Investment update
- There were concerns that interest rates would remain high for a longer period, which impacted stocks and bonds throughout October
- The conflict in Gaza that started in early October also had a negative impact on markets
- Markets had a significant rebound in the last eight weeks of the year
Macro overview
During the last quarter of 2023, there was a significant amount of volatility in global financial markets. Initially, equity and bond markets declined in October due to concerns about prolonged higher interest rates. These concerns were largely driven by the strong economic data coming out of the US. As a result, assets that are adversely affected by higher interest rates, particularly small and mid-cap stocks, struggled. Similarly, the US 10-year government bond yield moved beyond 5% for the first time in 16 years[1] (bond yields move inversely to prices). Additionally, conflict in Gaza caused worries about potential oil price increases and inflationary pressures.
However, a significant rally occurred in November and December. This recovery was driven by economic data indicating a decline in inflation. This was accompanied by Central Banks holding rates steady in November while also feeding growing optimism that they would start cutting interest rates more quickly in 2024. In response, bond yields fell globally, and mid and small-cap equities rallied in response to positive inflation news and an improved outlook for company earnings.
Asset class performance and positioning
At Tribe, we’ve made minor changes to take advantage of favourable entry points for bonds and alternatives that are sensitive to interest rates. Despite the rebound in bonds and equities over the last quarter, we still see attractive opportunities in the market. We are cautious of expensive sectors within equities, though, especially in the US tech sector, which experienced strong performance in 2023. However, we believe that our core sectors, such as healthcare and the clean energy transition, offer more favourable conditions for investment.
Impact update
- Artificial Intelligence comes under scrutiny
- UK finance markets wake up to a new regime
- Conference of the Parties (COP) 28 delivers mixed messages
This quarter
The ongoing deployment of sustainability-related regulations, particularly in Europe, continued throughout the quarter. The European Union (EU) and the UK’s Financial Conduct Authority (FCA) made progress with potentially wide-reaching and impactful regulatory frameworks across finance and artificial intelligence (AI). In the US, President Biden signed an executive order on Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence[2] in October. In November, the UK hosted the world’s first AI Safety Summit. In December, the EU agreed on the final version of what will be the first-ever comprehensive legal framework on AI, the European Union Artificial Intelligence Act.[3] There’s a growing unease with the fast pace of generative AI in what’s currently an unregulated market. It’s likely this fast-developing policy response will inform business strategy and investor sentiment in the near future.
In November, the FCA launched the final version and framework of the Sustainability Disclosure Requirements (SDR).[4] SDR introduces a labelling system to show how good funds are for the environment, helping consumers better understand funds’ sustainability objectives. The SDR also aims to tackle greenwashing in the sector.
Possibly the biggest development of the quarter was the Conference of the Parties (COP) 28 in Dubai, held in December. Despite frustration with the lack of progress on the Paris Climate Agreement, there was a sense of achievement in the first-ever commitment to “transition away from fossil fuels”. This was supported by a commitment to triple the deployment of installed renewable energy capacity by 2030.[5] For many, however, the final agreement fell short of the necessary language of “phasing out fossil fuels”.[6] Without that verbiage, there are concerns that a litany of loopholes may hamper progress.[7]
Future focus
The FCA confirmed that they will be consulting on the possibility of expanding the application of SDR to portfolio managers and discretionary wealth management services in early 2024.
We also anticipate more regulatory developments occurring in the next quarter, both at the EU and UK level, given new policy frameworks that have been in the pipeline. This could include the publication of the UK Green Taxonomy, a long promised and hotly anticipated part of the UK’s Green Finance Strategy.
[1] US Treasury yields fall from 16-year high as Bill Ackman ends bearish bet, Financial Times
[2] Executive Order on the Safe, Secure, and Trustworthy Development and Use of Artificial Intelligence, The White House
[3] The Act, EU Artificial Intelligence Act
[4] PS23/16: Sustainability Disclosure Requirements (SDR) and investment labels, The FCA
[5] COP28 and the world ‘on track’ to triple renewables, World Economic Forum
[6] COP28 forced into overtime as fossil fuel phase-out divides countries, Reuters
[7] Alliance of Small Island States sees ‘a litany of loopholes” in COP28 text, Reuters
