UK
The FTSE All-Share delivered a return of 4.5% in January, with the FTSE 100 testing all-time highs later in the month. Mid-cap companies outperformed large cap and consumer discretionary, and financials were leading performers as more defensive sectors including healthcare and consumer staples lagged behind. Economic data during the month indicated that growth has been more resilient than expected with GDP growing 0.1% in November and the UK economy narrowly avoiding a technical recession. Despite suggesting a shorter and less severe recession, the Bank of England expects a recession to begin in the current quarter that will last until the first three months of 2024. The rate of price increases slowed for a second month in a row but the cost of food including milk, cheese and eggs kept inflation at a 40-year high.
Europe
An improvement in sentiment and surprising resilience of the eurozone economy was reflected in equity performance in January, with European stocks the best regional performers (+6.8%). Consumer discretionary, real estate and technology rebounded, with energy and utilities the laggards. The eurozone composite purchasing manufacturers’ index (PMI) data beat expectations, indicating a marked improvement in sentiment and that the region might avoid a winter recession. Consumer sentiment also continued to improve for the fourth consecutive month. Inflation headed lower again in December with a print of 9.2% against 10.2% in November, however European Central Bank President Christine Lagarde reiterated that further interest rate rises would still be required to return inflation to the 2% target.
US
A similar change in sentiment was seen in the US market, albeit with smaller gains than peers. The strongest performing sectors were technology and consumer discretionary, with growth stocks and SMID-cap (small and medium) companies outperforming. Results from the mega-cap companies throughout the month were mixed. Microsoft commented that it was observing a more cautious approach to spending, while Tesla was slightly ahead of expectations. Significant job cuts from US companies continued across Amazon, Meta, Disney, and some of the banks. A survey from the National Association for Business Economics showed that 20% of its members anticipate employment at their companies to fall over the coming months.
The US saw better than expected GDP data and further evidence of slowing inflation in January. The US economy expanded 2.9% against a consensus of 2.6% for Q4 2022, however growth still slowed from 3.2% in the third quarter. Consumer confidence also fell, as well as ongoing tightening in the labour market. Inflation figures for December confirmed a cooling to 6.5% from 7.1%, a large part of which was from energy and food cost moderation. The inflation data sparked further optimism in markets, particularly in the tech heavy NASDAQ Index, as investors positioned for a slower pace of rate rises from the Federal Reserve.
Japan
Japanese equities saw modest gains throughout January, as investors focus remained on the Bank of Japan (BOJ) and government bond yields. Early indications on corporate earnings suggest an optimistic tone, with companies likely to benefit from improved demand after the final lifting of Covid restrictions.
The BOJ purchased a record 23.69 trillion (£152 billion) worth of government bonds in January and expanded programmes of loans to banks hoping to ease relentless recent pressure on the Japanese bond market. The Japan 10 Year Government bond yield ended the month higher at 0.495% vs 0.415% at the beginning of the year. Uncertainty as to whether inflation will be sustained at a level above the Bank of Japan’s 2% target continued. Initial surveys of the spring wage negotiations indicate that moderate wage growth is likely, but it may not be high enough to cause a change in policy stance from the BOJ.
Asia ex Japan and Emerging Markets
Asia ex Japan and emerging markets recorded some of the strongest regional gains in January. Chinese equities provided strong returns after the government loosened its Covid-19 policy and enacted measures to support the country’s property market. Wider Asian markets also gained following the resumption of quarantine-free travel, with shares in South Korea and Taiwan notable outperformers throughout the month. Outside of Asia, Mexico performed strongly, despite a slowdown in economic activity indicators. Brazil and India underperformed, with the latter impacted by a fraud claim against large multinational company Adani Enterprises.
Fixed Interest
Global government bond yields fell in January on the positive inflation news. Yields on the UK and US 10-year government bonds fell 33 and 37 basis points respectively. Credit markets performed well and outperformed government bonds both in the US and Europe and across both high yield and investment grade markets.
Property
Real Estate Investment Trust (REIT) prices continued their recovery over the month, following a year where they were among the worst performers. The headwind of rising bond yields has abated somewhat, which has reduced pressure on valuations and concerns on debt costs. Future performance will be determined by companies’ ability to capture continued rent growth.
Alternatives
Real assets, including infrastructure and renewables, also benefitted from reduced pressure from bond yields with most closed-ended funds producing positive returns in January. Commodities saw a negative return for the month. Energy was the worst-performing component, with brent crude falling 3.9% and natural gas also seeing sharp moves lower, while industrial metals and precious metals achieved strong gains.
Past performance is not a reliable indicator of future performance.