December marked another strong month for equity market performance. The US Federal Reserve (Fed) delivered the dovish (less aggressive) pivot markets had been hoping for, resulting in a sharp fall in yields that sent the S&P 500 Index close to all-time highs. The shift in the Fed’s stance was signalled in its recent statement, referencing slowing economic activity from “its strong pace in the third quarter”, signs of weakness in the labour market, and easing inflationary pressures. Markets have gone a long way in pricing in a soft landing (growth slowing without a recession), and it does appear that central bankers have been successful in slowing inflation to a more acceptable level without unduly damaging growth. While other developed-market central banks, including the Bank of England and the European Central Bank, have maintained a more hawkish stance, falling consumer prices have reinforced the likelihood of cuts in interest rates next year. Notably, UK inflation came in significantly softer than consensus estimates, falling to 3.9% versus the expected 4.3%. Commodity prices continued to trend lower, with Brent crude down by over 5% during the month.

US technology stocks remained the standout performer in December, propelled by sharply falling yields and strong earnings momentum. US technology earnings have been particularly resilient in 2023 and, indeed, the majority of equity market upside this year has been driven by a small handful of names. For instance, the Trust’s overweight holding in NVIDIA – the top S&P 500 performer during 2023 after gaining c.250% – has been able to consistently deliver results above market expectations, driven by massive demand for its datacentre products, which saw third-quarter earnings up c.40% quarter on quarter and up c.280% from one year ago. Its datacentre business has been built on the success of NVIDIA’s flagship artificial-intelligence (AI) graphical processing unit, the A100, which sells for around $10,000 per chip. It is the hardware of choice for the likes of OpenAI – the developers of ChatGPT – that train large language AI models, and these models can use thousands of the chips at a time. With much excitement around the potential of AI, technology has been the only sector within the S&P 500 to enjoy upgrades to 2023 fourth-quarter year-on-year earnings growth in recent months. Despite strong third-quarter earnings, where 84% of S&P 500 stocks beat expectations and aggregate earnings-per-share was 7% above forecasts, cuts to earnings growth rates can be seen across nearly every other sector, notably healthcare, where fourth-quarter earnings are expected to be down 18% year on year. Chinese stocks were a notable laggard during December, reflecting China’s sluggish economic recovery this year. While there are grassroots signs of improving consumer spending (retail sales growth picked up to 10.1% year on year in November), the Central Economic Work Conference in December again played down hopes for large-scale fiscal stimulus.

Broadcom (+c.25.0%), which is a top 20 name by weight within the Trust’s portfolio, was the Trust’s strongest performer during December, after the company delivered strong financial results for the fiscal year, notably 8.0% top-line revenue growth on the year. Semiconductor revenue (c.80% of Broadcom’s total revenue) was up 4.0%, with AI solutions comprising 15% of sales. The company should continue to benefit from demand from large cloud service providers for chips that make AI computing and training faster and more efficient. Furthermore, the company’s recent $61bn acquisition of VMware, the US-based cloud computing giant, is expected to accelerate Broadcom’s expansion into the enterprise software space in 2024. The stock, which is held at an overweight (higher than) position to the benchmark, has gained over 70% in 2023. Apple (+c.10%), which is held at an underweight (lower than) relative to the benchmark, was the most significant detractor from relative returns in December. Apple recently posted its fourth consecutive quarter of negative sales growth, with revenues from Macs and iPads falling 34% and 10%, respectively, on the year. The results suggest that Apple is facing more significant demand deceleration in China than feared amid soaring Huawei smartphone sales in the region and the banning of iPhones in some workplaces by the Chinese authorities. While halting sales of its Apple Watch Series 9 and Apple Watch Ultra 2 just days before Christmas due to a patent dispute is likely to have only a marginal financial impact, we remain concerned that incremental improvements to its iPhone line-up are being overshadowed by rising competition in China – a region that accounts for c.20% of Apple’s revenue. Despite this, Apple shares gained by almost 50% over 2023.

We ended the month at a discount of 6.0%, narrowing from a discount of 10.6% at the end of November.