Private Investor's Diary: Stock market hangover was inevitable – but don't lose hope

It was a tremendous end to 2023 for equity and bond investors. Inflation on both sides of the Atlantic came in below expectations. Inflation falling more than expected led to increased optimism that interest rates would soon be on a downward path. Investors were not disabused of this notion by the chairman of the Federal Reserve. At the December meeting, Jerome Powell opened the way to three interest cuts in 2024. The market widely anticipated the first in March. Government bond yields fell dramatically. The US Treasury 10-year yield ended the year at 3.87 per cent. In late October, it hit a 16-year high of 5 per cent. It was a similar story in the UK, with the 10-year gilt yield falling to 3.58 per cent, peaking at 4.8 per cent. The 10-year bund yield in Germany dropped from 3 per cent to 2 per cent. 

Equities also rallied strongly. Small and mid-cap stocks led the way. The Russell 2000 in the US topped the list. It was up 11.8 per cent in December and 15.2 per cent in 2023. In the UK, the FTSE Small Cap was up 8.7 per cent, the FTSE 250 up 8.2 per cent, and the Aim All-Share was 7 per cent higher. The 4.5 per cent return for the FTSE All-Share (TR) Index in December was held back by its exposure to large-cap stocks, with the FTSE 100 up only 3.9 per cent. For the year as a whole, the All-Share was up 7.9 per cent on a total return basis. 

The US produced a phenomenal performance in 2023. The Nasdaq Composite rose 43.4 per cent. The 'Magnificent Seven' shares helped the index by producing extraordinary returns for such prominent companies. Apple (US:AAPL) was up 48 per cent, Microsoft (US:MSFT) 57 per cent, Alphabet (US:GOOG) 59 per cent, Amazon (US:AMZN) 80 per cent, Nvidia (US:NVDA) 238 per cent, Meta (US:META) 194 per cent and Tesla (US:TSLA) 102 per cent. Those seven stocks now account for more of the MSCI All Country World Index (made up of 3,000 stocks in 48 developed and emerging markets) than the combined weighting of Japan, the UK, China, France and almost all of Canada. There was more of less only one decision to make last year – those who did will have done very well. The S&P 500 was up 26.3 per cent in 2023.

Gold was up 1.3 per cent in December to $2,062 an oz, leading to a gain of 13.8 per cent for the year. The increase for a sterling-based investor was reduced to 5.5 per cent due to sterling strengthening against the US dollar.

In general, commodities had a good December. Lower interest rates should lead to increased economic activity. Platinum was up 8.2 per cent, Aluminium 7.8 per cent, zinc 7.1 per cent and copper 2 per cent. Oil dropped back to $77 per barrel, ending the month down 4.1 per cent and the year down 10.4 per cent. Top of the list over the year was bitcoin, which gained 153.4 per cent. 

Performance

A super performance from my portfolios salvaged my year. The JIC Portfolio was up 8.3 per cent. December was its sixth-best month on record. The portfolio still ended the year down 5.1 per cent compared with 7.9 per cent from the All-Share. It was not my worst year in absolute terms during the past 12 – that falls to 2018, when it was down 11.9 per cent. Neither was it the worst in relative terms – in 2016, my return was minus 4.1 per cent compared with a positive 16.8 per cent from the All-Share.

Investment is a long game, and although one would dearly like to avoid down years, it is unlikely. A good year in 2024 would be very welcome. The long-term record remains healthy – since its inception in January 2012, the JIC Portfolio has gained 307.8 per cent, equivalent to an annualised return of 12.4 per cent. By contrast, the FTSE All-Share is up 128.1 per cent on a total return basis, with an annualised gain of 7.1 per cent. Over five years to 31 December, the JIC is up 65.8 per cent versus 37.7 per cent for the Index.

