Smiles all round as financial markets end 2023 on an unexpected high
Global financial markets confounded gloomy expectations in 2023. Stocks rallied, and bonds reversed heavy losses made early in the year as recession fears were replaced by growing confidence that US policymakers would achieve an economic soft landing.
Many major share indices recorded double-digit gains during the year, helped by a strong rally in November and December as falling inflation made traders more hopeful of an interest rate cut in 2024.
Britain’s FTSE 100 lagged behind the global rally, though, gaining less than 4% in 2023.
At the start of the year, many investors were expecting corporate earnings to decline as the US economy was dragged into recession by high borrowing costs. But it avoided a downturn, despite US interest rates rising to a 22-year high. Growth has beaten forecasts, while US corporate profits hit a near record in July-September.
While geopolitics cast a shadow over the markets, firms linked to artificial intelligence soared as investors backed the potential of the technology.
Relief at the US’s strong growth in 2023 helped counter concerns over China’s recovery, and the slow pace of the European economy, which ended the year teetering near recession.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, says 2023 has not played out as expected at all. “We were expecting the US to enter recession, but the US [recorded] about 5% growth in the third quarter,” she says. “We were expecting the Chinese post-Covid reopening to boost its growth and fuel global inflation, but a year after its zeroCovid measures ended, China is suffocating due to unexpected deflation and a worsening property crisis.
“We were expecting last year’s negative correlation between stocks and bonds to reverse – as recession would boost bond appetite but batter stocks.
None of that happened.”
Global shares
The MSCI World Index, which tracks shares in 47 countries, had a rollicking year, rising more than 20% since the start of January. Trading was volatile, though – with share prices going up through the first half of 2023, before sliding from August until October.
But then an “everything rally” began in November, as falling inflation spurred hopes of interest rate cuts on both side of the Atlantic. Then, in December, stocks surged after America’s top central banker, Jerome Powell, fanned hopes that borrowing costs had peaked.
America’s S&P 500 index, a broad gauge of US stocks, gained 25% over 2023, notching up a record high. The tech-focused Nasdaq Composite jumped by about 45%, led by the “Magnificent Seven” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. And the Nasdaq 100 index of large tech stocks had its best year since the dotcom bubble burst, rising by more than 50% to end 2023 at a record high, driven mainly by mega tech stocks.
America’s stock market rally was impressive, but lopsided. About 70% of S&P 500 stocks underperformed the index during the year, with roughly a third falling in 2023.
European markets also racked up solid gains as they bounced back from a torrid 2022. Germany’s Dax climbed by 20%, despite a lacklustre year for Europe’s largest economy, and Italy’s FTSE MIB rallied by almost 30%
Optimism about aggressive interest rate cuts in 2024 drove Asia-Pacific stocks to a five-month high at the end of 2023, while India’s major indices gained about 20% to hit record levels.
This market rally meant that only 11 of the world’s richest 50 people became poorer in 2023, according to Bloomberg’s daily updated list of billionaires.
FTSE 100
Britain’s blue chip share index lagged behind its rivals in 2023, gained only about 4%. The FTSE 100 index had a bright start, breaking through the 8,000-point mark for the first time to set a new all-time high of 8,047 on 16 February.
But the rally lacked legs, and in March the index suffered its two biggest falls of the year as fears of a banking crisis hit. Its third-worst day came in early July, when it lost 2.2% as investors braced for central banks to use interest rates to combat high inflation.
With the Bank of England raising the base rate five times during 2023, from 3.5% to 5.25%, UK stocks remained jittery, and the FTSE 100 closed the year at 7,733 points.
The FTSE 250 index of smaller companies rose by about 4.5% over the year, picking up gains towards the end of 2023 as traders bet that UK interest rates had peaked.
Within the FTSE 100, there were some impressive performances. RollsRoyce gained 220% as new chief executive Tufan Erginbilgiç pressed on with a turnaround plan for the aerospace company. Shares in Marks & Spencer, another famous UK name, rose by 120% – as a clothing turnaround helped its value swell enough to return it to the blue chip index in September.
Notable movers in 2023
Nvidia was the poster child of AI investing: its share price more than tripled in 2023. The chip maker reported swelling revenues and profits as demand for the high-powered processors needed to train the latest AI models grew even faster than Wall Street expected.
But even Nvidia’s 240% surge in 2023 wasn’t enough to keep pace with Symbotic, which has developed an AIpowered robotic technology platform for warehouses which it says can move goods faster and more efficiently. Symbotic shares climbed by about 350% during the year, as it reported higher revenues and smaller losses.
