Monthly markets review - January 2023
A look back on markets in January when stocks posted strong gains.
The month in summary:
Stock markets started 2023 on a strong footing with gains across global equities. China’s re-opening after dropping the zero-Covid policy in late December helped propel the advance. Signs that inflation is easing from its autumn highs in several major regions also supported sentiment, amid hopes central banks may be close to the peak of their rate hiking cycle. Emerging markets outperformed their developed counterparts. In fixed income markets, bond yields fell (meaning prices rose). Commodities saw a negative return for the month.
US equities made robust gains in January. Investors’ focus on inflation - which cooled for the sixth successive month in December – remains sharp. The headline consumer price index (CPI) dropped to 6.5% from 7.1% mainly due to energy and food cost moderation. In combination with a stronger-than-expected GDP print of 2.9% (seasonally adjusted annual rate), the inflation data led investors to position for slower rate rises from the Federal Reserve from here. Risk appetites picked up, despite expectations of a slightly softer earnings season compared to Q4 2021.
Economic data elsewhere was mixed but encouraging. Industrial activity - as measured by the S&P Flash Composite PMI - improved somewhat in January (to 46.6 from 45.0) but remains in contraction territory. (The PMI indices are based on survey data from companies in the manufacturing and services sectors. A reading below 50 indicates contraction, while above 50 signals expansion.) Employment data was more supportive, with weekly jobless claims below expectations. At 186,000, the weekly jobless claims was the lowest since April and well below expectations of 205,000.
The reversal in sentiment touched the majority of the market, with almost all sectors stronger over the month. Traditionally defensive areas of utilities, consumer staples and healthcare, were snubbed in favour of more growth oriented names. The strongest gains were linked to tech or consumer discretionary spending. Travel and auto stocks were amongst the month’s strongest gainers, while entertainment and media stocks also advanced.
Eurozone shares were among the best regional performers in January. Top performing sectors included economically-sensitive areas of the market such as information technology and consumer discretionary. Real estate also enjoyed a rebound after poor performance in 2022. Within consumer discretionary, luxury goods stocks were particularly strong following the news of China’s economic reopening. Energy was the weakest sector while defensive areas like utilities and healthcare also underperformed.
Eurostat data showed the eurozone economy eked out 0.1% of growth quarter-on-quarter in Q4, a slowdown from 0.3% growth in Q3. Forward-looking indicators raised hopes that the eurozone may continue to avoid recession. The flash eurozone composite purchasing managers’ index for January registered a seven-month high, coming in at 50.2 after 49.3 in December.
Inflation edged lower again in December. The annual inflation rate was 9.2% compared to 10.2% in November. The highest contribution to inflation came from food, alcohol and tobacco, with energy in second place as natural gas prices remained below their elevated levels of 2022. European Central Bank President Christine Lagarde warned that further interest rate rises would still be needed to return inflation to the 2% target.
UK shares posted gains in January although the advance was more muted than in some other regions. The consumer discretionary and financials sectors were among the top gainers. Laggards included more defensive sectors such as consumer staples and healthcare. Economically sensitive areas of UK equities outperformed in line with other markets. This occurred amid growing hopes that the US Federal Reserve might be in a position to ‘pivot’ to cutting interest rates in late 2023.
UK small and mid cap equities (smids) outperformed as domestically focused consumer stocks did particularly well, partly amid signs the UK economy is holding up better than expected. Consumer stocks generally delivered much more encouraging trading updates than had been feared. When combined with very low expectations this drove some very strong share price performances from the retail, travel & leisure and housebuilding sector. The domestically focused banks also performed well, although more broadly the banking sector benefited from its emerging markets exposure amid China reopening hopes.
Recent UK macroeconomic data suggested underlying growth has been more resilient than previously thought, partly helped by an easing of energy prices, driving hopes for a milder-than-feared recession. The latest updates on monthly GDP for November revealed that the UK economy unexpectedly grew in November, expanding by 0.1%.
The Japanese stock market rose throughout January, reversing the decline seen in December. The total return for the month was 4.4% in local terms. The yen initially strengthened against the US dollar, in line with the trend seen from November, before giving back some of the gain in the second half of the month.
Investors’ attention remained focused on the Bank of Japan, following the surprise adjustment to the yield curve control policy which was announced in mid-December. In early January, with 10-year bond yields testing the Bank of Japan’s new upper limit, there was some speculation that more changes could be made at the January policy committee meeting. In the event, policy was left unchanged and discussion moved instead to the likely candidates to replace Mr Kuroda as governor of the Bank of Japan. The prime minister, Mr Kishida, is likely to nominate the new governor in the first half of February.
The debate continued over inflation and whether it will be sustained at a level above the Bank of Japan’s 2% target. Preliminary surveys of the spring wage negotiations suggest that moderate wage growth is probable, but it may not be sufficiently high to provide a definitive trigger for any policy change at the central bank.
At the very end of January, the corporate results season began for the quarter ending in December. Only a minority of companies had reported before the end of the month. Early indications suggest a positive tone, especially as service companies should see a benefit from improved demand after the final lifting of Covid restrictions and a resumption of travel subsidies.
