As 2023 draws to a close, the stock market landscape has presented a stark contrast between the fortunes of large-cap and small- and mid-cap stocks.
According to a report by Liberum, a boutique investment bank, the S&P 500 saw an impressive rise of 20.3%, while the Stoxx Europe climbed 11.7%.
However, this positive performance was primarily limited to large-cap stocks. Small and mid-cap stocks across the UK, Europe, and the US struggled throughout the year, facing poor returns and a challenging environment marked by high inflation and rapidly rising interest rates.
Sideways motion
In terms of market performance, the UK's situation was particularly pronounced. The FTSE Small Cap and FTSE 250 indices moved sideways for most of the year, while the FTSE 100 saw only modest gains.
This performance disparity led to a notable valuation gap, with large caps trading at significantly higher multiples than their smaller counterparts.
The year also saw continued outflows from actively managed funds, as investors increasingly favored index trackers.
ESG out?
Surprisingly, environmental, social, and governance (ESG) funds, which have seen a steady rise in popularity over the years, experienced their first year of net outflows ever. This trend suggests a potential shift in investor sentiment and strategy.
In the equity capital markets, 2023 was marked by poor initial public offering (IPO) activity, continuing the trend from the previous year.
The UK market, in particular, saw a lack of IPOs, with volumes comparable to those during the 2008-2009 financial crisis.
The US market, on the other hand, outperformed, with half of its IPOs in 2023 involving foreign businesses. This trend indicates a preference for listing in the US due to higher liquidity, favourable valuation multiples, and a less burdensome regulatory environment.
UK IPO market toughest since '08
While IPO activity was subdued, the UK market saw some relief through merger and acquisition (M&A) activities.
The global M&A volume dropped significantly from the previous year, but the UK market experienced a resurgence in this area, especially in November.
Liberum's analysis indicates that small and mid-cap stocks may continue to face challenges in the first half of 2024 before potentially recovering in the latter half.