Market review 2023 and market outlook 2024

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Market review 2023 and market outlook 2024

After a challenging and – at times – almost turbulent year in 2022, the end of 2023 heralded virtual euphoria from an investor perspective. What does that mean for pension funds, and what developments can be expected for 2024? Three experts give their opinions.
Thomas Liebi, Markus Leuthard & Sébastien Dirren

Review of 2023

How would you summarize the year on the financial markets?

Sébastien Dirren: In short, 2023 can be described as the mirror image of 2022, since all the negative trends of the previous year reversed. Throughout the world, the market and the mood of investors were influenced primarily by the efforts of central banks to combat inflation. Following further interest rate hikes, central banks took a break – and this resulted in euphoria on the market in the final quarter. In contrast to the "perfect storm" of 2022, bonds, loans and shares saw considerable growth in 2023. The strong growth in the value of shares was enough to compensate for the losses of 2022. The Swiss franc also saw a large increase in value. This reduced inflationary pressure but also lowered returns from foreign investments.

What impact did these general conditions have on the portfolio and the preferences of pension funds?

Sébastien Dirren: First, the investment strategies of pension funds  have a long-term focus to enable them to fulfill their obligations in the long term too. For this reason, their investment preferences should vary only marginally from one year to the next. In 2022, most pension funds suffered strong losses with respect to both shares and bonds. This was due to the normalization of interest rates, which meant that some of the excessive returns of recent years had to be repaid. This also impacted coverage ratios.

As a result, pension funds focused on three topics in 2023: First, it was important to stabilize the coverage ratio after a bad year – this was particularly important for pension funds with few private market investments. Second, illiquidity in the portfolio increased – the so-called denominator effect. In this respect, pension funds had the option of either waiting it out or of selling investments at an unfavorable price. Third, pension funds once again invested more heavily in bonds, an asset class considered unattractive for a long time.

Which economic challenges kept the Vita Collective Foundation particularly busy?

Markus Leuthard: The general economic situation preoccupies us greatly. Market strategists predicted that the economy would cool down in the second half of 2023, in connection with initial interest rate reductions. Yet things worked out very differently: In the United States in particular, the economy is proving very robust. Inflation has already lessened, but a reduction in interest rates by the central bank cannot be expected until 2024. Either way, we are prepared for economic challenges such as these. Our organization is well positioned, and we have set up the necessary processes.

2023 was a much more stable investment year than 2022. How did this impact the Vita Collective Foundation? How did it benefit the insured?

Markus Leuthard: We were able to take advantage of positive stock markets and falling interest rates for bonds, which led to a solid return for the overall portfolio of the Vita Collective Foundation. Net performance for 2023 provisionally stands at 5.7 percent. This good result also benefits our insured; they receive additional interest.

How has the inflation rate developed over recent months, and what impact did this have on the markets and on pension funds?

Sébastien Dirren: High inflation played a substantial role in market development over the past two years. Central banks responded to it with aggressive interest rate hikes. This created an almost turbulent situation at times. Yet during the course of 2023, the actions of central banks took effect, and inflation decreased again considerably. Energy prices also dropped noticeably. Likewise, many supply bottlenecks that had arisen as a result of COVID-19 were able to be rectified. This meant that the situation generally relaxed. In Switzerland, the state of affairs is less dramatic in any case, since the country benefits from its economic stability. Switzerland's strong currency also contributed to reducing import prices and dampening inflation.

What has been the impact of inflation on the investments of the Vita Collective Foundation – and how are insured persons and retired persons affected?

Markus Leuthard: When inflation arises unexpectedly, as was the case in 2022, shares and bonds fall in value. The law states that all pension funds must accumulate a fluctuation reserve. These compensate for losses in value due to unfavorable developments on the capital markets. Our fluctuation reserve was fully funded at the end of 2021. This was a helpful cushion for the demanding investment year of 2022. The insured were impacted in so far as we were unable to grant any additional interest due to the low coverage ratio. Such fluctuations are of no concern for retired persons – they have a guaranteed pension. In 2023, the markets had already adapted to inflation, which meant that it had less impact and share prices were able to recover again.

In recent years, the historically low capital market interest rates posed a certain challenge for the investment of new funds. How have interest rates changed in the last few months, and how has this influenced pension fund investments?

Sébastien Dirren: In 2023, short-term interest rates rose, driven by central banks, while long-term interest rates fell, driven by the expectations of market participants. The effects on different asset classes are very specific. Investments listed on the stock exchange, so shares and bonds, experienced considerable corrections in 2022 and rose markedly in 2023. By contrast, private market investments remained stable initially and then corrected slightly. This meant that pension funds with a higher proportion of private market investments were able to generate more stable returns and boasted a higher coverage ratio.

What are the consequences of the interest rate turnaround for people insured with the Vita Collective Foundation?

Markus Leuthard: The insured will benefit from interest rates that remain high in the long term. The expected return will increase, which will result in a higher coverage ratio. Additional interest will rise accordingly.

Which investment products are particularly promising in the current market environment? Which will gain in significance further in 2024?

Sébastien Dirren: The stock market closed the year 2023 in a euphoric mood thanks to full employment, moderate economic growth, lower energy prices, and falling inflation and interest rates. It is unclear whether this perfect scenario can be sustained.

