Overall Market Summary:
Stock markets started 2023 strong with gains across global equities. China's reopening after ending its zero-Covid policy in late December boosted the markets. Signs of easing inflation in major regions also supported sentiment, raising hopes that central banks may be nearing the peak of their rate-hiking cycles. Emerging markets outperformed their developed counterparts. In fixed income markets, bond yields fell (indicating rising prices). Commodities saw a negative return for the month.
United States:
US equities made significant gains in January. The focus remained on inflation, which cooled for the sixth consecutive month in December, with the headline consumer price index (CPI) dropping to 6.5% from 7.1% due to moderation in energy and food costs. A stronger-than-expected GDP growth rate of 2.9% (seasonally adjusted annual rate) further buoyed investor sentiment, leading to expectations of slower rate hikes from the Federal Reserve. Risk appetites increased despite expectations of a softer earnings season compared to Q4 2021.
Other economic data were mixed but encouraging. The S&P Flash Composite PMI improved in January to 46.6 from 45.0, though it remained in contraction territory (below 50). Employment data was supportive, with weekly jobless claims at 186,000, the lowest since April and well below the expected 205,000.
Most market sectors saw gains, with traditionally defensive areas like utilities, consumer staples, and healthcare being overlooked in favor of growth-oriented names. Tech and consumer discretionary stocks led the gains, with travel and auto stocks among the strongest performers, along with entertainment and media stocks.
Europe:
Eurozone shares were among the best regional performers in January. Top-performing sectors included economically sensitive areas like information technology and consumer discretionary. Real estate rebounded after a poor 2022, and luxury goods stocks surged following China's economic reopening. Energy was the weakest sector, while defensive areas like utilities and healthcare underperformed.
Eurostat data showed the eurozone economy grew by 0.1% quarter-on-quarter in Q4, slowing from 0.3% in Q3. Forward-looking indicators suggested the eurozone might avoid a recession. The flash eurozone composite purchasing managers' index for January hit a seven-month high at 50.2, up from 49.3 in December.
Inflation edged lower in December, with an annual rate of 9.2% compared to 10.2% in November. The main contributors to inflation were food, alcohol, and tobacco, with energy prices in second place as natural gas prices remained below 2022 levels. ECB President Christine Lagarde indicated that further interest rate hikes would be needed to bring inflation back to the 2% target.
United Kingdom:
UK shares posted gains in January, though the advance was more muted compared to other regions. The consumer discretionary and financial sectors were among the top gainers, while more defensive sectors like consumer staples and healthcare lagged. Economically sensitive areas of UK equities outperformed, amid hopes that the US Federal Reserve might pivot to cutting interest rates later in 2023.
UK small and mid-cap equities outperformed as domestically focused consumer stocks did well, partly due to signs the UK economy is holding up better than expected. Consumer stocks generally reported encouraging trading updates, driving strong performances in the retail, travel & leisure, and housebuilding sectors. Domestically focused banks also performed well, benefiting from their emerging markets exposure amid hopes of China reopening.
Recent UK macroeconomic data suggested underlying growth was more resilient than previously thought, partly helped by easing energy prices, raising hopes for a milder-than-feared recession. November's monthly GDP data revealed unexpected growth of 0.1%.
Japan:
The Japanese stock market rose throughout January, reversing December's decline and achieving a 4.4% total return in local terms. The yen initially strengthened against the US dollar before giving back some gains in the second half of the month.
Investor focus remained on the Bank of Japan, following a surprise adjustment to its yield curve control policy in December. Speculation about further changes arose as 10-year bond yields tested the Bank of Japan's new upper limit, but policy was left unchanged. Attention then shifted to potential candidates to replace Mr. Kuroda as governor of the Bank of Japan, with the prime minister likely to nominate a new governor in early February.
The debate over inflation and its sustainability above the Bank of Japan's 2% target continued. Preliminary surveys of spring wage negotiations suggested moderate wage growth, potentially insufficient to trigger policy change at the central bank.
Corporate results for the quarter ending in December began at the end of January, with early indications of a positive tone, especially for service companies benefiting from improved demand after lifting Covid restrictions and resuming travel subsidies.