The Funds Portfolio performed better than the JIC Portfolio in 2023. Over the month, it was up 5.7 per cent compared with a 4.1 per cent rise for the FTSE All-World (GBP, TR) Index. December's return moved it into positive territory for the year. It rose 0.9 per cent in 2023, although still some way behind the FTSE All-World, which gained 15.7 per cent. Since this portfolio's inception in June 2020, it is up 22.3 per cent compared with 38.8 per cent for the All-World.

All my 15 positions were up in December, and 11 beat the index. The best was Global X Copper Miners ETF (COPX), which rose 11.4 per cent, and the worst was Strategic Equity Capital (SEC), up 2.9 per cent. Over the year, the top investments I held throughout were Fundsmith Equity (GB00B4Q5X527), which rose 12.5 per cent, and Smithson (SSON), up 8.2 per cent. My exposure to commodities damaged my overall return. BlackRock Energy & Resources Income (BERI) was down 10.4 per cent (total return), and BlackRock World Mining (BRWM) was down 10 per cent. The other major detractor was BH Macro (BHMG), which fell 18.3 per cent.

In the JIC Portfolio, 16 of my 20 holdings beat the FTSE All-Share in December and 10 were ahead of the 8.2 per cent return of the FTSE 250. My portfolio is clearly geared to a recovery in mid and small-cap stocks. The big winner was Harbour Energy (HBR). It is more than doubling the size of the business by acquiring Wintershall Dea, a portfolio of exploration and production assets outside the UK North Sea. It buys the assets at a very attractive valuation, and they will immediately be accretive to cash flow. The investments are in Norway, Germany, Denmark, Argentina, Mexico, Egypt, Libya, and Algeria. As well as transforming its geographic diversification, it materially enhances production, reserve life and margins. The share price was up 35 per cent in December.

Other big movers were Bloomsbury Publishing (BMY), which rose 13.3 per cent following an unscheduled but welcome trading update. It said that, in the current year ending 29 February, it expected turnover to be comfortably ahead of expectations and profits materially ahead. I take "comfortably" to mean around 5 per cent and "materially" to represent 10 per cent. The consumer division is trading "exceptionally" strongly, with Sarah J Maas's books proving popular.

Other positions rising more than 10 per cent were Ecora Resources (ECOR), up 12.6 per cent, IG Group (IGG), up 11.9 per cent, Sylvania Platinum (SLP), up 11.6 per cent, PayPoint (PAY), up 10.5 per cent, Bioventix (BVXP), up 10.3 per cent and Shoe Zone (SHOE), which rose by 10 per cent. There was no news from any of those companies – they benefited from a recovery in the stock market.

One position spoiled the party. Me Group International (MEGP) was down 2.2 per cent in December. A trading update for its year ended 31 October said the company "expects to have delivered a record financial performance for the year, despite some operational challenges within its Feed.Me division". It expects revenue to be marginally below the lower end of previous guidance, but profits towards the top end. The market focused on the shortfall in sales rather than profitability and cash flow. The result is that, at 126p, the market values the shares at only 9.7 times October 2023 forecast earnings, 13.3 times free cash flow and on a dividend yield of 5.3 per cent. Results are due in March, but that seems a bargain for a company with such a solid international franchise of PhotoMe machines, allowing it to achieve a return on capital of 28 per cent. 

Over the year, the big winners were NIOX (NIOX), rising 90.4 per cent (what an idiot I was reducing my position in April - thank goodness I didn't sell the lot!), and Renew Holdings (RNWH), up 19.7 per cent. I added three new positions in January and February last year – Shoe Zone, Me Group and IG Design (IGR). Up to 31 December, they had returned me 12 per cent, 8 per cent and -2 per cent, respectively. The money to acquire those positions predominantly came from my sales of IOG and Somero Enterprises (SOM) in January. I realised losses on both sales – in the case of IOG, the most significant loss in the 12 years of the JIC Portfolio. It knocked nearly 3 per cent off my performance. Had I not sold, it would have cost me another 1 per cent off the value of the portfolio with it going into administration in September – hardly my proudest moment. The sale of Somero was also worthwhile, with it down 18 per cent on my sale price, despite a strong recovery in December. 