Asia ex Japan
Asia ex Japan equities recorded a positive performance in January. Chinese shares achieved robust gains after Beijing loosened its Covid-19 restrictions that have constrained the country’s economic growth since early 2020. Government measures to support the country’s property market and a loosening of the regulatory crackdown on China’s technology companies also bolstered investor sentiment.
Other Asia Pacific markets also gained after Hong Kong and mainland China resumed quarantine-free travel, signalling the end of China’s zero-Covid policy which had kept borders closed for nearly three years. Shares in South Korea and Taiwan achieved significant growth in the month on renewed investor optimism, while gains in Hong Kong were slightly more muted. In Hong Kong, technology, travel and consumer stocks were particularly strong. Singapore also ended the month in positive territory after an upbeat global forecast for Asian markets helped allay investor fears of an economic slowdown. Property, financial and industrial stocks performed particularly well in the month.
The Philippines, Thailand, Indonesia and Malaysia also achieved solid growth. India was the only index market to end the month in negative territory, amid a sell off by foreign investors and investor caution as economic growth stalls.
Emerging market (EM) equities benefited from January’s risk-on environment. Signs of cooling inflation in the developed world fuelled optimism that interest rates may soon peak, with potentially positive consequences for growth. Developments in China also boosted investor sentiment. These included the ongoing re-opening of the economy, easing of regulatory pressure on the internet sector, more policy support for the real estate sector and better-than-expected Q4 GDP growth of 2.9% year-on-year. The MSCI EM Index outperformed the MSCI World Index over the month.
Czech Republic was the best-performing index market as a state-owned power utility company rallied strongly. Mexico followed close behind, despite a slowdown in economic activity indicators, including weaker manufacturing data, and a slight rise in inflation. Meanwhile, Taiwan and Korea both outperformed, supported by strong returns in their tech sectors, as the outlook for global growth and trade improved. Chile and Peru performed better than the index too, helped by higher copper prices as optimism about China’s re-opening drove industrial metals prices higher. While Hungary was ahead of the index, and Poland, just behind, both markets continued to rebound following months of poor performance in 2022 after the Russia-Ukraine conflict.
Brazil underperformed. Macroeconomic data softened while inflation rose and anti-government riots in Brasilia, the country’s capital, damaged government buildings. South Africa lagged the index amid an ongoing energy crisis, with the state-owned power supplier announcing permanent rolling blackouts for at least the next two years. Thailand, Indonesia and Malaysia posted returns behind the index, as did Qatar and Saudi Arabia, with the latter two impacted by generally weaker energy prices.
India generated negative returns amid allegations of fraud and share price manipulation at a major conglomerate. Turkey was the biggest underperformer as investors booked profits after very strong returns in recent months.
Global government bond yields fell in January (i.e. prices rose) on encouraging news on inflation – particularly out of the US. The month was light on central bank meetings, but the market began anticipating a slower pace of rate hikes by the Federal Open Market Committee (FOMC). The Bank of Canada hiked rates by 25 basis points (bps) but signalled a pause in its hiking cycle, while the Bank of Japan made no further adjustments to its yield curve control policy, despite a sharp rise in core inflation.
Credit markets did well and outperformed government bonds both in the US and Europe and across both high yield and investment grade markets. (Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.) Risk sentiment improved as signs of moderating inflation and better-than-expected growth (especially across the eurozone and China) saw investors dial back some of their worst recessionary fears.
Meanwhile activity data in the US pointed to further weakness. The better-than-expected fourth quarter GDP was driven by a significant build up in inventories, while other near-term and forward looking indicators, including retail sales and industrial production, fell.
Headline inflation rates in both the US and the eurozone continued to ease, driven by retreating energy prices. While there was a modest uptick in month-on-month US core inflation, the general disinflationary trend here is clear. In contrast, core inflation across the eurozone has remained sticky and is likely to prompt a further hawkish response from the European Central Bank (ECB).
The US 10-year yields fell from 3.88% to 3.51%, with the two-year falling from 4.42% to 4.21%. Germany’s 10-year yield declined from 2.57% to 2.29%. The UK 10-year yield fell from 3.67% to 3.34% and 2-year dropped from 3.56% to 3.46%.
The US dollar was weaker against most other developed market currencies. The Australian dollar was the strongest performer among G10 currencies, following much stronger than expected inflation and supported by optimism around China’s re-opening. There was broad-based strength across emerging market currencies, given indications that US interest rates would soon peak.
Convertible bonds benefitted from the equity market tailwinds, but once more failed to convince in their upside participation. The Refinitiv Global Focus gained 4.8% in US dollar terms, lagging the advance of the MSCI World index. January turned out a good month for primary market activity. We saw USD 5.4 billion of new paper was issued with a good regional split between the US and Europe. Convertibles are trading about 1% below their fair value with Asia remaining the cheapest region.
The S&P GSCI Index recorded a negative performance in January. Energy and livestock were the worst-performing components of the index, while industrial metals and precious metals achieved strong gains. Within energy, the price of natural gas was sharply lower in the month, Within industrial metals, the price of lead fell in January, while zinc, aluminium and copper all achieved robust gains. Within agriculture, wheat and cocoa prices fell in January, while sugar and coffee recorded significant price growth. Within precious metals, the price of gold was significantly higher than a month earlier, while silver fell back slightly.
Total returns (net) % – to end January 2023
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