Q4 Active Management Review: Expectations of Easing Propel Markets Higher

Executive summary:

  • The fourth quarter of 2023 was a more favorable environment for active managers in the UK, Europe, Emerging Markets, U.S. Small Cap and Listed Infrastructure, while being more challenging for U.S. Large Cap, Global, Global ex-U.S., Japan, Australia, Canada, Long/Short and Global Real Estate managers.
  • To varying degrees the Growth and Quality factors alongside Small Caps dominated returns across most regions, with Value being the clear laggard.
  • The information technology and real estate sectors were standout performers for equity managers across most regions, with financials also delivering strong positive returns. In a reversal from the prior quarter, energy was the weakest-performing sector, with consumer staples also underperforming.

Expectations that central banks could begin cutting rates in 2024 gave investors plenty to cheer about during the final quarter of 2023.

After a volatile third quarter, the last quarter of the year saw strong absolute returns across most markets on expectations that the U.S. Federal Reserve (Fed) had reached the end of its interest-rate hiking cycle and could begin cutting rates as early as March, potentially achieving the much-anticipated soft-landing scenario. This led to a reduction in inflation expectations throughout the quarter in most markets, with some central banks in emerging markets (EM) already lowering interest rates.

For many markets, such as the U.S., the fourth quarter of 2023 was the strongest quarter since the reopening rally in Q4 2020, when the rollout of COVID-19 vaccines was first announced. China was one of the few markets that experienced negative returns during Q4 2023, on the back of concerns around gross domestic product (GDP) growth and negative market sentiment. This weighed on EM returns, relative to developed markets, despite some EM countries seeing high double-digit returns in U.S. dollars (USD). Weakness for the greenback on the back of expectations of interest rate cuts resulted in even stronger USD returns relative to those in local currencies.