How fund manager predictions fared in 2023 – and forecasts for next year

It’s the time of the year when investment management firms release their outlooks for markets over the next 12 months. 

But how useful are they really when making investment decisions, and did last year’s biggest calls turn out to be correct? 

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To start, we look at what fund groups forecasted would happen in 2023 and assess how successful their predictions were. 

Then, we delve into what they expect to happen in 2024, covering the outlook for different parts of the stock market and bonds.  

What the experts predicted for 2023 

Legal & General Investment Management's (LGIM) head of investment strategy and research Ben Bennett was negative on equities because he thought profits would fall due to tough macroeconomic conditions. 

He said labour costs were rising and even a mild recession would lead to a sharp drop in company profits.  

“If we see a 20-25% decline in S&P 500 profits, then past relationships suggest the index could also fall by 20%,” he said. 

He reckoned that the S&P 500 could drop to 3,000 points, 21% below its end of December 2022 level, and that would be a good entry point for investing more in shares again.  

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LGIM’s chief investment officer Sonja Laud added that bonds should do well during the year, especially given the greater income they offered investors.  

Morgan Stanley said emerging market and Japanese shares were its top stock market picks for 2023, with the investment bank also saying that US stocks would continue to lag international peers. 

Its justification was that valuations were cheap in these markets, while US shares were expensive, and therefore likely to underperform. It predicted 12% gains for the MSCI Emerging Markets index in 2023.  

AXA Investment Management’s chief investment officer Chris Iggo said a peak in inflation, a plateauing of interest rates and China re-opening could send equities higher in 2023. Iggo also liked bonds for 2023, arguing that short-maturity corporate bonds could perform well, as well as high yield. 

Invesco put emerging market and Asian stocks as one of its biggest tips for 2023 because it said they were insulated from many of the economic challenges the West was facing. Invesco also liked UK shares, stating that they offer “significant value”. 

Generally, the consensus was that US shares would perform poorly and cheaper investment markets, such as emerging markets, the UK and in particular China, which was just breaking free from Covid restrictions, would perform best.  

What actually happened?  

Any fund manager betting against the US had a very difficult year. Thanks to excitement around artificial intelligence (AI), the S&P 500 index, which is packed with leading technology shares, rose around 25% in dollar terms in 2023, or 20% in sterling.   

Its biggest (and often most expensive) companies grew even larger, with the likes of NVIDIA Corp (NASDAQ:NVDA), Meta Platforms Inc Class A (NASDAQ:META) and Tesla Inc (NASDAQ:TSLA) more than doubling in value over the course of the year.  

The success of the US stock market pushed up global shares as well, punishing investors who took the view that the stock market would not deliver in 2023 due to pressures associated with rising inflation and interest rates. The MSCI World index in sterling rose around 19%.  

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Technology caught investors’ imagination and central banks signalled in the autumn that interest rates had peaked, and inflation dropped to below 4% across the developed world.  

UK shares struggled, despite being “cheap”. The FTSE All-Share Index rose just 2%, but with dividends reinvested the returns were around 7%. Smaller UK companies did not perform well, as investors worried about the health of the UK economy.  

The FTSE 250, which tracks the 101st to 350th largest listed companies in the UK rose a similar amount to the All-Share index, but was down around 8% at the end of October. A sharp rally in smaller companies took place due to expectations for interest rate cuts in spring 2024.  

Emerging markets had a challenging year, dragged down by Chinese shares, even though investors expected the developing world to perform well this year.  

The MSCI Emerging Markets index rose just 1.5%, with Chinese shares, as measured by the MSCI China index, dropping 17%.  

Another hot tip for 2023 was the bond market – but a new bond bull run failed to materialise, at least not until November. 

Over the year, a portfolio of gilts returned 4%, with income reinvested, while a global bond portfolio was flat. Until the end of October, these markets were down around 5%, but then better than expected inflation prints led to a big bond market rally, which would have been a big relief for investors who went overweight the asset class at the beginning of the year.  

What about 2024? 

After an unexpectedly strong year for markets, what are the professionals forecasting for 2024? 

In contrast to the end of 2022, investors are very optimistic that that stock and bond markets will rally because the worst of the inflation has been defeated and a “soft landing” has been engineered by central banks.  

Vanguard says that “bonds are back” and it now expects US bonds to return a nominal annualised 4.8%–5.8% over the next decade, compared with the 1.5%–2.5% it expected before the rate-hiking cycle began. 

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For international bonds, it expects annualised returns of 4.7%–5.7% over the next decade, compared with a forecast of 1.3%–2.3% when rates were low or, in some cases, negative. 

But it is not so positive on equities. It says that “valuations” are most stretched in the US and as a result it has downgraded its US equity return expectations to an annualised 4.2%–6.2% over the next 10 years, from 4.4%–6.4% heading into 2023. 

LGIM’s head of asset allocation Emiel van den Heiligenberg says that concentrated returns from just a handful of shares will not continue next year – and so investors should look to diversify portfolios.  

He said: “Will this outperformance of equities over diversified strategies continue in 2024? We don’t think so. First, cyclical pains are being delayed, not postponed indefinitely. On the contrary, we believe a recession in 2024 is likely.  

“We expect lower yields in 2024, so look for bonds to outperform cash. But even if we see a sideways move, healthy bonds yields should provide a positive return.” 

Invesco sees the greatest potential in emerging markets, although it also says developed market equities outside the US also appear attractive. 

The fund group said: “We anticipate that value, cyclical and small-cap stocks will outperform. In terms of sectors, we prefer consumer discretionary and technology. Consumer discretionary is closely correlated with the economic cycle, and so an economic recovery would likely be positive for this sector, especially since consumers are benefiting from low unemployment. 

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“We believe that as rates come down, earnings multiples for technology stocks may see a boost.” 

Schroders says that a “reset” is due in markets and the technology stocks that have led for the past decade will stall and so investors need to “change their mindset”.  

“This involves more diversification across regions (less US, more of the rest of the world), more focus on the implications of structural change, and renewed attention to valuation, quality and risk.” 

Federated Hermes’ head of US equities Mark Sherlock prefers small and mid-sized US shares to larger ones due to it being an election year in the US.  

He said: “Since President Hoover’s last year in office in 1932, the S&P 500 has gained an average of 6.5% in an election year. While the Russell 2500 Index doesn’t have data as far back as the Hoover administration, US small- and mid-caps have beaten the return of US large-caps in every election year.”