2024 - A soft landing on the horizon?

2023 will soon be history. It has been another turbulent year, with several major crises, high inflation and a sharp rise in interest rates. Most people have become less well-off. Despite this, returns have been good. The equity portfolio is up more than 20 per cent, and a balanced portfolio of equities and fixed income has risen more than half of this.

Strong returns caused by weaker macro figures

The main drivers behind this year's returns are the development in interest rates and inflation, as well as optimism about artificial intelligence. Central banks have raised key interest rates to levels not seen since before the financial crisis in an attempt to bring inflation under control. Market interest rates rose significantly, resulting in price losses in bonds with longer maturities/durations.

Macro statistics in November provided further indications that inflation is under control and on the way down. Market interest rates fell, reversing much of the earlier rise this year. Returns on bond funds so far this year have turned from negative to positive.

The best fixed income investments this year have been in credit, also known as high-yield bonds. High credit margins and few defaults have provided good returns in this asset class this year.

The Norwegian krone is having another bad year. The US dollar and the euro have both strengthened 12 per cent against the NOK. As the equity portfolio is not currency hedged, this contributes significantly to the year's return on international equities for a Norwegian investor.

The return on global equities measured by MSCI All Countries World is 17 per cent measured in local currency. The return on an equally weighted index of the same equity universe is 6 per cent. In other words, it is the largest companies that have risen, while the average share is more or less unchanged in value. Most of the year's return can actually be attributed to just 10 large US companies, 'The Magnificent 10', which together have risen by more than 80 per cent.

This year's price increase in the broad equity market has not been driven by growth in earnings per share, but almost exclusively by multiple expansion - higher Price to Earnings multiple. Shares in the MSCI World Index are now trading at 17 times expected earnings per share next year. The average over the past 20 years is a multiple of 15 times.