Sentiment swings from one extreme to the other as investors price in a soft landing
Market sentiment had once again swung from one extreme to the other. The subsequent rally was powerful, with global equities retracing a significant percentage of their 2022 losses. If central banks manage to achieve an economic soft landing, the argument that the bear market has finished makes sense. However, this was not guaranteed, and in the short term markets were in danger of getting ahead of themselves.
A broad-based surge across equities, commodities and bonds
It was a great start to the year for financial markets. Global equities surged 5% in January with broad increases across the globe, as sentiment was buoyed by China's reopening and better than expected inflation and economic data. Markets in the UK, the US and Japan each rose 4% in sterling terms. The strongest gain came from China, where stocks jumped 9%, propelling strong gains across emerging markets. India was the notable exception, where the implosion of the Adani Empire following accusations of fraud had market-wide repercussions.
Commodities also had a strong start despite slowing growth across much of the globe. The China reopening, a weaker US dollar and the search for value over growth all contributed to this move. Gold soared to a new record high in sterling terms. UK bonds rallied a further 3%.
In sector terms the recovery broadened to include technology stocks, which rallied from oversold levels despite the difficult operating environment for many leading companies as the prior boom continued to unwind. This was underlined by a second consecutive poor quarterly earnings season, resulting in widespread job cuts across majors such as Microsoft, Amazon, Salesforce and Meta. Investors were prepared to look through this in expectation of lower interest rates over the coming year.
Remarkably resilient data fuels soft-landing hopes
The more positive tone was fuelled by growing optimism that central banks might pull off an economic soft landing. For all the recent talk of recession, the data remained remarkably resilient. US GDP growth decelerated to 2.9% in the final quarter of 2022, down from 3.2% in the third quarter. The unemployment rate fell to a 50-year low following another strong jobs number. Even the UK narrowly avoided falling into recession: GDP was flat in the fourth quarter, having fallen 0.2% in the third, which was poor rather than catastrophic.
The Bank of England was now expecting a shorter and shallower recession in 2023 than previously forecast. Better data also prompted the IMF to raise its growth outlook for the first time in a year, saying it saw a turning point for the global economy and that while the risk of a global recession remained it was diminishing, thanks mostly to the resilience of the US consumer and China's reopening.
The Fed acknowledges that the disinflation process has started
Inflation continued to trend gradually lower, although it remained at elevated levels across the West. The annual rate of consumer prices was running at 6.4% in the US and 10.5% in the UK, where it was proving particularly sticky in the face of a weaker currency. This triggered large-scale strikes across the public sector, the latest in a series of political challenges for the UK Government.
January saw further interest rate hikes of 0.25% to 4.5% in the US, 0.5% to 4.0% in the UK and 0.5% to 2.5% in the Eurozone. However, for the first time in this cycle US Fed Chair Powell acknowledged that a disinflationary process had started. Equity and bond markets saw this as a pivotal moment.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
Scope for disappointment if the fight against inflation is not yet won
With economic growth proving resilient and the US Fed becoming less hawkish on the outlook for further rate hikes, investors were enjoying the best of both worlds. This raised hopes that central banks would be able to engineer a soft landing, where interest rates peak at a level that does not trigger a recession. This was a credible view but by no means guaranteed.
Inflation was slowing but did not look like it was going away any time soon. And with an unexpectedly strong jobs market, the risk remained that the US central bank would continue hiking rates above current expectations to cool things down. This could create further headwinds going forward.
Forecasting also remained problematic. Economies were still normalising after the pandemic shifted an unnatural level of demand away from areas such as hospitality and leisure towards online entertainment and e-commerce. Consumer demand had since swung back to areas denied during lockdown, meaning that resources such as labour needed to readjust. Meanwhile, demand for goods and services that benefited from lockdowns was now dropping, as consumer spending on items such as online subscription services and garden furniture was relatively tapped out. This process was clouding the overall data, making it harder to predict the trend for 2023.
The old mantra "don't fight the Fed" has been forgotten, but may yet return.
While the overall outlook was clearly improving, we should expect further bumps along the road. Markets were betting against whether interest rates would rise as much as policymakers said they would, which left scope for disappointment, particularly as the fight against inflation was not yet won.
Having increased exposure to equities across our standard portfolios during the October lows, we made no further changes to strategy at this point. We remain patient for further opportunities to add on weakness.
Value in the UK, Japan and emerging markets
Our emphasis remains on value in markets such as the UK, Japan and emerging markets, where valuations are more attractive and ownership levels are low. These regions stand to benefit disproportionately from a shift in global leadership away from the US.
Gold and commodities for diversification
Commodities, gold and other alternative assets continue to add diversification and uncorrelated returns while the macro environment remains uncertain. Gold's surge to a new record high in sterling terms during January underlines the value of this allocation.
Positioned for a range of outcomes
Our focus remains on maintaining robust portfolios that are positioned for a range of likely outcomes. The combination of value-oriented equities, commodities and alternative assets provides resilience whether the soft landing materialises or further bumps lie ahead.
Patient for further opportunities
Having added to equities during the October lows, we remain patient and ready to deploy remaining cash on any further weakness. The rally has been powerful, but the overall outlook warrants a measured approach.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
Make an enquiry →