In general, 2022 and 2023 showed that pension fund portfolios are heavily dependent on equities. Private market investments can play an important role as stabilizers. Their benefit lies in the fact that the valuations of such investments are balanced out and that they grant broader access to risk premiums, which should result in greater stability and higher return expectations. Private market investments also enable better protection against inflation, for example through infrastructure, real estate or private debt.
Another challenge when investing in shares is that indices are highly concentrated in some cases: For instance, performance in the United States in 2023 was largely driven by seven particularly successful stocks, the so-called "magnificent seven." These included technology shares such as NVIDIA and Meta (Facebook). In such situations, private equity can ensure the diversification and stabilization of the portfolio thanks to the considerably broader universe of non-listed companies. Following the interest rate rises of the last two years – an increase of +2.75 and +0.85 percent for short-term and long-term interest rates respectively – there is no doubt that Swiss bonds have become more attractive. However, the current interest rate level of 0.9 percent for ten-year government bonds remains relatively low and is therefore only moderately interesting for investment purposes. While interest rates in the United States and the EU are much more attractive, the costs of currency hedging are currently extremely high.

Outlook for 2024

What other factors will influence 2024 as an investment year from the macroeconomic side?

Thomas Liebi: The flip side of falling inflation rates and less aggressive central banks is weakening economic growth, which affects investor behavior in turn. Whether the soft landing that the markets currently expect actually occurs in the U.S. economy will be crucial. Historical experience shows that this is rarely the case. Monetary policy always takes effect with a delay, and central banks will want to ensure that inflation rates are falling sustainably before supporting the economy with substantial interest rate reductions.

If you look at the different markets, where do you see particular opportunities for 2024?

Thomas Liebi: Although global interest rates on the capital markets have fallen somewhat in recent months once again, government bonds continue to offer an attractive return. This is particularly true if inflation rates drop further in line with our expectations. By contrast, the additional return currently seen for corporate bonds scarcely compensates for the higher risk, particularly as we expect that global economic growth will weaken further in the coming months. Accordingly, this investment category does not appear attractive to us at present. Shares are likewise susceptible to setbacks in the event of an economic slowdown, particularly after the strong price increases in the past year. However, their valuations do not appear exorbitant as yet, and the expected interest rate reductions by central banks should give the stock markets upward momentum.

The subject of artificial intelligence – AI – dominated public debate in 2023. How considerable are the effects on the financial markets – and what other innovations might shape the markets in 2024?

Thomas Liebi: The topic of AI will continue to preoccupy the financial markets in 2024. Following the initial euphoria, concrete applications will also increasingly find their way to a growing number of users. For instance, Microsoft is equipping the Windows operating system and Office applications with artificial intelligence. This will make the potential of AI accessible to a broader range of the population. In addition, many states and institutions have announced extensive investments in this topic, which should further fuel investor expectations. More difficult to predict are long-awaited breakthroughs in other areas, for instance better performing batteries for electric vehicles or new trends in the health sector. As an example, drugs for the treatment of obesity from Eli Lilly and Novo Nordisk have fired the imagination of investors over the past year.

What impact will geopolitical issues and legal changes have on the markets?

Thomas Liebi: Geopolitical issues should be high up many investors' priority lists in 2024. The ongoing war in Ukraine, the tensions in the Middle East and the difficult relationship between China and the United States may affect investor sentiment. In this context, significant fluctuations in shares, bonds and commodities would be no surprise. Elections will also take place in many countries in 2024. They may also have a huge influence on the mood on the financial markets and the regulatory environment, particularly the U.S. presidential elections in November.


What is your personal recommendation for pension fund managers: What strategies should they choose and what measures do they need to take to remain successful in the current and future market environment?

Thomas Liebi: The long investment horizon is a huge benefit for pension funds, which should not allow themselves to be unsettled by short-term fluctuations. Regular rebalancing to bring the current positioning back in line with the investment strategy encourages anticyclical behavior. In this way, a pension fund can benefit in the longer term from the market fluctuations to be expected.

Markus Leuthard: The new starting position with positive interest rates requires a reassessment of the investment strategy. During the period of low interest rates, many pension funds increased their risk budget. This is evident, for example, in additional risks in the bond portfolio. Action is needed here: I definitely consider an analysis sensible in this respect.

Sébastien Dirren: Long-term investment requires a long-term approach, and so my advice for 2024 remains the same as for 2023: Ignore those who give short-term pieces of advice for 2024, and expand your investment horizon and the investment universe. This will enable you to more broadly diversify your portfolio and to focus optimally on the next cycle.

Thomas Liebi
Head of US & UK Market Strategy at Zurich Insurance Company Ltd
Markus Leuthard
Chief Investment Officer (CIO) at the Vita Collective Foundation
Sébastien Dirren
Chief Investment Officer (CIO) at Zurich Invest Ltd

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Zurich Invest Ltd, as manager of the Zurich Investment Foundation, manages the capital investments of the Vita Collective Foundation as well as the Zurich Insurance Group's own pension fund in Switzerland and many other pension funds. With managed assets of over 22 billion Swiss francs, the Zurich Investment Foundation is the country's largest non-bank investment fund and thus an important provider in the Swiss market for institutional investors. Zurich Invest Ltd selects the best products and partners for each asset class. This clearly structured and independent investment management process demonstrably delivers impressive performance values that are higher than the benchmark indices.

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