2023 Review

The positive outcome seemed far from inevitable as 2023 began. Interest rates climbed steadily during the first half, raising fears among investors of a recession later in the year. However, by midyear it became clear that inflation had peaked, and further rate rises were unlikely. This cautious optimism was then reinforced by evidence that U.S. growth and other key metrics including employment remained robust.

In parallel, a separate realisation was underway about the potential impact of artificial intelligence on innovation, productivity and ultimately, economic growth. Indeed, 2023 will likely be remembered as the moment when AI entered mainstream terminology and its transformative potential came into sharp focus. This helped propel valuations of some technology companies to new record highs.

The MSCI World Index rose 24% in 2023, with most of the gains coming in the last few months of the year as risk appetite surged. Meanwhile, fixed income markets moved in lockstep with equities once again, rising late in the year as investors anticipated interest rates cuts.

It was a more nuanced picture for private assets as high interest rates complicated deal economics. Overall, ADIA was well positioned to capitalise on the strong gains in parts of these markets, while benefiting from dislocations in areas where conditions were more challenging.

In recent years, ADIA has sought to emphasise total returns at a portfolio level, in contrast to the more traditional approach of tasking individual asset classes to outperform benchmarks. This has led ADIA to steadily increase its exposure at a total portfolio level to areas in which it holds natural competitive advantages. These include private assets, where ADIA’s long-term focus and resilience to market cycles enables it to capture opportunities during market dislocations.

In private equity, for example, ADIA has leveraged its often decades-long relationships in the sector to broaden and deepen how it accesses the sector, and ultimately enhance returns. In 2023, ADIA's allocation to private equity grew to 12%-17% of ADIA’s total portfolio, in comparison with 10%-15% in 2022.

At a total portfolio level, the proportion of ADIA’s assets managed internally has also grown, from 55% in 2022 to 64% in 2023. This increase can be mostly attributed to changes in how ADIA manages parts of its indexed equity exposures through the Core Portfolio Department, which has substantially expanded its internal capabilities in recent years. This provides ADIA with additional flexibility to optimise its investment activities and implement asset allocation decisions more efficiently. In parallel, ADIA is continuing to expand and deepen relationships with leading external managers across various asset classes.

As at 31 December 2023, ADIA’s 20-year and 30-year annualised rates of return, on a point-to- point basis, were respectively 6.4% and 6.8%*, compared to 7.1% and 7.0% in 2022. As always, these figures are influenced both by years dropping out of the calculations as well as performance data in 2023.

As 2024 began, expectations were for inflation in developed markets to decelerate further from its post-pandemic highs. However, economic indicators remained mixed, leaving many countries with the delicate balancing act of seeking to dampen inflation without stifling demand.

Structural factors mean that price pressures may remain elevated when compared to the decade following the global financial crisis. Fortunately, central banks are now better equipped than ever to navigate such challenges, with tools and strategies that enable more surgical targeting of emerging issues.

While U.S. corporate profits remained resilient in 2023, slowing demand combined with the delayed impact of higher material costs may pose challenges in 2024. U.S. equities, with price to earnings multiples above historical averages, may struggle to repeat last year’s performance in the absence of compelling new profit drivers.

Meanwhile, politics as a theme will make a comeback this year, as more than 2 billion voters in 60-plus countries go to the polls in one of the biggest election years in history. The choices that voters make will have significant implications, not only for domestic policy but also in terms of how countries engage with each other.

In recent years, financial markets have proven remarkably resilient to geopolitical events. However, this is no cause for complacency, as an unpredictable political outlook often has real-world outcomes that eventually cascade down to financial markets.

Looking ahead, technology will continue to rise up the global agenda as the emergence of increasingly powerful tools create new opportunities for those able to grasp them. Although nascent artificial intelligence solutions garnered much attention in 2023, related technologies are already profoundly changing the business of investing. On one hand, this is making markets increasingly efficient, and enhanced returns harder to achieve. On the other, technology is unleashing a wave of innovation that promises to deepen the opportunity set for those investors with the resources and agility to capture them.

At ADIA, we believe that several interconnected, global transitions are currently underway: technological, economic, and energy-related, among various others. With our long-term focus, we have been positioning ourselves to participate in and capitalise on opportunities generated by these dynamic trends in numerous ways.

In recent years, we have sought to integrate technology into the fabric of our organisation. As part of this, we have embraced new tools to enhance our efficiency and internal agility, and separately have been increasing our internal quantitative skillsets.

Meanwhile, technology is at the heart of another high-priority area for ADIA and the UAE as a whole – the global transition from fossil fuels to renewable energy sources. In 2023, the UAE demonstrated its commitment to this process by hosting the United Nations COP28 Climate Change Conference, which brought together representatives from almost 200 countries. This culminated in a historic agreement to transition away from fossil fuels in energy systems.

ADIA continues to build on its early recognition of the opportunities presented by the energy transition. It remains an active participant in global platforms for dialogue and cooperation, while also fully integrating climate considerations into its investment strategy and processes.

In summary, 2023 was a successful year for ADIA, both in financial terms and through its proactive engagement with ongoing and interlinked global transformations. As a long-term investor, ADIA continues to make strides in its multi-pronged effort to position itself optimally for a fast-changing world. Looking ahead, we remain enthusiastic about what the future holds, and in ADIA’s continued ability to fulfil the mission it was entrusted with more than four decades ago.