Market Opinion - April 2023

Market Opinion - April 2023

April witnessed a positive trajectory for equity markets globally, fuelled by encouraging economic indicators. Developed markets outperformed their emerging market counterparts, primarily due to a decline in Chinese shares. The fixed income market also experienced favourable returns across major credit markets.

In April, US equities saw moderate gains. Investor optimism was fuelled by expectations of the Federal Reserve's gradual adjustment of monetary policy. However, the central bank's warning about potential economic slowdown tempered the overall sentiment. The banking sector faced uncertainty as the collapse of First Republic appeared imminent by the end of the month. Despite JPMorgan and the US government acquiring First Republic, the aggregate performance of US banks in the S&P 500 index was not significantly impacted. However, concerns lingered regarding smaller banks.

Economic data revealed a decline in growth, weakening labor market conditions, and relatively controlled inflation in recent months. Consequently, there was a consensus view that the Federal Reserve would raise rates by 0.25 percentage points in May but pause its tightening policy thereafter.

While the performance of tech stocks, including major companies in the index, influenced equity market performance positively, industrial and consumer discretionary stocks, particularly automobiles, had a negative impact. Tesla's shares declined due to increased competition in the global electric vehicles market, leading to a dent in its profits.

In April, Eurozone equities recorded gains, with all sectors except information technology (IT) advancing during the month. Resilient corporate earnings supported this rise, and sectors that had previously underperformed earlier in the year, such as energy and real estate, saw notable improvements. Utilities also experienced an increase in share prices. However, the IT sector declined after several semiconductor companies, both in Europe and elsewhere, issued warnings about a longer-lasting slowdown in demand than previously anticipated.

Data indicated that the Eurozone economy returned to growth in Q1, expanding by 0.1% quarter-on-quarter, following no growth in the final three months of 2022. Although Germany's economy saw no growth, economies like Spain and Italy experienced stronger expansion. Furthermore, the pace of inflation in Germany slowed, with an expected rate of 7.2% year-on-year for April, compared to 7.4% in March.

The flash Eurozone Purchasing Managers' Index (PMI) for April reached an 11-month high of 54.4, indicating growth. This growth was primarily driven by the services sector, while manufacturing output experienced a decline. PMI indices are based on survey data from companies in the manufacturing and services sectors, where a reading below 50 indicates contraction, and above 50 signals expansion.

UK equities performed well in April, with financials and globally diversified energy groups among the top contributors. The recovery of the banking sector, aligned with global trends, supported the performance of financials. Additionally, an increase in oil prices resulted from Saudi Arabia's unexpected decision to reduce oil production.

Although inflation and wage data were disappointing, domestically focused sectors remained resilient. The Office for National Statistics (ONS) reported that headline UK inflation remained above 10%, with consumer price inflation slightly slowing to 10.1% in March, below the Bank of England's expectation of 9.2%. Core inflation, which provides a clearer picture of underlying trends, remained unchanged at 6.2% compared to February. With strong wage data published in April, concerns remained that the Bank of England might need to raise rates after the Monetary Policy Committee meeting in May to maintain sustainable inflation levels.

In April, the TOIPX Total Return index in the Japanese stock market continued its upward trajectory, increasing by 2.7% in local terms. The weakening of the Japanese yen supported investor sentiment, although it reduced returns for overseas investors using sterling or USD. Foreign investors showed significant interest in Japanese stocks, partly due to Tokyo Stock Exchange's initiatives to enhance corporate values and the "Buffett effect" following Warren Buffett's increased investments in Japanese equities.

The macroeconomic environment in Japan showed signs of recovery, particularly in inbound consumption. CPI inflation remained at historically high levels, and wage growth accelerated following spring wage negotiations between major companies and trade unions. Positive quarterly earnings results from retailers and resilient full-year annual results for the Japanese fiscal year supported the positive outlook for corporate profits.

In contrast, Asia ex Japan equities had a negative performance in April, with declines observed in China, Taiwan, and Thailand offsetting gains in Indonesia and India. China, which experienced faster-than-expected economic growth in the first quarter, witnessed the weakest index market performance due to ongoing tensions with the US and other Western nations over Taiwan. Share prices in Taiwan also ended the month in negative territory due to weaker growth in other parts of the world. Indonesia, on the other hand, had the best-performing index market in April, driven by its efforts to establish a prominent role in the global electric vehicle supply chain, while Indian equity prices achieved robust gains propelled by real estate and information technology stocks.

In April, bond yields, which had dropped in March due to stresses in the banking sector, began to rise again, although overall market conditions were calmer than the previous month. Markets anticipated further rate hikes in the near term from the Federal Reserve, Bank of England, and the European Central Bank. The UK gilt market underperformed others as resilient activity data and surprising inflation levels pushed yields higher. The Bank of Japan's new governor pledged to keep the loose monetary policy unchanged for the time being but announced plans to review past monetary policy decisions.

In April, the US 10-year yield slightly decreased from 3.47% to 3.42%, while the two-year yield dropped slightly from 4.03% to 4.01%. Germany's 10-year yield increased from 2.29% to 2.31%, and the UK 10-year yield rose from 3.49% to 3.72%, with the two-year yield increasing from 3.44% to 3.78%.

Positive returns were generated across investment-grade and high-yield credit markets in April, as markets rebounded following a volatile March. Spreads tightened, and total returns were positive across investment-grade and high-yield bonds. Investment-grade bonds, which have the highest quality as determined by credit rating agencies, and high-yield bonds, which are more speculative, both showed favourable performance.

The US dollar weakened against the euro and sterling, while the Japanese yen weakened against the dollar following the Bank of Japan's announcement. The US dollar index remained largely unchanged.

In April, the Refinitiv Global Focus convertible bond index experienced a -1% decline as convertible bonds couldn't fully benefit from the stock market tailwinds due to the information technology bias in convertibles and underweight exposure to financials. However, primary market activity remained strong, with $5.7 billion of new issuances, primarily from the US region and significant issuance in Asian convertibles.

In April, the commodity market experienced mixed performance across different sectors. Oil prices rebounded due to Saudi Arabia's unexpected decision to reduce oil production, which supported globally diversified energy groups. However, there were concerns about increasing competition in the global electric vehicles market, which impacted the profitability of companies like Tesla and had a negative effect on certain commodity sectors. Additionally, tensions between the US and China, as well as other Western nations, continued to create uncertainties in the market.

Gold prices remained relatively stable in April, as investors sought safe-haven assets amid economic uncertainties and inflation concerns. The precious metal served as a hedge against inflationary pressures and geopolitical tensions, supporting its demand and price.

Cryptocurrencies experienced heightened volatility during April. Bitcoin, the most well-known cryptocurrency, faced fluctuations in value, influenced by factors such as regulatory developments, market sentiment, and investor speculation. The crypto market as a whole continued to evolve rapidly, with new projects and technologies emerging, contributing to both opportunities and risks for investors.

Overall, the commodity market reflected a complex landscape driven by a combination of supply and demand dynamics, geopolitical factors, and investor sentiment.