World Markets Summary:
January’s equity market performance has historically been consistently strong, to the extent that the term ‘January Effect’ has been coined for this anomaly. However, the strength of the rally at the back end of 2023 has, with the exception of Japan, resulted in ‘Dry January’ being extended to financial markets. Bond markets also performed poorly as market participants had to rein in rate cut expectations after they got ahead of themselves at the end of last year. Treasury losses were somewhat offset by yields tracking lower in latter days of the month after further US regional bank concerns once again returned to the fore. After acquiring Signature Bank, which was involved in the Silicon Valley Bank Crisis earlier last year, the New York Community Bancorp Group is now struggling to deal with the poor balance sheet that it took on. We believe that this remains isolated to the US regional bank space and major US banks remain in good shape.
January performance is often thought to be a barometer for the rest of the year, but we expect that this anomaly will also fail to hold true this year. The global economy and underlying companies continue to remain resilient and interest rate cuts are typically conducive to positive stock and bond market performance. Reflective of this strength, the International Monetary Fund (IMF) upgraded their growth forecasts for the year to 3.1%.
Equity market volatility increased close to 10% in January and oil performed strongly as the Red Sea conflict escalated. Geopolitics are likely to become an increasingly prevalent talking point with 50% of the world’s population going to the polls this year. Trump is the favourite to make a return to presidency after his landslide victory in the Iowa caucus earlier in the month secured his position as the Republican nominee. Equity market volatility will likely be more elevated than last year, but if like us you are willing to look through the noise and focus on the long term, this volatility will provide opportunities. If you’ll pardon the pun, profits have and will always trump politics.
The UK provided a bright spot in a largely mixed economic data picture, with consumer sentiment at its highest since January 2022. However, as we have mentioned on previous months, bad news in economic data can be taken as good news for markets, but on this occasion the reverse was the case. The reason for this phenomenon is that stronger economic data gives central banks less reason to cut interest rates, which would provide a boost for the stock market. All three major central banks decided to hold rates steady, citing the need for further evidence of easing inflation before cuts can be implemented.
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Our weightings are based on sterling as a base currency.
United Kingdom (UK)
UK equity markets edged lower in January with the FTSE 100 down 1.27% and the FTSE 250 dropping 1.55%. The modest up-tick in the December inflation number, from 3.9% in the prior month to 4%, was enough for investors to start questioning the timing and extent of rate cuts in 2024 and cause anxiety across markets. Tensions remained elevated in the Middle East with the continued Houthi attacks on Red Sea shipping raising freight costs and shipping times into Europe.
There was, however, a raft of positive economic data for UK investors to enjoy with the economy making a good start to 2024. Business activity picked up for a third straight month with the all-important services sector hitting an eight-month high of 53.8*. UK manufacturing Purchasing Managers’ Index (PMI) came in above expectations for January and rose to a nine-month high, although remaining in contraction territory. Shop price inflation also offered some cheer as it fell from 4.3% to 2.9%, its lowest level since May 2022.
Finally, data from the Office for National Statistics provided a welcome boost for Jeremy Hunt ahead of the budget. Due to higher VAT, higher income tax receipts, and lower spending, the deficit in December came in at the lowest level since before the pandemic and 6 billion less than the 14 billion pencilled in. Despite playing down significant tax cuts, industry analysts believe this will give Hunt around £20bn to spend on tax cutting measures.
United States (US)
US markets continued their exuberance in January with the Nasdaq and S&P 500 setting record highs. Microsoft’s market cap surpassed the $3 trillion mark, a size which is bigger than the entire annual GDP of France! Artificial Intelligence enthusiasm showed little sign of waning with the poster child Nvidia soaring a further 27% in January and the Magnificent 7 less Tesla performing positively.
Although the pace of US economic growth slowed in the final three months of 2023, the annualised growth rate of 3.3% far surpassed economists forecast of 2% and underlined the continued strength of their economy. The unemployment rate of 3.7% remains close to 50-year lows and consumer spending remains robust in the face of higher rates. Off the back of this, the IMF has upgraded growth forecasts from 1.5% to 2.1% for the US economy this year.
Inflation data was somewhat mixed during the month with the initial Consumer Price Index (CPI) print showing the annual pace of increase at 3.4% in December 2023 and ahead of the 3.2% consensus. On the other hand, the Federal Reserve’s (Fed’s) preferred measure, the Personal Consumption Expenditures (PCE) Index, remained below 3% and increased at its lowest level since March 2021.
Finally, The US Composite PMI reached 52.3* in January 2024, marking a significant increase on the previous month’s 50.9* and indicating the fastest rise in business activity since June 2023. Both manufacturing and services saw a pick-up in activity.
The major European markets registered muted gains in January, with the French CAC up 1.9% and the German DAX up 0.9%.
The latest European inflation print showed inflation for December coming in at 2.9%, which was higher than November’s reading. However the increase was largely due to energy-related base effects. Encouragingly, French inflation for January showed a noticeable improvement which may be indicative of the wider European market. The European Central Bank kept rates unchanged at their January meeting but we expect cuts to become increasingly likely as inflation continues to subside in the coming months.
