Market Opinion - January 2023

Market Opinion - January 2023

In January, the equity markets started the year on a positive note, with all major regions experiencing gains. European equities ended the month higher as the economy benefited from easing inflation and the progress of China's reopening. The European Central Bank (ECB) raised interest rates by 0.5% to their highest level since 2008, signaling its commitment to monetary policy tightening.

In the UK, equities also performed well as markets ended the month in positive territory. Inflation in the UK slowed for the second consecutive month, although it remained in double digits. The UK economy saw growth of 0.1% in November, defying expectations of a contraction. However, the International Monetary Fund (IMF) still predicted that the UK would be the only leading economy to experience a recession in the coming year.

US markets had a strong start to the year, with the S&P 500 index having its best start since 2019. Improved investor sentiment was supported by positive news flow, although there were lingering concerns about recessionary trends.

Asian equities rallied, boosted by China's progress in reopening its economy. Chinese equities had a strong performance, and Taiwan and Korea were the top performers in the region. The Pacific region, including Australia and Japan, also saw gains, while Indian equities retreated.

Emerging markets outperformed developed markets, benefiting from China's reopening and a weakening US dollar. The Czech Republic, Greece, and Hungary were the strongest performers in Europe, while Turkey, the UAE, and Egypt lagged behind. Latin America, led by Mexico, Chile, and Peru, was the strongest performing region.

Bond markets had a strong start to the year, with broad gains across various regions. Hopes that the cycle of interest rate hikes might be nearing its end boosted US treasuries, UK gilt, and German bunds. Inflation showed signs of slowing in both the US and the eurozone.

In summary, January saw a positive start for global equity markets, with Europe, the UK, the US, and Asia all experiencing gains. Emerging markets outperformed developed markets, and bond markets also had a strong performance. While there were concerns about inflation and the possibility of a recession, overall investor sentiment was positive.

In January 2023, the US equity markets had a strong start, with positive news flow boosting investor risk appetite. The NASDAQ composite, which is more focused on growth stocks, outperformed the S&P 500 and the Dow Jones Industrial Average. Longer-term assets saw a rally in anticipation of a potential pivot by the US Federal Reserve to lower interest rates.

The S&P 500 had its best start to a year since 2019, driven by a brighter macroeconomic outlook. Factors such as declining energy prices, the reopening of China, and a decrease in inflation contributed to the positive sentiment. Technology stocks, especially the FAANG group (Facebook, Apple, Amazon, Netflix, and Google), experienced a strong rally, marking their best month since August 2020.

December's headline annualized Consumer Price Index (CPI) reading of 6.5% confirmed the continued downward trend in inflation, providing support to equities. This led markets to anticipate a 25-basis point interest rate hike in the February Federal Open Market Committee meeting, which was half the size of the previous rate hike in December.

Despite the tight labor market in the US, wage growth (measured by the employment cost index) was lower than expected, posing a challenge for bringing inflation down to the target of 2%. Institute for Supply Management (ISM) readings raised concerns about a potential US recession, as both the services and manufacturing sectors showed contraction in December. Retail sales and industrial production also fell short of expectations.

In the Asia Pacific region, equities advanced in January, with China's reopening progressing faster than anticipated. Taiwan and Korea were the top performers, driven by a rebound in the technology sector and expectations of a more gradual interest rate hike cycle in the US. The information technology, communication services, and materials sectors led the gains, while energy underperformed.

Chinese equities continued their strong performance, benefiting from improved regulatory conditions in the internet and real estate sectors, as well as video game approvals. Faster-than-expected mobility recovery and a resumption of foreign investor inflows also contributed to the positive sentiment. Materials was the top-performing sector, supported by China's reopening, leading to rallies in the prices of aluminum, copper, and steel.

Taiwan and Korea also had a strong start to the year, with the technology sector driving their market performance. The de-risking of corporate earnings expectations and hopes of a demand recovery from China's reopening were key factors. In contrast, Indian equities declined, with all sectors except information technology and consumer discretionary ending the month in the red. Although headline CPI fell, macroeconomic data showed positive signs, with inflation softening further and industrial production expanding more than expected.

Australia experienced a double-digit rally, while Japan advanced steadily. Australia's notable commodity exposure to China and the faster-than-expected reopening were favourable factors. Japan benefited from China's reopening and expectations of slower tightening by the US Federal Reserve.

Emerging market equities outperformed developed markets, driven by the broad-based reopening in China and a weakening US dollar, which supported risk-on sentiment. Other factors included policy shifts in China, the potential bottoming of the semiconductor price downcycle, and higher commodity prices. Mexico and the Czech Republic were the top performers, while Turkey and the UAE lagged behind.

In fixed interest markets, January saw broad gains as expectations grew that the current cycle of interest rate hikes might be reaching its end. Government bonds, such as US treasuries, UK gilts, and German bunds, all registered positive returns. Optimism in the market was fueled by the slowdown in the US inflation rate and the strength of the US labour market. In the eurozone, inflation eased with declining energy costs, while the UK's consumer price growth remained high due to food prices.

The European Central Bank (ECB) maintained a hawkish stance on inflation, indicating an interest rate hike in February. The Bank of England (BoE) also planned to raise interest rates, but it faced the challenge of balancing high inflation with the risk of an economic downturn. The UK economy showed unexpected growth in November, driven by increased consumer spending, but higher energy and borrowing costs were expected to impact economic activity in the first half of 2023.

The Bank of Japan surprised global markets by widening the tolerance level on its 10-year government bond (JGB) without making changes to its monetary policies. Credit markets performed well, with gains in investment-grade bonds denominated in various currencies and narrowing credit spreads. High yield bonds also saw positive returns, with narrowing credit spreads in both euro and sterling high yield bonds.

In summary, January 2023 witnessed a strong start for US equity markets, with positive news flow and investor risk appetite. Asia Pacific equities benefited from China's reopening, while emerging markets outperformed developed markets. Fixed interest markets saw broad gains, supported by the potential nearing end of interest rate hikes.