The equity rally continued in December. The MSCI All-Country World Equity index advanced 4,7% (in USD) for the month and finished 2023 with a return of more than 20%, exceeding most full-year expectations. Markets were buoyed by rising hopes that interest rates would be lowered in 2024, as favorable inflation data and slowing economic growth might soften central banks’ tight monetary policies. The rally broadened as smaller cap stocks outperformed their large cap counterparts, although in the USA the best performing major index again was the tech-heavy Nasdaq, which closed the month 5,5% higher. China continued to weigh on emerging markets performance, recording a 2,4% monthly loss – debt and real estate restructuring, youth unemployment, and business sanctions influence investor sentiment. Middle East markets also lagged as oil prices fell again in December. Gold, however, appreciated and finished the year with a 13,5% price rise (in USD). Commodities, as a whole, sent off a bad year, in contrast to their exciting performance last year (2022). Investors’ renewed appetite for risk meant that cyclical sectors like real estate, industrials, and materials outperformed in December, while energy, consumer staples, and communication services fell behind. The growing enthusiasm that central bankers might cut interest rates sooner in 2024 than previously expected resulted in a broad rally among (almost) all asset classes. Fixed income markets were positive across the board – government bonds delivered strong returns, helped by expectations of early central bank cuts, tightening debt spreads and a weakening US dollar.
           In the US, equity returns for the full year were dominated by the “Magnificent 7” stocks (AAPL, AMZN, GOOGL, META, MSFT, NVDA, TSLA), which contributed around 80% of the broad S&P500 index returns. However, during the last quarter, the rally broadened to other sectors – up to 1/3 of all companies in the index reached 52-week highs in December. Headline inflation increased from 3.1% to 3.4% in December, while The Federal Reserve’s (Fed) preferred measure, core inflation, declined from 4.0% to 3.9%. Within core components, core goods prices remained flat, while there was an increase in core services and shelter inflation. Consumer spending remains healthy (4% increase on annual basis), while the labor market keeps adding an impressive number of jobs - alleviating fears of a deep and prolonged recession. Nonetheless, signs of weakness are emerging. Job openings are trending lower and producer confidence indicators have deteriorated (especially in services). The data reinforced market expectations that the Fed has finished its rate hiking cycle and will move towards cuts in 2024, thus fueling the strong rally in US shares. Top performing sectors were those most sensitive to interest rates - real estate and consumer discretionary, along with information technology. The energy sector posted a negative return with crude oil and natural gas prices dropping. The yield on the benchmark 10-year U.S. Treasury note decreased 49 basis points (meaning that its price rose), providing a general uplift to the fixed income markets. Riskier debt, like corporate and securitized bonds, especially mortgage-backed securities, outperformed.
           European equities also delivered strong returns – the broad pan-European index STOXX 600 added 3,8% in December, and finished 12,7% higher for the year.  Major indexes in Germany, Italy, France, and the Netherlands also rose sharply. The UK stocks lagged, however, due to a combination of higher exposure to underperforming energy stocks and currency strength, ending the year weakly (less than 4% return). On the inflation front, the favorable news extended into Europe with data coming in below expectations. Euro area inflation fell to 2.4% in November (from 2.9%) – a year earlier, the annual inflation rate was 10.1%! The ECB kept its benchmark rate unchanged in December at 4.0%, its highest level ever. The Eurozone purchasing managers’ index (PMI) fell to 47.0 in December (reading below 50 indicates contraction) signaling a pessimistic growth outlook. Most sectors rose amid optimism over future rate cuts - real estate (amid  the prospect of a cheaper cost of debt); IT stocks, industrials and materials aslo registered strong gains. By contrast, the energy sector fell amid weaker oil prices. The hopes for an early rate cut caused European governments bond yields to drop to their lowest levels in a year (meaning that their prices rose). The yield on the 10-year German Bund ended the month around 2.0%, after breaking briefly even below that level.
           The month of December also brought a tailwind to the sails of domestic investors. The indices of the Bulgarian Stock Exchange turned green: the representative SOFIX rose by 2.5% for the month and ended with an annual return of over 27%, and the broad BGBX40 index - by 0.5% for the month and ended with a "more modest" 13.4% for the year. During the month, the first successful initial public offering of bonds on a regulated market of the BSE was completed, with the amount raised exceeding EUR 20 million. For the month, the best performer among Bulgarian companies was the technology company Shelly Group AD (formerly Alterco AD), whose price rose by 16%, and the worst - the pharmaceutical giant Sopharma AD, whose share fell by 8%. Shelly Group is also the best performing local stock of the year, up nearly 130%.