Senior Investment Editor
Summary: Market performance in January indicates that while some are increasing the hopes of a soft landing, markets are waiting to see what will play out. Will the recession come? Will any geopolitical tension break? Will we see rate cuts? How will US fiscal spending pan out? Will inflation come back? These are some of the questions that could tell the market whether it's up or down from here. But until there's a clearer direction - we wait.
At the regional level it becomes there’s a divide in performance. The US and Europe post returns of 1.6 and 1.5% respectively for the month. The Asian region and emerging markets (EM) were both down. Asia with –1.7%, whereas the EM index fell by 4.7%. While there’s a big difference between those numbers, one of the reasons behind the falls are the same, as China are pulling down both. The reason for the difference is that a large proponent of the Asian index is Japanese stocks, which had a good month, but Japan isn’t part of the EM index, of which China makes up a relatively larger part.
The Chinese economy is faced with a wide variety of challenges, which have sent the Chinese stock market down.
Communication services was the best performing sector during an earnings-heavy January. Within this sector it may be worth highlighting a company like Netflix, which presented positive earnings late in the month. Also, the second-best performing sector, information technology, seemed to be positively affected by earnings, as companies like Microsoft posted good results.
Materials and utilities are at the bottom of the chart falling 4.7 and 3.4% respectively. While there would be several reasons for this, two could be an expression of some worry about the stability of the economy despite the positive results in other sectors, as well as bond rates remaining somewhat attractive relative to especially utilities, which by some may invested in for dividends.
Global bonds had a relatively quiet month ending up in a small minus. The asset class may come into focus later, as the big central banks incrementally move closer towards pushing the rate-cut button.
Sources: Bloomberg and Saxo
*Please note that the sector graph omits the Real Estate sector this time around. This is because Bloomberg hasn’t posted prices for MSCI World Real Estate (MXWO0RE), which has been used as the proxy for that sector, since October 31st.
Global equities are measured using the MSCI World Index. Equity regions are measured using the S&P 500 (US) and the MSCI indices Europe, AC Asia Pacific, and EM respectively. Equity sectors are measured using the MSCI World/Sector] indices, e.g., MSCI World/Energy. Bonds are measured using the USD hedged Bloomberg Aggregate Total Return indices for total, sovereign, and corporate respectively. Global Commodities are measured using the Bloomberg Commodity Index. Oil is measured using the next consecutive month’s WTI Crude oil futures contract (Generic 1st CL Future). Gold is measured using the gold spot dollar price per ounce. The US Dollar currency spot is measured using the Dollar Index Spot, measuring it against a weighted basket of the following currencies: EUR, JPY, GBP, CAD, SEK, and CHF. Unless otherwise specified, figures are in local currencies.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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