Always a crowd favourite, our “12 Themes of 2023” came out nearly a year ago. Similar to last year we thought it would be an interesting exercise to go back and look at the potential themes we identified and see how the predictions turned out. With the benefit of hindsight, we will be giving each theme a grade (completely arbitrary) based on the relevance and the accuracy with respect to what has transpired over the past 12 months. Keep your eyes open for our 2024 themes which will be published soon!
1. Attractive Risk Reward in Shorter Dated Investment Grade Fixed Income
While not doing as well on an absolute basis as the equity piece of our portfolios, our Kipling Strategic Income Fund has had a fantastic 2023. In the first ten months of the year, the portfolio is up 5.5%. While a very strong return thus far perhaps the more impressive feat is that the fund has only had one negative month so far this year posting a -0.47% return in March. Compare that to a longer duration fixed income proxy (VAB ETF) which for the first ten months of the year is down 1.1% with 5 of those months posting negative returns.
2. Book a Cruise for Fun Not as a Debt Investment
Cruise lines from a financial aspect have had an exceptionally difficult start to the 2020’s with a once in a lifetime pandemic to navigate and a strong worry about the purchasing power of the end consumer. While all of this is still true, 2023 (so far) has been very profitable for those that were willing to buy the cruise line bonds. There were a number of debt instruments that had very strong 2023 performance and were up over 20%. While still too spicy a meatball for this grader to invest in, it appears that the risk those bond investors took at the beginning of the year led to relatively strong gains. Bonus points though for the creativity with this prediction even if it wasn’t the most accurate.
3. Thematic ETFs make a roaring ‘20s Comeback
A bit of a mixed bag for thematic ETFs as a whole but the poster child for Thematic ETFs (ARKK-US) has had a strong year and is up 33.09% year to date (as of writing this). Still down nearly 75% from 2021 highs, ARKK has had a strong year outperforming most broader market indices. The entire space has had some trouble as many of the major Health Care and Financial related thematic ETFs were negative on the year hence weighing negatively on our grading of this theme.
4. Volatility Continues in Unusual Places
This by and large has been true especially in the government bond market. Interest rates have continued their volatile ways and in the 2023 calendar year we have seen the US 10-year yield bounce around from 3.8% to start the year with a low of 3.25% in April and a high of just over 5% in October with current yields now at 4.4%. The main measure for volatility amongst interest rates is the MOVE index which has averaged 122.28 throughout the year. For comparison in the 5-year period from 2017-2021 the MOVE index averaged 58.98 indicating that this year has seen interest rates twice as volatile as normal. Currency, while not as extreme, has kept its volatility higher this year too. The DXY which measures a basket of global currencies against the USD started the year at 103.39 and is currently at 103.9. While on the onset that doesn’t seem like much volatility, the intra year swings have seen hit a low of 99.9 in July and a high of 107.5 in October. Again, reading the volatility indexes associated with the DXY 2023 has averaged an implied volatility measure of 8.02 with a comparable 5-year average volatility from 2017-2021 of 7.16.
5. Commodities do not 3-peat
Of the major asset classes we follow, commodities as a whole have had the worst absolute performance in 2023. By and large the darling asset class of 2022, the year began with numerous articles of “why you need commodity exposure in your portfolio” and many experts were calling for the commodity bull market to continue. It appears that while the world has avoided imminent recession concerns, commodities have still struggled in 2023. The Bloomberg Commodity index had an absolute return of -9.5% in USD year to date. For comparison’s sake the MSCI all world index is up 17.6% as of this writing which equates to an underperformance of 27.11%.
6. Labour Markets will Remain Tight in the Short Term
While labour markets are still tight in the US, they are not as tight as they were at the beginning of 2023. For the first 10 months of 2023 the US had seen 2,388,000 net new jobs created implying a still healthy job market. Participation rates have gone up as well starting the year at 62.3% and as of October that number is 62.7% still down form pre-pandemic levels but moving in the right direction. The unemployment rate has actually gone up slightly starting the year at 3.5% moving to 3.9%. The employee cost index (a common measure of wage inflation) has actually eased from 5.1% at the beginning of the year to 4.3% in September. While still tight in a historic sense there does appear to be some easing of labour conditions that have transpired over 2023.