European Q4 Gross Domestic Product (GDP) growth was released this month, showing that the European economy was stagnant. Meanwhile, services came in better than expected while retail sales and consumer confidence came in slightly weaker.
It is widely regarded that European manufacturing has been in a recession for the last 18 months, largely caused by an inventory overhang as a result of post-pandemic supply chain disruptions. However, manufacturing has recently seen a noticeable improvement which is of welcome relief and, in particular, the rising new orders to inventory component suggests this overhang is now starting to clear. We expect a recovery in manufacturing over the course of this year as financial conditions continue to ease.
Asia and Emerging Markets
Emerging markets’ equities performed poorly on the whole, with China acting as the primary laggard.
It was a tumultuous month for China, with the country producing a GDP print that was below expectations. This threw fuel on the already lit fire and markets sold-off sharply. It is worth noting that 5.2% GDP growth is still reasonable, and as a result, we think these moves were overdone. The Hang Seng index falling over 10% exemplified this. Chinese policymakers reacted by leaking rumours of injecting a $278 billion stimulus to stabilise the market by purchasing onshore stocks and by cutting the reserve ratio requirement by 50 basis points. On the back of this news, China had one of the strongest days of performance up over 4%, but the rally was short-lived as Evergrande, the world’s largest real estate developer, was given court orders to liquidate.
Japan is the best performing index this year (up 8%) helped along by the weakness of the Yen, which participated in exports hitting a record peak in December. Japanese economic data was weak during the month with the inflation rate falling to the lowest figure since July 2022, whilst both retail sales and industrial production came in worse than expected. However, on January 24th the Bank of Japan concluded that conditions for the phasing out of its considerable stimulus policy were underway, indicating that negative interest rates may soon come to an end. This is something we noted in prior communiques and we expect to unfold in the coming months.
Bond market eyes were fixed on Fed Chair Jerome Powell in late January, when he talked down the narrative of rate cuts in March. There continues to be a disparity between the Federal Reserve, who have guided for three cuts to occur in 2024 and the market which is still pricing for six. At the start of this year we believed that market participants had got ahead of themselves and we still think this is the case. Never in the history of the Federal Reserve have they cut rates by 150 basis points in a calendar year without a recession. Furthermore, there is an election this year and the Fed will not want to be seen as influencing events.
Despite the Fed talking down rate cuts, US yields fell quite sharply late in the month on news that treasury auction sizes are set to slow down after April, meaning there will be less new supply flooding the market. The declining yields also resulted from slightly weaker US jobs data and the ‘flight to safety’ on the back of further regional bank concerns.
On the wider credit market, investment grade spreads in the US hit their tightest level post Global Financial Crisis in January, as demand continues to outstrip supply and soft landing is increasingly becoming the central view. High-yield was again a strong relative performer, but spreads continue to look ubiquitously tight and are priced for perfection. As such, we prefer to play our current fixed income exposure through high quality short-dated issues, where the starting yields on offer are some of the best in the last decade and where we stand to benefit from a normalisation of the yield curve in the coming months.
January was another month plagued by geopolitical tensions and consequently oil prices gained 6% on the month, leaving Brent Oil above $80 per barrel for the first time since the end of November. Tensions in the Red Sea were further elevated by a drone-attack towards the end of month which killed multiple US troops and President Biden has ominously promised to respond. Therefore, a resolution doesn’t appear to be in the offing and this will likely continue to push up the price of oil. Furthermore, US production was ramped up to a record amount last year, but there are signs that this source of supply may be weakening, with US crude inventories falling by the largest margin since August in the final week. Simultaneously, the Saudi Arabian government ordered Saudi Aramco, the world’s largest oil producer (responsible for 10% of global supply), to halt plans to increase production by one million barrels per day. The supply picture is therefore weak and supportive for oil prices, but given slowing growth globally and the Chinese economy continuing to struggle, the demand picture is also waning. On balance, the risks appear slightly skewed to upside in the near term, but looking further out, Organisation of the Petroleum Exporting Countries (OPEC+) have a reported 5.1 million barrels per day of spare capacity and a weakening of the alliance could therefore strengthen the supply picture and exert downward pressure on the oil price.
Gold was down 1% over the month largely resulting from the expectation of fewer rate cuts in 2024 and the Fed striking a more hawkish tone.
UK house price performance markedly exceeded expectations, increasing 0.7% compared to December, bringing the yearly figure from a 2% decline closer to stagnation. This was the most muted decline in 12 months, largely attributed to average mortgage rates falling for the first time in three years. Mortgage demand has naturally picked up and net mortgage approvals hit a six-month high in January. Subsiding inflation alongside wage growth remaining elevated has resulted in real wage growth in the UK. When combined with falling mortgage rates, housing affordability has markedly improved. London house prices have seen the most substantial decline and affordability is the highest since 2014, at 13x the average salary.
US house prices continues to be a different picture, as the vast number of residents with mortgages fixed for 30 years has prevented the house price declines experienced in the UK and Europe. The inability to transfer these mortgages has kept demand for new homes elevated and consequently they rose 8%, whilst existing home sales declined 1%.
*Figures below 50 indicates a contraction in activity whereas figures above 50 indicates expansion.
All Index data figures are sourced by Morningstar and correct as at 31 January 2024, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.