In healthcare, weight-loss drugs captured most market attention. Denmark’s Novo Nordisk became Europe’s most valuable company thanks to its obesity drug Wegovy, which helps patients lose weight and also reduces the risk of stroke.
Other pharma companies tried to compete, but in December Pfizer scrapped the twice-daily version of its experimental weight loss pill after finding it caused a high rate of side effects, knocking its share price.
Weight loss drugs dominated earnings calls last autumn, with companies across the economy pressed on whether the boom in anti-obesity products would help or hinder their sales.
Banking blues
The past 12 months have been a mixed time for banks. Although many reported bumper profits, rising interest rates left them nursing losses on their government bonds.
Some didn’t survive the year. In early March, US crypto-focused lender Silvergate failed, closely followed by Silicon Valley Bank. The latter was the largest US bank failure since the 2008 financial crisis, and followed a bank run whose speed surprised regulators. Days later, fears over the health of Credit Suisse rattled the markets, wiping more than £75bn off the FTSE 100 in a day as the Swiss bank lurched towards rescue by UBS.
In the UK, NatWest, dogged by its debanking row with Nigel Farage, fell by almost 18% in 2023 while Barclays lost 3%. The whole UK banking sector came under pressure this year over its net interest margins – the lucrative gap between saving and borrowing rates – with the Treasury committee pushing for better treatment of savers.
Michael Hewson, market analyst at CMC Markets, says that even though expectations had been low, the UK banking sector had “a disappointing year”.“We already knew heading into the year rising interest rates are good for bank margins, however the flip side of the coin was that firstly demand for loans and mortgages was likely to slow, and then on top of that competition for savings was also likely to act as a drag on margins.”
“There was also the fact that banks were expected to come under political scrutiny when it comes to their savings rates at a time when consumers were starting to feel the pinch from the rising cost of living,” says Hewson.
Bonds
Bond traders endured a year to forget for most of 2023, before the biggest two-month rally on record in the debt market lifted their spirits.
Through most of 2023, bond prices weakened amid concerns that major central banks would keep increasing interest rates in order to quell inflation.
In October, US Treasury prices hit their lowest level since 2007, with yields (the interest rate on the bonds) rising over 5% for the first time in 16 years. UK government bonds hit their weakest point since 2008 in August.
This left bond funds facing a third straight year of losses for the first time in about 40 years. But this all turned around in November, on growing optimism that inflation was cooling and interest rates would soon be lowered. Investors piled into treasury bonds, which drove up prices and helped trigger a powerful market rally.
The Bloomberg Global Aggregate Total Return Index has risen by nearly 10% over November and December, its best two-month run in data going back to 1990.
But Vincent Chaigneau, head of research at Generali Investments, warns that this wave of optimism could falter, if the US Federal Reserve starts tempering expectations of quick cuts, or if the US economy suddenly comes to a halt.
“Last Christmas, everyone and their grandma feared a recession,” he said. “A year later, they’re all worshipping Goldilocks [a very soft landing if any, quick disinflation, large rate cuts]. Beware the pitfalls of the consensus.”
The pound
Sterling had its best year against the US dollar since 2017. Having begun the year at $1.21, the pound hit 15month highs in July of more than $1.31 as investors bet that UK interest rates could rise as high as 6.5%.
But sterling then fell back through the autumn, as UK inflation eased and the City began to conclude that monetary policy would not need to be quite so restrictive.
With inflation now down to 3.9%, and UK interest rates probably at their peak at 5.25%, the pound ended the year at about $1.27.
The other side of this was a generally weakening dollar, which also lost more than 3% against the euro, as investors anticipated rapid cuts in US interest rates in 2024.
“After shedding all of this year’s gains during an autumn retreat, the US dollar, as benchmarked by the tradeweighted DXY basket, stands no higher now than it did in spring 2022,” says AJ Bell investment director Russ Mould.
“Investors must now assess why the globe’s reserve currency is sliding, whether those trends will continue and what the potential implications would be for investment portfolios should the greenback continue to weaken.”
Commodities
Oil has had a volatile year, with prices both pushed down by fears of a global downturn and lifted by concerns that geopolitical tensions would hurt supply.
And in the end, the price of crude ended the year down by about 10%, despite the Opec cartel’s best efforts to prop up prices by cutting production. Having started January at $86 a barrel, Brent crude finished the year about 10% lower, at $77.50.
In the spring, the price of Brent crude started sliding towards $70 a barrel, which spurred Opec into trimming output in order to tighten the oil market.
Those cuts drove the oil price towards $100 a barrel in September, but it never quite reached that milestone this year, and instead weakened in the final three months of 2023, before a pickup in December as attacks on vessels in the Red Sea prompted fears of disruption to shipping.
