Knowledge Centre

Q4 2023


As the world continues to navigate past the long shadow of COVID, there is less uncertainty than we have had in recent years as the tail end of a decades high bout of inflation and a stomach churning 18 months of rate hikes appears to be coming to an end. The global economy is expected to slow slightly in 2024 but the risk of a hard landing has subsided despite high levels of debt. There may be some short term pain but there should be gains down the road as central banks reverse course on rate hikes and usher in the beginning of a generational opportunity for investors.

Canada’s economy is flirting with recession as the economy contracted in the third quarter. This happened despite substantial government spending, (which contributed about 1.2% to the third quarter economy) meaning the decline could have been far worse. Canada’s economy continues to generate jobs but is not keeping pace with a massive influx of 430,000 job seekers that has caused the unemployment rate to increase. The Bank of Canada drove up rates pretty dramatically over the past two years and has driven inflation low enough to give evidence that the tightening cycle is likely over; with cuts just around the corner.

U.S. short term interest rates have been unchanged since July and now look poised to finally slow what has been a surprisingly strong economy. The Federal Reserve has been successful in its brutal rate hiking cycle such that inflation excluding rent increases is only 2%. U.S. commercial bank credit shrank during the third quarter, the first year over year decline in more than a decade. Households have spent much of their savings and pay raises but this trend does not look sustainable. All this adds up to a slowing cycle in early 2024 before the “all clear” is sounded.

European inflation dropped to its lowest level in two years as energy prices fell and the high interest rates set by the European Central Bank dampened demand. It is likely that the next step will be rate cuts. Europe has likely been in a recession since the third quarter as its two biggest economies, Germany and France, have contracted. Britain’s inflation has been more than halved from its peak of 11.1% while interest rates appear to have peaked. The U.K. economy is very stagnant, and the road ahead will likely continue to be bumpy.

Japan is the only major advanced economy yet to hike interest rates in the current cycle, but global inflationary forces are finally seeping into economy after decades of falling prices. This could potentially force the Bank of Japan to push interest rates above zero. These events have been very positive for the Japanese stock market which has rallied to its highest level since 1990. China is also going through a tough economic transition as it tries to dig itself out of significant problems. They are grappling with a deflating real estate bubble and increasing consumers savings in the face of greater price deflation.

Financial markets dramatically rebounded in the fourth quarter as investors looked past the current malaise to a healthier future. Canadian equities surged 8.1% in the quarter (all figures in Canadian dollar terms) and 11.8% for the year. U.S. stocks gained 8.9% in the fourth quarter and 23.2% for the year. International stocks climbed 7.8% in the quarter and 16.0% for 2023; emerging market stocks were the laggards, gaining only 5.3% in the quarter and 7.6% for the year. Bonds had an even more dramatic reversal spiking 8.3% in the fourth quarter which dragged them out of negative territory for a final gain of 6.7%.

Investors had a lot of negative expectations heading into 2023 but looking back 12 months it is clear that most of them did not pan out. The once inevitable recession did not materialize, and inflation has managed to slow dramatically without a meaningful rise in unemployment. Credit conditions tightened but did not squeeze growth as much as we had anticipated. The global property market did not collapse. Geopolitical shocks did not shock as markets simply moved on. The world was much more resilient last year and the outlook for 2024 is now pretty darn good.


2023 was a year that demonstrated just how difficult it can be to predict changes in economic conditions and their impacts on financial markets. On paper, the set up appeared “toxic” during the year with negative headlines like the escalating conflict in the Middle East, higher yields, the ongoing war in Eastern Europe, and a slowing global economy. Unsurprisingly, most analyst views at the beginning of the year were skewed towards forecasting a possible recession by year end and consequently lackluster performance in the markets. However, markets strongly defied these forecasts.

During the last quarter of 2023, Canadian equities recovered in November and December from their summer lows on the backdrop of falling inflation and peak interest rates. The Bank of Canada (BOC) put a break on interest rate increases for three straight meetings as more signs of inflation pressures easing have emerged. The economy showed its resiliency by navigating through weaker GDP growth and a softer job market that started in the third quarter. Market analyst expectations of rate cuts have been aggressive with the belief that high rates are almost behind us and the BOC’s key rate will ease as soon as April 2024. The S&P / TSX found comfort in that renewed optimism to post an 8.1% total return in the fourth quarter. Year to date the index closed with a comfortable 11.8% although its counterpart south of the border performed better at 23.2% (in Canadian dollars terms).

