In general, the prevailing sentiment in 2023 was positive as signs emerged that inflation had peaked, and once-widespread fears of a recession appeared misplaced. This boosted risk appetite and renewed demand for high quality growth stocks, especially in the technology, communication services, and consumer discretionary sectors. The benign outlook also benefited fixed income assets, which experienced a simultaneous rally alongside equities.
The MSCI World Index closed the year with a 24% gain, with U.S. and Japanese equities among the top performers in the developed world, while European markets also ended broadly higher despite lingering concerns about the region’s economy.
Meanwhile, many emerging markets fared even better than their developed peers, having suffered steep declines in the previous two years due to risk aversion caused by rising interest rates. Leading the way was India, which saw strong inflows on better than expected macroeconomic growth and steady corporate earnings, while Brazil and Mexico surged to record highs.
Small cap equities generally fared worse in developed markets than their large cap peers during 2023, while the opposite was true in emerging markets.
In terms of sectors, some mega-cap technology stocks and those with AI-related exposure soared by more than 50%. Stocks in the consumer discretionary and communication services sectors also outperformed, with gains ranging from 50% to more than 200% for the year. In contrast, defensive stocks such as utilities lagged the most as risk appetite grew, delivering just above 1%.
In 2023, ADIA's Equities Department (EQD) continued to concentrate its active management capabilities in areas with structural advantages and strong prospects for future relative growth. In addition, EQD allocated additional capital to shorter horizon, high-turnover strategies in the low active risk space, several highconviction strategies with higher tracking error profiles, and long-short strategies with higher levels of leverage. In 2024, EQD is exploring complementing its existing strategy mix with a range of new, highly targeted public equity strategies.
Looking ahead, increased dispersion in equity valuations and volatility arising from a complex market backdrop should continue to create opportunities for skillful active managers. That said, the sustainability of 2023’s rebound may well hinge on factors such as central bank policies and the trajectory of economic recovery in major markets.
Meanwhile, investors will likely seek to balance their risk exposures by increasing investment in comparatively safe havens such as developed markets with accommodative policies, and defensive sectors that lagged in performance during 2023.
