Customers in Velliv shared in the solid financial market growth experienced in 2023.
VækstPension (medium risk, 15 years to disbursement) generated returns in 2023 that spanned from 9.6% in Aktiv to 12.3% and 12.9% in Aftryk and Index, respectively. In general, customer returns have been positive. However, higher risk investments, such as equities, rose most during the year, so return was greatest for customers with the highest level of risk and the longest time to disbursement.
The year ended with a strong final that produced a return of 6.3% in Q4 2023 for VækstPension Aktiv and 7.4% for both VækstPension Aftryk and VækstPension Index. One reason was the pronounced fall in inter-est rates, which was driven by declining inflation rather than recession fears – good news for both bonds and equities. Another positive was that small-cap equities made a particularly strong comeback, which boosted the portfolio’s overall return.
Despite the slight air of global gloom at the start of the year, 2023 ended up being a good year for invest-ments. High interest rates replaced inflation as the overarching theme across the financial markets, while the economic recession that many – including Velliv – had expected, has so far failed to materialise. Neverthe-less, the high interest rates have left their mark many places, including within one of the biggest themes of our time, the green transition, where the consequences became much more obvious in 2023.
2023 was also the year when the spread of artificial intelligence really took off. In the equity market, this produced a bubbling euphoria around the small group of companies that the market perceived as benefi-ciaries of this development. Seven of the largest US technology companies rose all of 107% over the year, while the remaining 493 companies in the broad US equity index ‘only’ rose by 12%. The marked spread in returns was also evident across regions, with the US and its high level of exposure to the tech industry ris-ing by 26% overall, whereas China, by contrast, fell 11%.
| Return (in %) | VækstPension Aktiv | VækstPension Index | VækstPension Aftryk |
|---|---|---|---|
| 2023 | 9.6% | 12.9% | 12.3% |
| 5 years | 38.4% | 41.8 | |
| 10 years | 83.1% | 96.1% |
Source: Velliv. Medium risk and 15 years to retirement. Returns are calculated as of 31.12.2023 and are exclusive DinKapital and bonus
Polarisation was less evident in the fixed income markets, as several key countries were at more or less the same stage of the monetary policy tightening cycle. Common to all has been their central banks’ battle to control inflation, with the US as the global baton-waving conductor of policy rates. However, rising expecta-tions towards the end of the year of upcoming interest rate cuts meant yields declined markedly, with 10-year US Treasury bond yields ending the year unchanged overall.
Progress on fighting inflation, recession fears easing, and a tailwind for artificial intelligence were all good news for the financial markets, which responded by sending both equity and bond prices higher. By the end of the year, a globally invested portfolio comprising 60% equities and 40% bonds was up by around 17%.
Velliv is going into 2024 expecting the economy to continue its soft landing and the significant monetary policy tightening of recent years to fully rein in inflation without causing unemployment to soar. That being said, the risk of a hard landing cannot be ruled out, in part because a hard landing can resemble a soft land-ing to start with, and also because growth looks set to remain relatively weak.
The outlook of further economic growth is due to a strong service sector, where activity levels will get a particular helping hand from wage inflation being higher than consumer inflation. Hence, we expect last year’s self-reinforcing dynamic to continue, with the labour-intensive service sector underpinning a solid demand for labour. That will boost wage inflation, which in turn will support private consumption and the service sector.
Last year’s pronounced drop in inflation has left considerable wiggle room for monetary policy, which the central banks are apparently willing to capitalise on relatively early to cut interest rates – even though infla-tion is not yet fully back at the 2% target. The US central bank has already opened the door to discussions about rate cuts, while their European counterparts have, true to form, been more reticent in their communica-tion.
While neither of the two central banks has put their interest rate weapon to use yet, both short and long yields have already retreated somewhat. Further falls in long yields would, however, likely require the market to begin doubting the soft-landing narrative. However, that happening is not our main expectation.