Investors were betting on Value to lead in 2023 amid an environment of high interest rates but the top gainers rotated between Value and Growth with Growth outperforming in the end. Technology led the pack to finish the quarter and the year with the strongest returns of 18.6% and an outstanding 56% respectively. Financials were the second best performers of the quarter, up 11.6%, although they closed the year with just a 9% return as concerns of potential household defaults weighed heavily on the sector in the previous quarters. Industrials ended the quarter with a 7.1% gain and a strong 10.8% for the year. Health Care posted a modest 3.9% gain for the quarter, but the sector was the second best performer for the year at 22.1%: its first gain in six years. Energy was the sole detractor over the quarter with 10% loss although the loss was muted at -0.4% over the year as Energy experienced occasional spikes throughout the year. Telecommunications and Materials were positive in the fourth quarter but lagged the most year to date with returns of -7.3% and -3.3% respectively. Interestingly, although gold bullion rose to more than $2,000 per ounce for most of the year (a more than 11% increase), its effect on Materials was somewhat muted due to relative underperformance of gold companies as the U.S. dollar rally created competition for investors seeking a safe haven to park cash.

As investors close the curtains on a surprisingly strong 2023, the evolving macroeconomic and geopolitical environment could matter a great deal for the market’s performance in the months ahead. Evidence of a slowdown has been apparent in major economies and the IMF (International Monetary Fund), in its latest report, revised the global GDP down from 3% to 2.9%. Preliminary data in Canada show that the domestic economy has nearly dodged a back to back quarterly contraction (i.e. a technical recession) after -1.1% GDP in the third quarter, a flat 0.2% in October, and a possible slight rebound for the fourth quarter. Still, there are clear signs of a struggling economy with unemployment ticking higher. The BOC has made clear its data dependent stance for any policy change, which explains the pause on rate hike for three consecutive meetings. As for the S&P / TSX, it is currently trading at a deep discount with a price / earnings ratio (P/E) of 13 times forward earnings versus 19 for the S&P500. This positions an opportunistic entry point in the event of a slowdown in a “goldilocks economy” scenario.


The fourth quarter of 2023 started shakily with talks of higher rates for longer sparking an October selloff for bonds which was then quickly reversed through November and December. Following two straight negative calendar years which placed the bond index in a bear market and a selloff October, the index returned 8.3% in Q4 bringing its 2023 into positive territory with a return of 6.7%.

Following ten consecutive rate hikes beginning in March of 2022, The Bank of Canada (BOC) held rates steady through the second half of the year. During a time when it is becoming increasingly difficult and more expensive to own a home, a pause in the rate hikes is welcomed by all. In July, inflation exceeded 8%, the highest in over 40 years. The annual inflation rate fell to 3.1% as of November.

South of the border, the average contract interest rate for 30 year fixed rate mortgages jumped to 7.53% as of September 29th. These are the highest levels since the early 2000s and a full percentage point higher than just a year prior. The Federal Reserve decided to keep its interest rates unchanged at 5.25%-5.50% with rhetoric of higher for longer (i.e. high rates for an extended period of time). Investors called this bluff and similar to bonds, equities had a strong rally through December.

Meanwhile in Canada, although borrowing costs still sit at their 22 year high, policymakers noted that there are signs that the BOC’s tightening policy is starting to reduce spending and relieve price pressures. There are many buyers on the sidelines, particularly in real estate, and there is a fine line between soft landing an economy and sparking another surge in inflation and potential recession. Just as very high interest rates are a threat, so would be the reduction of interest rates at an accelerated rate. Canada is still flirting with a recession and policymakers need to take a measured approach to avoid that scenario.

Positive developments as a result of the rate hikes are becoming evident as ex-automobile sales in Canada are down, unemployment is up despite more job creation, inventories are up, and Canada’s GDP growth rate contracted by 0.3% in the quarter offsetting its expansion from the prior quarter. A retraction in GDP is not as negative as it would initially sound. As we’ve discussed previously, the market was severely overheated and a correction was in order. These are signs that consumers are tempering their spending and excess demand is on the decline.

Within the bond market, high yield corporate bonds outperformed the pack as their value has a greater correlation to the company’s value and offer a premium relative to investment grade government bonds. Inflation-indexed bonds were the bottom performers. In times of normal inflation, inflation-linked investments do well but the same cannot be said for when inflation gets out of control.

