European markets enjoyed solid gains in 2023 as slowing inflation increased hopes for future rate cuts, although macroeconomic data remained uncertain. The Morningstar Europe ex-UK Index posted a gain of 12.9% for the fourth quarter and 21.5% for the 1-year period, outperforming other developed markets. UK equities trailed their European peers amid a stalling economy and volatile political climate; the Morningstar UK Index added 7.4% for the quarter and rose 14.2% for the year.
Modest fourth-quarter returns helped pull the Asia ex-Japan region into positive territory for the year, as the Morningstar Asia-ex Japan Index climbed 10.8% in the fourth quarter, bringing 1-year gains to 5.4%. In Japan, equities benefited from improved corporate earnings and a weaker yen, with the Morningstar Japan Index gaining 7.9% and 19.2% for the fourth quarter and 1-year periods, respectively. Indications that the Bank of Japan would begin adjusting its ultra-loose monetary policy also helped sentiment.
Emerging Markets Lag Their Developed Counterparts
Weakness in China and Turkey caused emerging market stocks to lag their developed-market peers for both the fourth quarter and 1-year periods. The Morningstar Emerging Markets Index rose 7.8% for the fourth quarter, compared to 10.5% for the Morningstar Developed Markets ex-US Index. The variance grew for the 1-year period, as the Emerging Markets Index rose 11.5% while the Developed Markets ex-US Index gained 17.3%.
Chinese equities began 2023 with hopes for a rebound following an end to strict pandemic lockdowns. Still, the recovery failed to materialize amid the country’s ongoing real estate crisis and as weak consumer demand weighed heavily on economic growth. Chinese stocks underperformed even as the Bank of China announced several stimulus packages. However, hopes of a dovish Federal Reserve and solid performance from India helped lead emerging Asian stocks to rally in the fourth quarter. The Morningstar Emerging Markets Asia Index gained 7.3%, pushing the yearly return to 10.4%.
Eastern European stocks fell into negative territory in the fourth quarter, hampered by geopolitical concerns and drastic central bank tightening in Turkey. Amid the Russia/Ukraine war, now entering its third year, and the more recent Israel/Hamas war, the Morningstar Emerging Markets Europe Index declined 4.1% for the quarter while gaining 12.9% for the 1-year period.
Latin American Stocks Led in 2023
While emerging markets stocks underperformed, a closer look shows a divergence between regions. Solid returns from Brazil and Mexico powered Latin American stocks to best every other market for the fourth quarter and the 1-year period, including the United States. The Morningstar Latin America Index soared 17% in the fourth quarter, bringing 1-year gains to 33.5%. Many of Latin America’s largest economies have already started to ease monetary policy after beginning rate tightening ahead of developed countries.
Source: Morningstar Indexes. All returns are calculated in U.S. dollars. Data as of December 31, 2023.
Read the full Morningstar Markets Observer Q1 2024.
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