Senior Investment Editor
Summary: After a tough end to 2022 for global financial markets, January will be remembered for three things: 1) positive returns are great, 2) it’s been a rollercoaster ride up and down for the past three months, and 3) central bank meetings and earnings season will be important in February.
Global equities increased with seven percent over January. A month ago, when we looked at December, they fell more than four percent. Back then, we argued that the financial markets are on a rollercoaster ride and January only strengthened that analogy.
Check out these numbers: in November, global equities performance was +6.8%, in December-4.3% and now January posted +7%. Since October, these market rewinds have shown monthly global equity performance with changing falls and increases of more than four percent every single month. Up and down, and up…
While this relatively simple depiction of how markets are performing isn’t an absolute truth, it does point to financial markets having a hard time figuring out what to believe in. To some extent a fair issue, as there’s enough to worry about like conflicting macroeconomic figures, geopolitical conflicts, inflation and interest rate increases and a reopening of the Chinese economy. Whether or not recession is coming, whether central banks are making financial conditions too harsh and whether the tightening regime is soon gone are just a few of the topics that occupy market participants and add to the seemingly directionless performance experienced over the past three months.
Towards the end of January, earnings season, which runs into February, as well as some important central bank meetings as early as 1 February were in focus.
US 6.2%.
The American market – as the lowest performing region – climbed six percent in January despite discussions of recession picking up. Still, the market was positive because of a variety of factors, such as easing inflation numbers, strong job market reports and whispers of easing financial conditions based on the potential for less aggressive central bank policy.
Europe 6.7%.
European stocks increased a bit more than seven percent in January. A key driver of this performance is the expectation – or hope rather – that leading central banks will slow their interest rate increases, either in terms of actual tightening or a slower pace of tightening, which will create a more attractive business environment than currently.
Asia 7.8%, Emerging Markets 7.9%.
Both the Asian and Emerging Market regions were supported by a strong performance in China after ending it’s lockdown-heavy zero COVID policy, despite more muted performance in the days after being closed for Chinese New Year.
The equity sectors haven’t been able to get off the rollercoaster either. Back in November, every sector posted positive returns, in December negative returns and in January, we’re back to a thrill ride with only Healthcare in minus and Utilities at status quo.
Interestingly, it was Consumer Discretionary that fell the most in December (-8.6%), but in January, it stood on top of the world, returning almost 15% for the month. To a large extent, you can almost flip last month’s performance.
Take an area like Information Technology, which is always in focus it seems. In December, it fell by eight percent, while it more than made that back in January, increasing with 10.
Global bond performance – and specifically corporate bonds – posted strong returns of more than two and three percent respectively relative to what can be expected by the asset class. The positive numbers come on the back of central bank policy and a potential belief that especially corporate investment grade bonds may fare better than equities in the uncertain environment we are experiencing currently.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
