary 

Please Note: This report was created and provided by VanEck.

For investors, it feels like an episode of The Twilight Zone. What is happening, does not reflect reality. It remains to be seen, but only after the most recent Federal Open Market Committee (FOMC) meeting with the market sell off, did it seem like normal transmission may have resumed.

Until then, it appeared that the equity market was being cheerily optimistic that the Federal Reserve (Fed) would come to its rescue by cutting rates before any real economic slowdown. This is despite all signs pointing to a Fed remaining firm in its fight against inflation.

Equities markets remained strong as the market sought out any positive news stories supporting its narrative.

And there have been many. Inflation numbers continue to encourage investors. The recent earnings season was better than expected. But as companies reported earnings, forward guidance was, at best, hazy. Businesses seem wary of an economic slowdown or a period of low growth, even if equity markets are not.

The sheer velocity and the size of the rate hikes, it was thought by markets, should have brought the economy to a screaming halt. But that did not happen, and it has been a slow burn for the rate rises to filter through the economy. The market’s impatience for a slowdown has been usurped by its impatience for expansionary monetary policy. The equity market is seemingly out of practice with investing in this environment.

The Fed, and its fight against inflation, remain the biggest driver of market movements. At the most recent meeting, the Fed could not have been clearer. Its pause remains just that, a pause.

The Fed has been honest in its approach and cites no reason to start cutting. Wage and labour numbers remain robust. A pivot in central bank policy may only happen if the order of magnitude, that is, the size of employment numbers and wage growth, changes significantly and this is true for both the Fed and the Reserve Bank of Australia (RBA).

While the RBA may have a new Governor, it’s also likely it will also need to continue to hike, with inflation, wages and house values rising and productivity falling.

There are many reasons the impact of the fastest and steepest rate rises in history did not have the immediate impact markets expected. To name a few these include the loose fiscal policy in the US, the ability to draw on savings accumulated during COVID and the preceding period of historically low rates that many borrowers were able to lock in and therefore shield them from new policy settings.

Market movements during the second quarter reflected the market’s cheery optimism in the economic outlook. Aside from Australian Bank Bills, equities have performed best, led by the UK and emerging markets, with large caps outperforming small caps.

At a sector level, cyclicals such as energy and financials were the stars. Weakness in China weighed on the local bourse. That, and our lower comparative rates, pushed our dollar lower. This also explains much of the positive returns, in Australian dollar terms, of international equities.

The price of gold barely moved during the quarter, despite continued central bank buying.

During the first half of the year, the price of gold was supported by central bank buying and the threat of a 2023 recession. Its return since the beginning of the year is above 5%.

Speculation in the yellow metal waned as the anticipated slowdown got pushed into 2024/2025, even though central bank buying continued.

Since the beginning of the year, all markets have outperformed except for China and global carbon credits futures.

Investors are worried about a potential crisis in China, or a potential government rescue package. Let’s break it down to things we can know. First, Chinese policy rates are on a downward trend, and US rates are expected to be ‘higher for longer’. This puts significant downward pressure on the renminbi. Second, China’s equity market valuations arguably better reflect the news flow and outlook more so than the developed markets, having been punished over the past 18 months. Finally, China’s targeted measures support commodities demand and consumer sectors.

China has not been the only concern for markets. We, like many others, are still mindful of private markets, namely real estate and credit. And in the face of re-pricing, we remain wary of illiquid assets.

Liquidity, for investors, should be key, not only to be able to exit at a ‘fair’ price if needed but to take advantage of opportunities that present themselves elsewhere.

Beyond an emphasis on liquidity, we continue to think investors should focus on balance sheets and cash flow. We think, in the face of a slowdown, gold should be considered as a part of a portfolio, and gold miners if you like value. Asset allocation remains key, as prudent investors focus on what is or what can possibly go wrong. One feature of markets is that they are unpredictable.

One of Warren Buffett’s better-known quotes is that uncertainty “is the friend of the buyer of long-term values.” But we think it is the preceding sentence that investors should consider in the current environment:

“The future is never clear, you pay a very high price in the stock market for a cheery consensus.”

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