Monthly Market Review - December 2023
Building on November's momentum, global markets continued their ascent in December, fueled by fresh signs of a dovish pivot i.e. a transition from rate hikes to rate cuts, from central banks across the globe. The MSCI World Islamic Index extended its gains with a robust 3.7% return in December, bringing its total year return to 23.4%. Similarly, the Dow Jones Sukuk Index climbed 2.6% further in December, pushing its annual return to 5.5%. These impressive performances were buoyed by signs of decelerating inflation across developed economies and expectations of monetary easing.
The final monetary policy meeting of 2023 saw not only the Fed confirming the peak of the tightening cycle but rather penciling at least 3 rate cuts in for 2024 and a further 7 cuts through 2026, bringing the Federal Funds Rate to the long-term target of 2-2.25%. Bond markets mirrored the bullish sentiment pushing US 10-year treasury yields down to close at 3.87% from 4.33% at the start of the month.
The Feds new language comes amidst a brightening picture for inflation that had spiked to a 40 year high in mid-2022. Headline inflation fell to 3.1% YoY in November, driven largely by a continued pullback in energy prices. However, core inflation remains a point of concern as it held steady at 4.0% with an uptick in shelter and non-housing service prices continuing to provide upward pressure.
Across the pond, a similar picture was seen as inflation readings across Europe continued their downward trend. UKs headline and core inflation fell more than expected to 3.9% and 5.1% respectively. Likewise, Eurozone’s headline and core inflation were confirmed at 2.4% and 3.6% respectively, down from 2.9% and 3.6% in October. Following the footsteps of the Fed, both the ECB and BoE held rates steady in December owing to the sharp decrease in economic activity as the HCOB Eurozone Composite PMI (a popular index to track economic output) fell to 47.0 in December from 47.6 in November, signaling a 7th consecutive reduction in business activity.
China continues to show mixed signs of an economic recovery. Retail sales shot up 10.1% in November, the fastest rate of growth since May earlier this year, while industrial output grew 6.6% YoY in November, the fastest pace in two years. However, deflationary pressures still loom large as November CPI readings recorded a YoY decrease of 0.5% in consumer prices while PPI readings saw a decline of 3.0% YoY. Unemployment rate remained steady at 5.0%. The real estate sector continues to be the biggest risk in China, with the government providing only limited support for the developers. However, broader fiscal measures expected in early 2024 should provide the economy with a lift.
Looking ahead, despite the Fed pointing to rate cuts and the risk of inflation remaining higher for longer having subdued, they still cautioned that the actual path would remain dependent on how the economy evolves. Markets, however, expect the Fed to cut 5-6 times in 2024, leading to a rally across all asset classes. This may lead to some profit taking and presents the risk of some turbulence if market expectations are not met. Investors should seek to remain invested through a well-diversified portfolio while shielding themselves from any shocks.
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As with any investment, a Wahed Invest Ltd investment puts your money at risk, as the value of your investment can go down as well as up. The tax treatment of your investment will depend on your individual circumstances and may change in the future. If you are unsure about whether investing is right for you, please seek expert financial advice.
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