Investors had begun the year with concerns about high inflation and the likelihood of a recession in the second half, which were only heightened by a regional banking crisis in March. In the end, those concerns proved unfounded as the U.S. economy remained resilient even as inflation cooled. By November, sentiment was shifting firmly toward the end of policy tightening and the possibility of rate cuts, which sparked a sharp rally in global rates and risk assets more broadly.
In the developed world, major central banks remained cautious about persistent inflation and continued to tighten policy until the third quarter. In the Eurozone, despite healthy labour markets, the PMI gauge of business activity reinforced a pessimistic growth outlook. While the Eurozone avoided a technical recession in 2023, growth remained uneven across member countries with Germany among the laggards. In the U.K., the Bank of England's Monetary Policy Committee remained divided on the mixed economic outlook of a tight labour market versus sluggish economic activity. Meanwhile, the Bank of Japan's minor adjustments to its policy fell short of market expectations.
Emerging markets were a relative bright spot in 2023, reversing some of their heavy losses in 2022 to post a partial recovery. Latin American central banks led the way in raising interest rates before others followed suit, which then enabled outperformance in EM local rates. Despite these positive trends, outflows from emerging markets persisted as uncertainties about China's postpandemic reopening hampered regional recovery prospects.
Credit markets experienced several ups and downs in 2023. Investors began the year with concerns that Fed tightening could lead to wide dispersion in sensitive sectors such as real estate and consumer credit. The regional banking crisis in the U.S. then saw global credit concerns spike as investors questioned the economy's resilience to higher rates. However, prompt and bold liquidity measures from the Fed and other global central banks brought a return of stability and credit markets rebounded, although signs of credit pressure emerged. The Fed’s pivot in November fueled a credit rally, with interestrate and credit-sensitive sectors performing exceptionally well, and U.S. investment-grade debt reaching some of the tightest levels in the past decade.
Looking ahead, politics looks set to be a key driver for fixed income markets in 2024, with more than 60 countries holding national elections. On the economic front, it seems likely that monetary policy normalisation will continue as global inflation cools, although the speed and extent of the loosening remains difficult to predict.
ADIA’s Fixed Income team manages a liquid, diversified set of investment strategies. Its fully active mandate and inbuilt flexibility enable it to target return-enhancing opportunities across the full spectrum of fixed income assets. As in recent years, the Department will continue to diversify its sources of return in 2024, further enhancing its ability to generate absolute returns across all market conditions.
