The power of patience for investors

As the year comes to a close, investors would be well-advised to remember that a loss is only a loss if you crystallise it by selling out. Those who have held their nerve in 2023 have generally fared better than those who have been blown about by market noise.

This year has been dominated by military conflicts in Ukraine and the Middle East, and, closer to home, the UK economy has been held back by high interest rates (which have now hopefully plateaued), high inflation (also easing off) and extreme weather conditions. In a turbulent world, it hasn’t been a bed of roses for financial markets.

Here we consider which sectors performed best in 2023 and ask whether they provide some lessons for the year ahead.

The best performing sectors of 2023

Rank 2023 Rank 2024 IA Sector Percentage returns year to date*
1 55 IA Technology & Technology Innovation 31.96%
2 2 IA Latin America 15.63%
3 10 IA India/Indian Subcontinent 14.73%
4 36 IA North America 12.14%
5 32 IA Europe Excluding UK 9.66%

A lesson in unpredictability

2023 provides a stark lesson in the perils of attempting to time the market. It underscores the importance of resilience and the value of a patient, long-term investment strategy.

Attempting to predict market movements is always a precarious endeavour, and this year it was amply demonstrated by the performance of the technology sector. It saw a significant comeback from its position as the second worst-performing sector in 2022 (returning -27.5%**). The average fund returned 32%* year-to-date, climbing 54 spots to top of the charts.

This dramatic shift can be attributed to the strength of market leaders collectively known as the ‘Magnificent Seven’ (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia and Tesla), which were fuelled by the continued advancements in artificial intelligence.

Bob Kaynor, manager of Schroder US Mid Cap, says the US market is a concentrated as it’s ever been: “The dynamic in the US equity market is that we really have two markets: we have a market of seven stocks, and everything else. But, excluding those companies, the ‘S&P 493’ is basically flat on the year.***”

Hugh Grieves, manager of the Premier Miton US Opportunities, believes markets need to get more comfortable, then investors may explore the rest of the market. This should ultimately create opportunities beyond the Magnificent Seven****.

If investors ignore the tech-driven distortions of the US market, and the transitory charms of a couple of emerging markets, a surprising sector bubbles to the top of the table: Europe. What explains the strength of many European funds at a time when the European economy has been sluggish?

Tom Lemaigre, manager of the Janus Henderson European Selected Opportunities fund, says there are a raft of global champions within Europe that are really good at what they do. There is no global equivalent to luxury goods companies such as Hermes, or Luxottica, for example.

In general, these companies are available at far lower valuations than their US equivalents. Tom says European markets naturally offer a margin of safety that just isn’t there in US markets.

However, in European terms, these areas are still relatively expensive. Some of these companies also feature significantly in the major indices. The MSCI Europe has Novo Nordisk, Nestle, ASML, LVMH Moet Hennessy and Total Energies among its top 10 weightings^.

James Hanford, co-manager of the Comgest Growth Europe ex UK fund, believes Novo Nordisk is a good example of a company that should perform well regardless of economic conditions. "We expect it will deliver another year of strong double digit growth in 2024 despite stagnant global economic conditions, simply as it continues to roll out its GLP-1 products in diabetes and obesity,” he says.

Investing is a marathon, not a sprint

The pivotal lesson from the market's roller-coaster ride in 2023 is the importance of holding steady. Markets have been blown about by every sneeze from central banks, but those that have held a diversified, well-run portfolio have been rewarded. Steadfast investors have steered a path through market falls, rebounds and sector rotations.

Human beings can focus on short-term threats and opportunities, losing sight of the bigger picture. Knee-jerk reactions and attempts to time the market often lead to suboptimal results. What truly matters are the returns accumulated over the span of decades.

*Source: FE Analytics, total returns in sterling, 1 January 2023 to 7 December 2023
**Source: FE Analytics, total returns in sterling, 1 January 2022 to 31 December 2022
***Source: Investing on the go podcast, 16 November 2023
****Source: Premier Miton, September 2023
^Source: MSCI index factsheet, 30 November 2023

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice.

Published on 18/12/2023