Among other commodities, iron ore prices gained more than 50%, as China tried to prop up its troubled property sector.
Cocoa prices rose by about 72% to their highest level in four decades as global shortages bit – and pushed up costs for chocolate makers.
But other agricultural commodities have struggled. The price of wheat has fallen by more than 20% in 2023, corn is down more than 30% and soya beans have lost almost 14% this year, thanks to a loosening of supply bottlenecks and increased production.
Gold
Geopolitical tensions and easing inflation rates helped to push the gold price up by more than 10% in 2023, which was its best performance in three years.
Having begun the year at $1,824 an ounce, gold ended 2023 on about $2,065. In the final week of 2023, London’s gold price benchmark hit an all-time high at a daily auction.
Marios Hadjikyriacos, senior investment analyst at XM, says gold was boosted by the weaker dollar, and falling real yields on bonds, as well as purchases from some central banks, including China’s.
Ruth Crowell, head of the London Bullion Market Association, says: “Gold continues to be the safe-haven of choice in periods of uncertainty and high volatility.”
Bitcoin
The world’s largest cryptocurrency jumped by 150% in 2023, despite starting the year overshadowed by the collapse of crypto exchange FTX in November 2022. It jumped from about $16,500 at the beginning of the year, to about $42,227 at the end of last week.
Bitcoin’s rally was fuelled by ongoing speculation that America’s SEC would approve a bitcoin exchangetraded fund (EFT). This would be a milestone for investors, allowing large institutions to buy cryptocurrencies for the first time.
Some experts believe approval for a bitcoin ETF could come as early as January, with more than a dozen firms reportedly waiting for news of the green light from the SEC.
Last Christmas, everyone and their grandma feared a recession. Beware the pitfalls of the consensus
Vincent Chaigneau, Generali
survey of more than 100 countries found that nearly a third of people do next to no exercise.
But what if the drug industry could help mitigate this? From the UK to Japan, scientists have spent years searching for exercise mimetics – pills or perhaps injections that could replicate some of exercise’s beneficial effects on the body. The signs suggest we are starting to get close.
“We know that exercise releases all these hormones which show up in the blood,” says Christiane Wrann, an assistant professor of medicine at Harvard Medical School.
Because scientists are still unsure which exercise hormones are the most beneficial, the ExPlas trial is taking a broad approach. Injecting blood plasma from people who exercise regularly is a simple way of transferring all these potentially beneficial hormones to patients. “The Norwegian idea is to take the plasma as the drug and give it to those who need it,” says Wrann.
But another, more focused approach is also gaining traction. In 2012, scientists discovered a hormone called irisin that is released by muscles during exercise – a messenger chemical that communicates with various parts of the body. In November 2023, Wrann and her colleagues demonstrated that irisin can reach the brain and clear the toxic amyloid plaques involved in Alzheimer’s disease, a big breakthrough in understanding how exercise helps shield the brain from dementia.
Wrann and others have now created a spin-off company, Aevum Therapeutics, with the ultimate aim of commercialising irisin as the world’s first exercise-based treatment; perhaps through mimicking the hormone with a drug, tweaking genes so that they generate more irisin, or simply injecting more of it into the body.
It is too early to say whether this could represent a novel Alzheimer’s treatment or simply a broadly beneficial exercise drug, but Wrann believes that if irisin can be shown to demonstrate health benefits in clinical trials, it could lead to many more exercisebased medicines.
“[So far,] no one has successfully translated the benefits of exercise into a drug,” says Wrann. “But if you can capture, perhaps not all, but at least a significant amount of the benefits of exercise in a medication, I do think it could be transformative for improving patient outcomes.”
A pill for all?
Could we all be released from the obligation to hit the gym in Januarys to come? Andrew Budson, professor of neurology at Boston University, agrees that the idea is a compelling one.
“I think there’s nothing inherently wrong with the idea of trying to replicate the physiologically beneficial effects of exercise,” he says. “I have no problem with that. I happen to enjoy my exercise and I don’t think that I would give it up, but on a busy day, I think it would be great to [be able to] take a drug instead of missing out on the health benefits of exercise completely.”
However, researchers such as Wrann insist that the main target group for exercise drugs is not the timepoor or the lazy, but rather disabled and elderly patients who have become housebound or bedridden through enforced inactivity. At the Tokyo Medical and Dental University, scientists have been searching for exercise’s secret ingredient – the element that protects against osteoporosis and sarcopenia (the loss of muscle mass and strength) – with the idea of turning it into a new drug for preventing frailty and perhaps even restoring the ability to move.