Asia (excluding Japan):
Asia ex Japan equities performed well in January. Chinese shares achieved robust gains after Beijing relaxed its Covid-19 restrictions, boosting economic growth. Government measures to support the property market and ease the regulatory crackdown on technology companies also lifted investor sentiment.
Other Asia Pacific markets benefited from resumed quarantine-free travel between Hong Kong and mainland China. South Korea and Taiwan saw significant growth due to renewed investor optimism, while gains in Hong Kong were more muted. Singapore ended the month positively, driven by an upbeat global forecast for Asian markets, which eased investor fears of an economic slowdown. Property, financial, and industrial stocks performed well.
The Philippines, Thailand, Indonesia, and Malaysia also saw solid growth. India was the only index market to end the month negatively, due to a sell-off by foreign investors and concerns over stalling economic growth.
Emerging Markets:
Emerging market equities thrived in January's risk-on environment. Cooling inflation in the developed world fueled optimism that interest rates may soon peak, with positive implications for growth. Developments in China, including economic reopening, easing regulatory pressures on the internet sector, policy support for real estate, and better-than-expected Q4 GDP growth of 2.9% year-on-year, boosted sentiment. The MSCI EM Index outperformed the MSCI World Index for the month.
The Czech Republic was the best-performing index market, with strong performance from a state-owned power utility company. Mexico also performed well, despite weaker manufacturing data and a slight inflation rise. Taiwan and Korea outperformed, driven by strong tech sector returns. Chile and Peru benefited from higher copper prices, driven by optimism about China's reopening. Hungary and Poland rebounded following poor performance in 2022 due to the Russia-Ukraine conflict.
Brazil underperformed due to softer macroeconomic data, rising inflation, and anti-government riots in the capital. South Africa lagged amid an ongoing energy crisis, with permanent rolling blackouts announced. Thailand, Indonesia, Malaysia, Qatar, and Saudi Arabia posted returns behind the index, impacted by weaker energy prices.
India saw negative returns amid allegations of fraud and share price manipulation at a major conglomerate. Turkey was the biggest underperformer as investors booked profits after recent strong returns.
Global Bonds:
Global government bond yields fell in January (indicating rising prices) on positive inflation news, particularly from the US. Few central bank meetings occurred, but markets anticipated a slower pace of rate hikes by the Federal Open Market Committee (FOMC). The Bank of Canada raised rates by 25 basis points (bps) but signaled a pause, while the Bank of Japan made no further adjustments to its yield curve control policy despite rising core inflation.
Credit markets outperformed government bonds in the US and Europe across both high yield and investment-grade markets. Improved risk sentiment was driven by moderating inflation and better-than-expected growth, particularly in the eurozone and China, alleviating recession fears.
In the US, activity data pointed to further weakness. The better-than-expected Q4 GDP was driven by inventory build-up, while other indicators, including retail sales and industrial production, fell.
Headline inflation rates in the US and eurozone continued to ease, driven by falling energy prices. US core inflation showed a modest month-on-month uptick, but the disinflationary trend was clear. In contrast, eurozone core inflation remained sticky, likely prompting further hawkish actions from the European Central Bank (ECB).
US 10-year yields fell from 3.88% to 3.51%, and two-year yields fell from 4.42% to 4.21%. Germany's 10-year yield declined from 2.57% to 2.29%, and the UK 10-year yield fell from 3.67% to 3.34%, with the two-year yield dropping from 3.56% to 3.46%.
The US dollar weakened against most developed market currencies, with the Australian dollar performing the strongest among G10 currencies due to stronger-than-expected inflation and optimism around China's reopening. Emerging market currencies also strengthened, reflecting expectations of peaking US interest rates.
Convertible bonds benefited from equity market tailwinds but lagged in upside participation. The Refinitiv Global Focus gained 4.8% in US dollar terms, underperforming the MSCI World Index. January saw active primary market activity with USD 5.4 billion of new issuance, split between the US and Europe. Convertibles are trading about 1% below their fair value, with Asia remaining the cheapest region.