2023 was further proof that patiently staying the course is rewarded. If investors took the policymakers’ words at face value and panic sold their investments in late October when headlines were at their most negative, they would have missed the following rally through November and December which recouped the prior quarters losses in swift fashion.

The market has signaled that future rate cuts could be approaching but this should not be mistaken as a guarantee that it will happen in 2024. The BOC and their decision to begin cutting rates or keep them stable will be dependent on economic factors. This is a far cry from one year ago when sustained high rates felt like a certainty. If rate cuts do arrive in 2024, long duration bonds will benefit greatly as they are more sensitive to interest rates and have been beaten up for the past two years.Investors would be wise to take a measured approach to the bond market in the coming year as recent history has shown us how quickly things can change.


The S&P 500 has shown its resilience in 2023 as equity investors were rewarded with a strong Q4 rally erasing the bear market of 2022 in which the Index fell 18.1% (all figures in U.S. dollar terms). The S&P 500 returned 11.7% for the quarter, capping a very strong calendar year return of 26.3% after completing its ninth straight weekly gain. This comes as a huge sigh of relief. Back in March 2022, the U.S. Federal Reserve launched a series of aggressive rate hikes in an attempt to cool an overheated market with the highest inflation numbers we’ve witnessed since the 1980’s. The Fed’s actions on cooling inflation have thus far proved to be the correct move but not without great risk. Higher rates translate to more expensive mortgage and car payments, disappointing corporate earnings, and a resulting fear of recession.

The average contract interest rate for 30 year fixed rate mortgages peaked at 7.9% in October 2023, the highest since the early 2000’s housing crisis and finished the year under 4%. In November, for the third consecutive meeting, The Federal Reserve decided to keep its interest rates unchanged at 5.25%-5.50% with rhetoric of higher for longer (i.e. high rates for an extended period of time). Investors have called this a bluff. This extended pause in rate increases coupled with encouraging inflation data has flipped market expectations despite The Fed’s latest bearish comments. As previously discussed, the purpose of rising rates is to cool inflation by slowing consumer spending and encouraging savings without destroying the job market.

We are witnessing the Fed’s actions potentially succeeding in its goal of cooling the economy whilst avoiding a recession; a soft landing. Although higher interest rates are troublesome, they have curbed consumer spending and maybe even more importantly, energy prices. Gasoline prices in the U.S. have been cut by a third to $0.83 per litre since its peak of $1.30 per litre in June of 2022, a big win for consumers and businesses alike. With the unemployment rate also falling, the American economy is trending towards a continuation of its strong market rebound.

Information Technology stocks continued as market leaders in 2023 with 7 out of the top 10 performers in the S&P 500 coming from the sector. The NASDAQ 100, which is comprised of the top 100 largest Tech companies globally, surged 53.7% in 2023, largely attributable to the AI backed rally across the Information Technology sector which returned nearly 80% year to date. The utilities sector was the sole underperformer for the quarter; losing 6%. The U.S. market continues to impress amidst a messy geopolitical period with the conflicts in Ukraine and Israel showing no signs of slowing.

Typically, during an economic rebound period smaller capitalization and cyclical stocks are best positioned for strong returns as their profits are more closely tied to the economy. Consumer confidence and spending increases as people are willing to travel more and purchase luxurious items. The result is reflected in stronger corporate earnings and a broadening of the market. Large cap equities with top class leadership and a strong balance sheet are also in a position of strength as they can be more aggressive in mergers and acquisitions to generate shareholder value.

It is crucial to understand that we are not completely in the clear of overheated inflation. There is some logic in Fed Chair Jerome Powell’s warning that the Fed may keep interest rates higher for longer as it is in the best interest for all parties involved to do so. Cutting interest rates too aggressively could drag the stock market right back to the pain felt in 2022. While there will be opportunities for outperformance in 2024, volatility will still be present as the Fed continues its work against the red hot inflation that has tormented investors since 2021.


The relentless ratcheting up of interest rates globally to subdue overheating economies was like steadily applying the brakes to a mile long freight train; it takes a long time to slow down but eventually it grinds to a halt. The third quarter brought further compelling evidence that the multiple rate hikes by major central banks are doing what was intended. Inflation fell as economies cooled. The situation looks a little less gloomy than earlier in 2023 but unfortunately the picture cannot be described as supportive. As the woes afflicting the world are become increasingly clear, short term issues are going to take a while to release their grip.

