Overall Market Summary:
Stock markets had a mixed performance in January, with developed markets advancing while emerging markets experienced negative returns. Signals from major central banks suggested that interest rate cuts might not come as soon as hoped. In bond markets, government bond yields rose, causing prices to fall. Oil prices increased amid ongoing Middle East conflicts and shipping disruptions.
United States:
US shares advanced in January, supported by strong corporate earnings and data suggesting a soft landing for the economy. Expectations of imminent rate cuts also boosted shares, although these hopes were dashed by the Federal Reserve (Fed) at month-end.
Communication services and information technology were the strongest sectors, buoyed by robust earnings and positive outlooks from some large-cap companies. In contrast, real estate and materials were among the weakest sectors.
US GDP grew at an annualized rate of 3.3% in Q4 2023, with an overall growth of 3.1% for the year. Annual inflation, measured by the consumer price index (CPI), rose to 3.4% in December from 3.1% in November. The labor market remained firm, with non-farm payrolls adding 216k jobs in December and the unemployment rate steady at 3.7%. The ISM manufacturing index indicated contraction but improved to 49.1 from 47.1 in December (a reading above 50 indicates expansion, while below 50 implies contraction).
The Fed held its policy-setting meeting at the end of January, keeping interest rates on hold at 5.25-5.5%. Fed Chair Jerome Powell indicated that while rates have peaked, a rate cut at the next meeting in March is unlikely.
Europe:
Eurozone shares gained in January, led by the information technology (IT) sector. The communication services sector also performed strongly. Sectors that had rallied in late 2023 on hopes of imminent rate cuts, such as utilities and real estate, were weaker performers.
In the IT sector, semiconductor equipment stocks registered robust gains despite facing a ban on exporting some high-end chipmaking equipment to China. The software subsector also performed well.
Hopes for an early interest rate cut from the European Central Bank (ECB) began to fade after December inflation was confirmed at 2.9%, up from 2.4% in November. However, January's flash estimate showed inflation easing to 2.8% year-on-year. The ECB kept interest rates unchanged at its January meeting, with rate cuts still expected later in the year. ECB President Christine Lagarde noted that "the disinflation process is at work."
The eurozone economy registered zero GDP growth in Q4 2023, following a -0.1% contraction in Q3, resulting in annual GDP growth of 0.5% for 2023. The German economy was a significant drag, shrinking by -0.3% in Q4.
United Kingdom:
UK equities fell in January as expectations for interest rate cuts were pushed out. The Office for National Statistics (ONS) reported that the Consumer Prices Index increased to 4.0% in December from 3.9% in November.
The consumer inflation numbers added complexity to the UK macroeconomic picture, with other ONS statistics revealing slowed wage growth in the three months to November. However, the UK economy performed better than expected in November.
Chancellor Jeremy Hunt hinted at major tax cuts in the upcoming spring budget. Amid increased geopolitical uncertainty, the market struggled, with large UK-quoted diversified energy, basic materials firms, and financials underperforming.
The technology, consumer discretionary, consumer staple, and healthcare sectors outperformed. Overseas inbound bids for smaller companies remained a theme, supporting UK small and mid-sized companies as overseas buyers made further approaches.
Japan:
The Japanese equity market had a strong start in 2024, with the TOPIX index returning 7.8% in January and the Nikkei 225 surging by 8.4%, driven by large-cap stocks. Foreign investors led the rally on expectations of structural changes in Japan, including the launch of the new NISA (Nippon Individual Savings Account) for Japanese retail investors.
Despite beginning the year with an earthquake in the Noto region and an accident at Tokyo Haneda airport, the market responded positively, reaching a new post-bubble high intra-month due to renewed expectations of a policy change by the Bank of Japan (BOJ).
The BOJ did not make any policy changes at its January meeting, leading to a depreciation of the Japanese yen, which further boosted the stock market. Value stocks, including automotive, trading companies, banks, and securities companies, rose strongly, whereas domestic-oriented and defensive stocks lagged.