In autumn 2022, they announced the discovery of a chemical called locamidazole that stimulates two of the signalling pathways in the body that are activated in exercise, and are involved in the maintenance of muscle and bone. When given to mice as an oral supplement, it appeared to improve muscle width and function as well as promoting bone formation.
But while this is encouraging, researchers are largely proceeding slowly and cautiously because of the risk of unpleasant or even dangerous side-effects that has waylaid various previous attempts to turn exercise into a drug.
Jonathan Long, an assistant professor at Stanford University in California, gives the example of AMPK (adenosine monophosphate-activated protein kinase), an enzyme in the body that is activated by exercise, stimulating the clearance of excess sugars in the blood and so reducing the likelihood of type 2 diabetes. However, the AMPK system is highly complex, and activating it affects many different tissues in the body, not just blood glucose.
“People have been trying to develop AMPK activators, and a few years ago a pharma company succeeded in doing that,” says Long. “They put those molecules into monkeys and they did exactly what you would expect them to do, which is lower blood glucose. But on top of that, they also saw that those monkeys developed dilated cardiomyopathy, which means their hearts were getting too big, which is dangerous. So that wasn’t useful.”
Antidepressants and fat jabs
The key question that Long and others are trying to answer is whether there is a safe way to artificially stimulate the body when it is at rest and not expecting exercise-related pathways to be active.
Wrann says it is unlikely that we will ever have a medicine that universally replicates the full benefits of exercise. Physical activity is simply involved in too many biological processes, and even if it were feasible to target all of them, it would probably not be safe. “I don’t think it’s realistic that a single pill would give you the 20 things that exercise is doing to your body that are good,” she says.
Instead, scientists envisage a future with many different therapies all based on biological pathways identified from studying exercise, some for osteoporosis and others for protecting the brain. At University College London,
Jonathan Roiser, a professor of neuroscience and mental health, is working on a Wellcome-funded project to measure the impact of moderate-intensity exercise on the immune system and metabolism, and how that affects mood and motivation, in unprecedented detail. One hope is that this could one day lead to a completely new class of antidepressants based on exercise.
Long is particularly interested in whether understanding the effects of exercise on the brain can yield new alternatives to existing obesity drugs. His research group has discovered a metabolite called Lac-Phe (N-lactoylphenylalanine) that the body produces during sprinting or resistance training. Because Lac-Phe is released into the bloodstream, it can travel to the brain, where it suppresses appetite.
“In prehistoric times, when you were exercising, you were typically running away from predators,” says Long. “Your nervous system wants to shut down digestion and appetite so all your glucose goes to your muscles to help you escape and survive.”
Lac-Phe may be a valuable new tool in the fight against the modern obesity epidemic. While the drugs Ozempic and Wegovy have emerged as the leading weight-loss treatments, Long points out that they come with limitations, particularly the requirement to inject them weekly to maintain the benefits.
“Maybe you can combine them [with Lac-Phe] in interesting ways that would allow for more durable suppression of appetite,” he says. “And maybe Lac-Phe could be developed as a molecule you can take orally rather than injecting.”
Others see mimicking exercise as a way of potentially reprogramming the body’s metabolism in ways that aid fat-burning. Some mouse studies have shown that boosting irisin levels can convert normal fat cells into energyburning brown fat, causing the rodents to lose weight even on a high fat diet.
For the past 20 years, Ronald Evans, a professor at the Salk Institute for Biological Studies in San Diego, California,
has been studying a protein called PPAR-delta (peroxisome proliferator-activated receptor-delta), a drug target that he describes as a master switch activated through endurance exercise.
PPAR-delta can help us increase our proportion of slow-twitch muscle fibres and tells the body to go from burning sugar to fat. Now, after years of research, Evans is finally convinced that he has a drug capable of pressing this switch; what he still needs is the data to demonstrate that it is safe and efficacious in humans.
Because big funding bodies tend to be sceptical about the idea of exercise drugs, Evans has had to bill it as a potential new treatment for either fatty liver disease or the genetic muscle weakening disorder Duchenne muscular dystrophy to attract regulatory approval and funding for clinical trials.
“I hope that in the next 10 years, there is an exercise drug,” he says. “But the challenge from a scientific point of view is that all the research that gets done [in the US] is sponsored by the National Institutes of Health. And giving a drug that promotes the benefits of exercise, they say: ‘Well, what are we treating? Why don’t they just exercise?’”
But if evidence does start to emerge that such medicines are safe and work in humans, experts agree that they could be the blockbuster drugs of the future. “If we could succeed, I think absolutely,” says Long. “If we were actually able to do this, I think these would be really terrific medicines.”
On a busy day, it would be great to [be able to] take a drug instead of missing out on the health benefits of exercise
Prof Andrew Budson