Economic market update
In December equity market performance was supported by expectations that major central banks will implement interest rate cuts over 2024. These expectations were underpinned by evidence of inflation easing and a change in language from the United States Federal Reserve about their forecasts for monetary policy. The MSCI World Index recorded an increase of 4.0% for December.
United States
The US equity market showed robust performance in December, with the S&P 500 increasing by 4.5%. All sectors delivered positive returns, especially the Real Estate sector with an 8.7% gain. The US economy demonstrated resilience in solid monthly consumer spending and a steady unemployment rate of 3.7%. Initial jobless claims also remained low.
Europe and the UK
Both UK and the Eurozone equity markets benefitted from softer inflation figures, which led to expectations for potential rate cuts. However, economic data for these regions has been less resilient than the US. Business activity indicators in these regions showed signs of contraction. GDP figures contracted marginally in the September quarter.
China and Emerging Markets
The MSCI Emerging Markets Index returned a modest 1.0% increase over December. Most regions delivered positive return except for China, where equity markets reflected investor concerns regarding the stimulus measures implemented by the Chinese government to support economic activity.
Australia
The equity market in Australia rallied, with a gain of 7.2%. All sectors delivered positive results, led by the Real Estate sector (11.4%). Utilities had the lowest monthly return at 2.5%.
The Australian economy expanded modestly, recording a 2.1% year-on-year growth rate to September 2023. Household spending has slowed and unemployment remains low. Despite increased migration contributing to overall economic activity, a growing population combined with slowing growth resulted in lower GDP per capita. The Reserve Bank of Australia (RBA) maintained its policy rate at 4.35% at its final meeting of 2023, as it continues to target an inflation rate of 2-3%.
Currency and Bonds
Bond yields declined sharply throughout the month as markets adjusted to expectations of lower inflation and interest rates. In the US, the 10-year government bond yield fell by 48 basis points to 3.88%, while the Australian yield dropped by 45 basis points to 3.96%.
The AUD strengthened against other major currencies in December, rising by 2.9% against the US Dollar and 2.2% against the Pound Sterling.
Read the Market Commentary for November 2023.