The Tokyo Stock Exchange (TSE) announced a list of companies responding to their request for management plans considering capital cost and stock prices, seen as a significant step in Japan's corporate governance reforms.
Quarterly earnings results started being released late in the month, showing encouraging numbers despite some technology companies downgrading their earnings estimates.
Asia (excluding Japan):
Asia ex Japan equities fell in January as investors scaled back their expectations for swift interest rate cuts amid ongoing concerns about weaker economic growth in China. Mainland China, Hong Kong, and South Korea were the weakest index markets, while India and the Philippines achieved modest gains.
Investor concern over China's economic growth persisted, with factory output contracting for the fourth consecutive month in January. The ongoing property market challenges further weakened sentiment.
Share prices in Thailand and Singapore were also significantly lower, while Taiwan, Malaysia, and Indonesia saw more modest declines. In contrast, India saw modest gains due to strong inflows from overseas and domestic investors.
Emerging Markets:
Emerging market (EM) equities declined in January, underperforming developed markets. China was the main drag on performance, with concerns that the Federal Reserve (Fed) will maintain higher rates for longer adding to negative sentiment.
Chile posted the biggest losses, with peso weakness weighing on returns and difficulties at a major lithium producer. China underperformed due to property challenges and news of further US sanctions on Chinese technology companies. The Korean market also lagged the index.
Thailand underperformed, amplified by local currency weakness, as did the Czech Republic. Brazil underperformed despite resilient macroeconomic data and a cut to the central bank's policy rate to 11.25%. In South Africa, the rand weakened along with major industrial and precious metal prices.
Poland outperformed despite a negative return in US dollar terms. Similarly, Peru and Mexico were down but did better than the index. Taiwan outperformed, helped by the technology sector. Saudi Arabia and the UAE also outperformed, benefiting from strength in energy prices.
Colombia generated positive returns, with the central bank cutting interest rates by 25 basis points to 12.75%. Local demand for equities boosted the market in India, while optimism about central bank rate cuts supported returns in Hungary. Kuwait and Turkey both gained, with Turkey raising rates to 45% and signaling the end of the hiking cycle.
Global Bonds:
In January, global government bond markets saw a partial reversal of the positive performance at the end of 2023. Despite encouraging news on disinflation, enthusiasm for near-term rate cuts subsided as the US economy demonstrated robust growth.
Yields rose across major government bond markets, causing prices to fall. The UK 10-year yield increased from 3.54% to 3.80%, German 10-year yields rose from 2.03% to 2.16%, and US 10-year yields increased from 3.87% to 3.95%.
Investment grade (IG) corporate bonds posted negative returns but outperformed government bonds, with new issuance absorbed well and spreads tightening further on hopes of a soft landing. Within high yield, the eurozone outperformed with tighter spreads and positive total returns exceeding those of investment-grade counterparts.
The US economy sustained its momentum, with Q4 GDP surpassing expectations (4.9% against a forecast of 2.0%) and the composite purchasing managers' index (PMI) for January reaching its highest level since June. In contrast, eurozone growth remained lackluster, with a disappointing German Ifo Index and a dip in consumer confidence.
Inflation pressures continued to ease. The Federal Open Market Committee's (FOMC) preferred measure, core PCE inflation, softened to 2.9% year-on-year in December.
The European Central Bank maintained rates but adopted a more dovish tone, noting progress on inflation. The FOMC meeting at the end of the month raised the bar for a March rate cut, with Powell indicating a need for greater confidence that inflation is moving sustainably toward 2%.
The dollar rebounded against its G10 peers as investors scaled back expectations for aggressive rate cuts. The Japanese yen was the underperformer, reversing some of the previous month's gains.
The FTSE Global Focus convertible bond index finished January with a loss of -1.4%, compared to gains for global equities. Convertible bonds could not benefit from the mid-month rally in technology stocks. Convertible primary markets started the year well, though volumes remained below average due to seasonality. Valuations of convertibles remain subdued.