7. Debt Servicing to Remain at Attainable Levels, Although Higher than we have seen in the Last Couple Years
Although things could change in the coming years, the reality is that the death of the US consumer has been wildly overstated. From a balance sheet perspective, the consumer is actually in fine shape as debt payments as a percentage of disposable personal income remains below 45-year averages. Currently at 9.9%, the story we saw in the 2010s about a strong US consumer still appears to be going on.
8. The Rumours of Software’s Death has been Greatly Exaggerated-Software will outperform the S&P 500
Software absolutely ripped in 2023 outpacing the S&P 500 by 37.5% as of this writing. Much has been made about the lack of market breadth in 2023 as sector selection has been key as a major portion of the S&P 500’s performance has been driven by these technology darlings. While software has had an unbelievable year, it has trailed two other sub sectors; semi conductors and media/entertainment. Therefore, this doesn’t allow us to give this prediction the coveted A+ grade.
9. The Economy is not the market-never overstay your bearish welcome-US markets are strongly up in 2023 >10%
Getting a little picky maybe with the grading (show your work!) but not all US markets are up strongly so far this year. The main tech heavy indexes, which the majority of investors follow, the S&P 500 and the Nasdaq as of this writing are up 18.7% and 36.3% in USD respectively. Lesser followed indexes though are not having nearly as strong a year. The Dow Jones Industrial Average is only up 6.4% and the Russell 2000 (US Small Cap) is only up 1.95% as of this writing. Even worse US Micro-Cap index is actually down 7.1% on the year.
10. 3 Mile Island, Chernobyl, Fukishima. Why Nuclear?
You have to go a few paragraphs in to actually understand the prediction but, essentially, it was have some exposure to nuclear energy in the portfolio. This theme has been an absolute home run for investors over the last few years regardless of how you get the exposure. Our favorite way to get the exposure by owning shares in Cameco Corp has yielded a return of 102.4%, but even owning the actual commodity has proven to be a positive return seen with units of Sprott’s Physical Uranium Trust up 64.1% on the year. With the space up so much on the year why only an A? Marks were docked for not having a clear concise prediction.
11. This is not your grandfathers pivot-No rate cuts for 2023
To reiterate the bond market by the end of 2022 was pricing in an 86.7% chance that we would see at least one cut in 2023. We were on the opposite side of the fence saying that current rhetoric would lead us to see no cuts in 2023. While this alone was dead accurate, we do get some marks docked as the contributor of this prediction is the overall grader of everyone’s predictions. While there was an accurate call for no cuts in 2023 the author of this prediction also did not see 6 hikes in 2023. Trying to keep the integrity of this grading system I cannot in good conscience give this prediction an A+.
12. Coming Home NA manufacturing will move from “Just-in-time” to “Just-in-case”
This is definitely a theme that has been quietly happening since 2014 (a deglobalization/protectionism movement) but I’m not sure the author of this prediction overly understood the assignment. There has been a continued onshoring effort a theme like this is going to take much longer than 12 months to play out.
13. Bitcoin-still the king of crypto(bonus)
This prediction is missing detail in regards to specific prediction other than “bitcoin will go up”. First we’ll look at the positive as of this writing the price of the coin is hovering just under $38,000 USD representing an increase of 128%. The negative though is that marks are docked for not completely showing our work with a prediction of “Bitcoin will be up X”.
Overall Grade: A-
Our second year in a row with an arbitrary grade of A- albeit we are currently ignoring the grade on prediction 12. With the themes and narrative of 2023 being much different than 2022 coming in with an honour roll grade is something we’re quite pleased with. Thank you to those clients that have entrusted us with their hard-earned wealth. Keep your eyes peeled for our 12 themes of 2024 piece which should be published in the upcoming weeks.
All the best.