How did US, UK and Chinese equities perform in December?

There had been little to cheer about heading into the final month of the year as investors were spooked by the Ukraine-Russia war, a global energy crisis and political events closer to home. December proved to be a mixed bag for US, UK and Chinese equities.

• The S&P 500’s bear market rally faded in the second half of the month
• The FTSE 100 and 250 both outperformed the Stoxx 600
• The iShares MSCI China ETF rose 2.5% in December

In the run-up to the final month of 2023, the S&P 500 benchmark had recorded its second consecutive monthly gain in November. Meanwhile, the Dow Jones Industrial Average had climbed 20% since falling to its lowest level in almost two years in September.

But the spectre of a recession still loomed. Despite hope that the final stretch of the year could see stocks surge, the S&P 500 actually ended up dropping 5.9% in December, pulling back 19.4% over the course of the year.

For 2023, Morgan Stanley’s chief investment officer Michael Wilson told Bloomberg TV that he expects the S&P 500 to bottom at between 3,000 and 3,300 points. This would represent a downside of between 14% and 22% from the benchmark’s 30 December closing price of 3,839.50 points.

The tech-heavy Nasdaq Composite suffered bigger losses of 8.7% in December and 33.1% for the year, while the Dow Jones Industrial Average logged smaller losses of 4.2% and 8.8% respectively.

Mixed US economic data

The bear market rally faded in the second half of December largely due to the Fed striking a hawkish tone at its most recent meeting. The US central bank’s persistence to tackle inflation with aggressive rate hikes is what’s stoking recession fears.

Despite the gloom, there were some bright spots for the US economy. Manufacturing activity stopped contracting in the final month of the year, reported the Federal Reserve Bank of Richmond. In a surprising move, the manufacturing sector gauge rose to 1, implying marginal growth, up from negative 9 in November. Economists polled by the Wall Street Journal had been expecting a reading of minus 10.

“While wages continued to increase in December at a solid pace, supply chains also eased, helping to send prices paid and received lower and leaving inflation expectations for the coming year ‘much lower than current price trends,’” commented T. Rowe Price traders in their monthly market round-up.

Hang Seng rallies on China reopening

Any hopes of a festive rally for US equities were also partly wiped out by China softening its Covid restrictions. Beginning on 8 January, the country’s National Health Commission will no longer require inbound travellers to quarantine, leading to worries that the virus could spread more widely. Washington has since imposed Covid-19 testing for visitors from China.

The country’s reopening did, however, help the Hang Seng index to rally 6.4% in December, closing the year at 19,781.41 points and climbing 35.5% from its year-low of 14,597.31 points set on the last day of October. The Shanghai-based SSE Composite slipped 2% in December and finished the year down 15.1%.

Morgan Stanley upgraded Chinese equities to overweight from equal weight on the back of the reopening – it’s particularly bullish on consumer discretionary and services and durables. “Consumption recovery is on the way,” commented chief China equity strategist, Laura Wang, on Morgan Stanley’s Thoughts on the Market podcast released on 8 December.

UK stocks outperform European counterparts

The FTSE 100 and FTSE 250 recorded losses of 1.6% for December. However, the FTSE 100, which is weighted heavily in favour of commodities, sharply outperformed its counterpart through 2022, logging a slight 0.9% gain for the year versus the latter’s decline of 19.7%.

Both of the indices fared better than the pan-European Stoxx 600, which pulled back 3.4% in December. Over the course of the year, however, the European index outperformed the FTSE 250, declining by 13.1%.

The pound suffered a turbulent autumn in 2022 following the former chancellor Kwasi Kwarteng’s botched mini-budget in September. It ended the year by posting its worst annual performance against the dollar since the Brexit vote of 2016, just 10% above its all-time low in 1985.

Funds in Focus: iShares MSCI China ETF

ETFs that track the performance of the world’s benchmarks provide exposure to these broader market movements. The Vanguard FTSE 100 UCITS ETF [VUKE.L], for example, mirrors the loss that the FTSE 100 index recorded in December, falling 1.7% over the last month of the year.

The ProShares UltraShort S&P500 [SDS], on the other hand, provides a negative 200% return on the performance of S&P 500, and gained 12.8% over the course of December and 30.7% through 2022.

Meanwhile, the iShares MSCI China ETF [MCHI] tracks the MSCI China Index, which represents large and mid-cap companies in an attempt to capture exposure to the nation’s sector leaders. The fund’s top three holdings are Tencent [0700.HK], Alibaba [9988.HK] and Meituan [3690.HK], at respective weightings of 13.03%, 7.99% and 4.82% as of 2 January. The fund fell by 22.8% in 2022, but rose 2.5% over the course of December.