January 2024 Portfolio Management Team Update

Elvis Picardo

January 26, 2024

January 2024 Portfolio Management Team Update
By Elvis Picardo , CFA® , CIM, Senior Portfolio Manager, iA Private Wealth
January 23, 2024

Market Review
Global equities continued to rally in December, adding to November’s strong gains and capping a stellar fourth-quarter performance that contributed substantially to 2023’s unexpectedly robust results. The rally was fuelled by expectations that the Federal Reserve would ease monetary policy through multiple rate cuts in 2024, as optimism for a soft landing surged after the central bank’s surprise policy pivot towards easing at its December 13 meeting. In addition, rampant appetite for stocks related to artificial-intelligence (“AI”) enabled U.S. indices to outperform their global peers by a huge margin, with the Nasdaq-100 soaring 53.8% in 2023 and the S&P 500 closing within striking distance of its all-time high.

The TSX Composite rose 3.6% in December after a 7.2% surge in November that was its biggest monthly advance in three years. The index’s 7.3% increase in Q4 was a major contributor to its 8.1% overall gain in 2023. The technology group was the best performing sector in 2023, surging 68.8% as two of its constituents – Celestica (+154%) and Shopify (+119%) – were the top performers on the index for the year. The health care, industrials, and consumer staples groups generated double-digit returns, followed by the financial sector with a 9% gain; communication services (-9.2%) and utilities (-4.3%) were among the laggards.

The S&P 500 rose 4.4% in December after an 8.9% surge in November that was one of its best-ever gains for the month. The index rose 11.2% in Q4 and gained 24.2% in 2023, reversing its 19.4% plunge in 2022 and taking it to within 1% of its record high. The Dow Jones Industrial Average advanced by a more sedate 13.7% in 2023, primarily on the back of a 12.5% Q4 gain that took it to a new high in December.

The “Magnificent Seven” – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, Tesla – contributed about 64% to the S&P 500’s rally in 2023. Some of these stocks had lost half their market capitalization or more in 2022, but rebounded massively in 2023, with an average gain of 111%, led by Nvidia (+239%), Meta (+194%) and Tesla (+102%).

The disproportionate contribution from this group also enabled the Nasdaq-100 to post a record high in December, while the broader Nasdaq Composite gained 13.6% in Q4 and 43.4% overall in 2023, reversing its 33% plunge in 2022. The Russell 1000 index of large stocks rose 24.5% in 2023, outperforming the Russell 2000 index (which consists of smaller-capitalization stocks) by more than nine percentage points.

Overseas markets also posted solid gains. In Europe, the Euro Stoxx 50 index gained 19%, as stocks in Italy, Germany and France outperformed, while the UK’s FTSE 100 index lagged with a gain of about 4%. In Asia, Japan’s push for reform at undervalued companies and rising acquisitions led to a 28% surge in the Nikkei 225 index, its best performance since 1989. The Taiwan market also rose 27% despite mounting political tensions with mainland China, while Hong Kong was one of the laggards in Asia with a 14% decline.

In emerging markets, Brazil gained 22% while India’s Sensex index advanced for the eighth straight year to post a 19% gain. India recently surpassed Hong Kong as the fourth-biggest equity market globally, with its market capitalization reaching $4.33 trillion on January 22, 2024. China’s Shanghai Composite index plunged almost 11% in Q4 for an overall decline of 4% in 2023. The index has extended its decline in January, erasing over $6 trillion from its February 2021 peak, as government measures to combat the Chinese economy’s struggles with deflation and a property crisis have been unsuccessful so far.

Bonds rallied strongly in the fourth quarter, as optimism that interest rates may have peaked triggered the best gains for U.S. bonds in November since the 1980s. According to Morningstar, the typical U.S. government long bond fund spiked almost 12% during Q4 but gained only 3% for the full year as yields edged up over the first nine months of 2023.

(Sources: FactSet, Bloomberg)

Portfolio Strategy
While equities commenced 2024 on a subdued note, renewed appetite for technology mega-caps enabled the S&P 500 to post a new high above 4,850 this week; since its October 2022 low, the index has added $10 trillion in market capitalization.

U.S equities have outperformed almost all major asset classes over the past decade, with the S&P 500 generating returns of 12.0% annualized during this period, compared with the TSX Composite’s 7.6% returns. The U.S. now accounts for almost 70% of the MSCI All-Country World Index of 23 developed markets, with Japan a distant second at 6%; Canada has a 3.2% weight in this index.

In terms of the economic outlook, Canada and the U.S. appear to be heading in diametrically opposite directions. Recent data indicates that the Canadian economy is headed for a recession as indebted households – faced with mounting debt servicing costs due to higher interest rates – pull back on spending, while the U.S. appears to be on course for a “soft landing,” although it should be noted that over the years this has generally been elusive. Against this backdrop, in November, we increased the allocation to U.S. equities in our model portfolios while marginally trimming our exposure to Canada.

The outlook for inflation / interest rates will continue to be key market drivers in 2024 as well. The year-end rally was based on unbridled optimism for as many as six interest rate cuts by the Federal Reserve this year. However, those expectations have been somewhat tempered following comments from Fed officials, with five rate cuts now expected in 2024. Rising geopolitical risk remains the wildcard this year too, as the volatile Middle East threatens to turn into a tinderbox, the Russia-Ukraine war shortly enters its third year, and China-U.S. relations continue to deteriorate.

In 2023, our model portfolios generated returns in line with their peers, thanks to contributions from the Platinum Growth Fund, as well as individual stocks including Salesforce, Qualcomm, Visa, and Manulife. Our Pension balanced growth model returned 8.82% in 2023 (money-weighted return, net of fees), while the Pursuit growth portfolio generated a return of 9.85%. The Platinum Growth Fund, which is held in all models at Luft Financial, was a stellar performer in 2023 with a gain of 19%.

The Portfolio Management Team (PMT) made multiple changes to model portfolios in 2023, cutting non-core securities, boosting U.S. exposure, and increasing duration in fixed-income holdings. The portfolio tilt continues to be defensive, based on a likely recession in Canada and higher geopolitical risk. The PMT believes that client portfolios are well positioned for this stage of the economic cycle and will continue to manage client portfolios proactively with the objective of generating healthy risk-adjusted returns.

Please contact any member of the PMT if you have any questions or concerns regarding your accounts.

This information has been prepared by Elvis Picardo, who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.