The U.K. economy flatlined in the third quarter but it did finally manage to recoup all the losses inflicted by the pandemic. British inflation plunged in November to its lowest rate in over two years after surging 21% over the same period. The Bank of England kept its main interest rate unchanged for the first time after 14 consecutive raises, indicating that borrowing costs will likely stay close to current levels (which is still a 15 year high) for much of 2024. Consumer confidence and real incomes are slowly improving and the outlook looks modestly brighter given that the U.K. has probably already faced the worst of its economic weather.

The European Central Bank has lifted rates by 4.5% since July 2022 to combat runaway inflation but hinted that it would pause as the hikes have worked their way through the economy. This is only possible since inflation has more than halved in a year while the economy has slowed so much that a recession may already be under way. The outlook for the economy appears to be increasingly precarious as the manufacturing industry is in recession, sentiment indicators are pointing south, consumption is weak, and even the labour market has started to soften. The stagnant German economy has already contracted for two consecutive quarters and France’s activity remains on a steady downward slide.

The Bank of Japan kept its longstanding easy credit policy unchanged at -0.1% which is meant to encourage banks to lend more and businesses and consumers to borrow more to spur the economy, the world’s third largest. Inflationary pressures have not abated, topping 4% earlier this year, the highest it has been since 1990. Currently, Japan’s household balance sheet, with roughly 55% of assets in cash and deposits, is forcing people to seek out higher returning, riskier assets; and as a result, Japanese equities have hit their highest level since 1989. With continued weakness in Japan’s consumer and government spending, a tight labour market, elevated levels of government debt, and aging demographics, the way forward is getting quite murky.

International equites started the year very hot with the world’s best performance in the first quarter, then fell into the doldrums during the next six months before once again accelerating in the fourth quarter with a 10.5% gain (all figures in U.S. dollar terms) to end the year up 18.9%. European stocks surged 11.1% in the quarter and 20.7% for the year. Japanese stocks were equally impressive, gaining 8.2% in the quarter and 20.8% in 2023. U.K. stocks unsurprisingly were the laggards given their economic difficulties but still managed a respectable 6.9% in the final quarter and 14.1% for the year.

The global backdrop is far from supportive as numerous headwinds stand in the path to recovery in a world seemingly stuck in the mud. While the travails of the world’s economies have become increasingly apparent, (wage growth and capital spending remain missing elements) the pressure facing the consumer from higher costs and the lagging effects of interest rate rises is progressively biting harder, and as the cushion of pandemic era savings shrink, the puzzle of a soft or hard landing will become clearer.


Emerging market economic growth, driven by more than just China, is starting to move higher as growth slows in developed markets. However, emerging market stocks have just crossed a grim milestone, tumbling to their lowest level relative to U.S. equities in 36 years. Selective countries are doing well but it could be a difficult start to 2024 for the region with the expectation that it could pick up later and finish the year with meaningful gains. China’s stumbling economy has been central to recent underperformance, given that it accounts for roughly a third of the index.

China’s economy remains in the doldrums for a variety of reasons. Prices are falling with deflation due to slack demand from consumers and businesses. There is the potential for a terrifying crash in real estate, while exports and imports are also struggling as demand fell in overseas markets. Youth unemployment has gotten so bad that Beijing has simply stopped reporting it. Foreign investment has plummeted as investors have pulled billions out of China. Still, China’s manufacturing sector is showing some signs of improvement, as is retail sales. While low by their standards and targets, China’s year to date growth of 5% is outstanding compared to its peers. Beijing is rolling out supportive policies to boost growth, which combined with further rate cuts could generate a glimmer of stabilization and momentum to boost growth in 2024.

India is poised to become the world’s most populous country with nearly 80% of its population younger than 50. The country is politically stable and has made economic development its top priority. Corporate confidence is high, the economy is expanding at a decent clip, and technological innovation is leading to new areas of growth. The fundamental outlook for India is arguably better than ever. The country has a lot going for it: it is one of the world’s fastest growing, inflation is under control, the government has been fiscally responsible, and corruption is lower than it was a decade ago.