Long-standing favourite Bioventix was up 11.6 per cent over the year. As with the funds portfolio, the real damage came from my exposure to commodities. Ecora Resources was down 29.9 per cent, Sylvania Platinum fell 18.1 per cent, Serica Energy (SQZ) dropped 11.4 per cent, BlackRock World Mining 10 per cent, and Glencore (GLEN) 7 per cent. Harbour Energy was the only one of my commodity positions in positive territory. It was up 7.7 per cent over the year due to the 35 per cent appreciation in December. Without that, it would have competed with Ecora at the bottom of the pile.

Dividend update

The final 2023 dividend income tally was £35,809, up 15.1 per cent on 2022's £31,104. Based on last year's income, the JIC Portfolio starts 2024 with a dividend yield of 5.8 per cent. Forecasts point to a 5 per cent or so increase in the dividend income from the current portfolio this year. That should come in ahead of inflation. So far this year, a dividend income of £4,453 has been declared. RS Group (RS1) paid its dividend amounting to £214 on 5 January and Polar Capital (POLR) paid me £984 on 12 January. I should receive the remaining £3,255 in the coming weeks.

Lessons from 2023

It was a poor year for me, and while it is tempting to beat myself up, the 12-year record of 12.4 per cent per year is good. However, as a matter of good housekeeping, I should examine what lessons I should learn from 2023. In last month's outlook, I pondered whether I had been guilty of focusing too much on macro factors and not enough on bottom-up stockpicking. The conclusion must be yes. My exposure to commodity stocks, although helpful in 2022, was hugely detrimental in 2023. I had too much exposure to this theme. I allowed my belief in the positive drivers to influence my portfolio construction. I was also too obstinate to change course – perhaps because I had invested too much emotional capital in such a significant exposure. I intend to shift the balance back towards bottom-up stockpicking – in truth, I already have with purchases of stocks such as PayPoint, highlighted earlier.

In what is a perennial problem for me and many, if not most, investors, I must get better at cutting losses earlier. That IOG cost nearly 3 per cent off my portfolio value is frankly embarrassing. In May, I introduced "Falling Review Prices" for each stock—a price at which I had to review my position in the cold light of day. I had to develop an action plan – cut, hold, or add. I found the process helpful and will continue with it.

I also looked at earlier years of the JIC Portfolio. In addition to my UK stock positions, I used to have several investment trust holdings to gain exposure to overseas markets or themes. When I started the Funds Portfolio in July 2020, I reduced my investment trust exposure in the JIC Portfolio. That was an error, and over the long term, some exposure to investment trusts within the JIC Portfolio will enhance the risk/reward.

Outlook

A hangover was inevitable after the partying of December that saw fabulous returns from equities, bonds, and commodities. Markets started 2024 by giving back some of those gains. I remember well the start of 2016 when things were so bad it headlined the 10 o'clock news. The S&P 500 and the FTSE All-Share were off more than 10 per cent by mid-January before recovering. The FTSE All-Share ended 2016 up 16.8 per cent and the S&P up 9.5 per cent. The FTSE All-Share beating the S&P 500, who'd have thought. This is a long way of saying how the year starts does not necessarily foretell how it will end.

I continue to favour the UK, given the value on offer. I'm sure there will be further acquisitions as trade buyers and private equity swoop in to take advantage of cheap valuations and the seeming keenness of UK investors to give it away. As I write, Wincanton (WIN) has just announced it is being acquired by a French company, Ceva Logistics. It is paying 450p per share cash – a 50 per cent premium. The sad thing is that the premiums paid for UK companies are large, but in many cases, such as Wincanton, they are at the price the share was only a couple of years ago or so.

Good news on inflation should continue despite the odd bump in the road. In the UK, the drop in gas prices should lead to another substantial fall in the coming months and it’s good to see that wage growth is moderating. Once the Federal Reserve cuts interest rates, the UK and continental Europe will be close behind.