Latin America, principally Brazil and Mexico, has greatly improved on the back of nearshoring trends and an increase in foreign direct investment as companies adjust their global supply chain strategies. They are doing very well both cyclically and structurally and should continue to deliver strong returns. However, political developments may create a broader threat to the region. Argentina’s newly elected government plans very painful measures to combat 45% poverty and 200% inflation. The Argentine peso is overvalued so it is devaluing the currency by 50%, cutting energy subsidies, cancelling tenders of public works, and slashing the size of government to cut the fiscal deficit. The economy is likely already in a recession and is expected to contract further next year.

The outlook for Emerging Asia will be further strengthened by climbing commodity prices improving Indonesia’s growth prospects. Eastern Europe, where central banks pursued some of the most aggressive rate hikes over the past three years due to higher inflation than the rest of Europe, appears to be turning the corner. New governments in Poland and Hungary have sparked dramatic stock rallies across the region.

Emerging market stocks were having an abysmal year until the fourth quarter when stocks gained 7.9% (all figures are in U.S. dollar terms). This led to positive annual gains of a 10.3% return but on a relative basis they trailed all other regions. Chinese equities fell 4.2% in the fourth quarter and was down 11.0% for the year. They were the main culprit for the sectors moderate returns. Asian stocks excluding China gained 13.1% in the quarter and 20.6% for the year. Latin American stocks surged 17.8% in the quarter and climbed 33.5% in 2023. Eastern European stocks leaped 29.2% in the final quarter and 48.7% for the year.

Emerging market stocks just had their best month since early 2023 but there are major pitfalls ahead that could derail the rally. Yet, while numerous headwinds exist, there are a growing number of catalysts that are leading to heightened optimism, including the end of the tightening credit cycle and positive earnings growth. Investors searching for superior returns should buy in to the diversification offered by emerging market economies.


The fourth quarter saw a rapid increase in the value of the global REIT market as central banks appeared to signal the end of their aggressive pace of rate tightening. In Canada, REITs bounced back with a 9.2% return for the quarter while global REITs posted 12.9% (in Canadian dollar terms), driven by a sharp downward trajectory of bond yields that started in October. Year to date, Canadian REITs were more subdued, gaining 2.6% versus a comfortable 9% for the S&P Global REIT index. Momentum at year end seems to indicate that the headwinds for the sector over the past 18 months have considerably abated.

As 2023 drew to a close, the technical indicators of reversal in the REITs sector were undoubtedly a positive development. However, lingering high financing costs on the backdrop of higher rates continue to represent a major impediment to the sector’s recovery. The average financing rate for Canadian publicly traded REITs has been around 4%. As rates spiked in the last few months, many mortgages were renewed at higher rates, adding more pressure to REIT cash flows, but the likelihood of a widespread credit crunch appears low. Some analysts estimate that more than 80% of Canadian REITs are structured on a fixed rate terms along with above average liquidity ratios. The U.S. public REITs have not been insulated from higher rates and are now facing more stringent underwriting standards, despite carrying lower leverage ratios at 30.6% along with strong balance sheets.

Compared to other global markets, the North American office sector was the most in distress. In Canada, the office vacancy rate is still high at 18% and some Canadian office landlords estimate that 30% of office buildings in bigger cities such as Toronto are obsolete. The glut of empty U.S. offices has yet to reverse significantly, with 20% of offices vacant; a 20 year high. Conversely, other segments such as residential and industrial REITs are showing resiliency with less investor capital on the sidelines. The Canadian residential segment, for instance, has been emboldened by high levels of migration. Canada added more than one million people within a year as of July 2023, a growth rate ahead of all G7 countries, and at the same time has recorded the least amount of housing per capita versus its peers. That changing demographic has put a strain on the country’s rental market with average rents at all time highs. The industrial segment in Canada has seen a run up in valuations from a year ago resulting in an unprecedented capitalization rate compression. Year to date, the segment has begun to lose steam slightly with an increased availability of industrial space. However, the overall segment fundamentals remain steady and positive.

As the Bank of Canada (BOC) and central banks around the globe get close to the end of the tightening cycle, global REITs should increasingly find their support level. Although the sector has now been facing competition from other income producing assets such as bonds for the first time in fifteen years, it does offer attractive entry points. For example, Canadian REITs have seen investors on the sidelines,. causing a deeper discount of the average NAV (Net Asset Value) than the level experienced during the last global financial crisis. However, the balance sheets and key fundamentals ratios for Canadian REITs are far from distressed levels. Canadian REITs appear well positioned to potentially outperform the broader market two years on from the first BoC interest rate hike this cycle.

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