Market Analysis Jan 2023

January saw robust gains in US equities, as investors continued to focus on inflation, which had moderated for the sixth consecutive month in December. The consumer price index (CPI) retreated from 7.1% to 6.5%, primarily due to a moderation in energy and food costs. Coupled with a stronger-than-expected GDP growth of 2.9% (seasonally adjusted annual rate), this led investors to anticipate a more gradual pace of rate hikes from the Federal Reserve in the future. Despite expectations of a slightly softer earnings season compared to Q4 2021, risk appetites grew, and nearly all market sectors demonstrated strength over the month.

Investors leaned toward growth-oriented stocks over traditionally defensive sectors like utilities, consumer staples, and healthcare. Notably, technology and consumer discretionary sectors recorded the most significant gains. Among the top performers for the month were travel, automobile, entertainment, and media stocks.

In January, Eurozone shares outperformed other regions, propelled by economically-sensitive sectors such as information technology and consumer discretionary. Real estate also rebounded after a lackluster 2022. Within the consumer discretionary sector, luxury goods stocks shone, boosted by China's economic resurgence. However, energy emerged as the weakest sector, and defensive sectors like utilities and healthcare lagged behind.

According to Eurostat data, the Eurozone economy experienced a 0.1% growth quarter-on-quarter in Q4, representing a deceleration from the preceding quarter. Nonetheless, forward-looking indicators indicated the Eurozone's potential avoidance of a recession. The flash Eurozone composite purchasing managers' index for January reached a seven-month high, clocking in at 50.2 compared to December's 49.3.

Inflation in the region continued to ease in December, with an annual inflation rate of 9.2%, down from November's 10.2%. The primary contributors to inflation were food, alcohol, and tobacco, with energy ranking second, as natural gas prices remained below the elevated levels of 2022. Despite the decline, European Central Bank President Christine Lagarde cautioned that further interest rate hikes would remain necessary to achieve the 2% inflation target.

January witnessed gains in UK equities, although the advance was not as robust as in other regions. The consumer discretionary and financial sectors stood out as top performers, while the more defensive consumer staples and healthcare sectors lagged. Economically sensitive segments of the UK equities outperformed, mirroring other markets' hopes that the US Federal Reserve might cut interest rates by the end of 2023.

UK small and mid-cap equities (smids) outshone, with domestically focused consumer stocks performing well, partly due to indications that the UK economy was holding up better than anticipated. Encouraging trading updates from consumer stocks drove strong share price performances in the retail, travel and leisure, and housebuilding sectors. Domestically oriented banks also fared well, benefitting from their exposure to emerging markets amid China's reopening prospects.

Recent UK macroeconomic data indicated that underlying growth had proven more resilient than previously believed, supported by easing energy prices, fostering hopes of a less severe recession. The latest monthly GDP update for November unexpectedly showed growth, expanding by 0.1%.

In January, the Japanese stock market rebounded from the previous month's dip, achieving a local return of 4.4%. The yen initially gained strength against the US dollar before relinquishing some of those gains in the latter half of the month. Investor attention remained on the Bank of Japan, with discussions revolving around potential changes to the yield curve control policy. The corporate earnings season for the quarter ending in December commenced toward the end of the month, with early indications suggesting a positive outlook.

Across Asia ex Japan, equities posted positive gains, with Chinese shares achieving robust growth after the government relaxed Covid-19 restrictions and implemented measures to support the country's property market. Hong Kong and China resumed quarantine-free travel, signaling the end of China's zero-Covid policy, while South Korea, Taiwan, and Singapore also achieved substantial growth. India stood as the sole index market to conclude the month in negative territory, attributed to foreign investors' sell-off and investor caution amidst slowing economic growth.

In Japan, the debate continued over inflation and the sustainability of levels above the Bank of Japan's 2% target. Preliminary surveys of spring wage negotiations hinted at moderate wage growth. The corporate earnings season and potential changes to the Bank of Japan's policy remained focal points.

In January, global government bond yields retreated, leading to a rise in bond prices, owing to positive inflation news from the US. While the market anticipated a more measured pace of rate hikes by the Federal Open Market Committee (FOMC), the month featured few central bank meetings. The Bank of Canada raised rates but signaled a pause in its hiking cycle, whereas the Bank of Japan made no further adjustments to its yield curve control policy.

Credit markets outperformed government bonds across high yield and investment grade markets in both the US and Europe. Risk sentiment improved as inflation moderated and growth surpassed expectations, particularly in the eurozone and China. However, US activity data indicated further softness, with better-than-expected GDP growth attributed to inventory buildup, while other indicators like retail sales and industrial production declined.

Inflation rates in the US and the eurozone continued to ease, primarily due to declining energy prices. US core inflation exhibited a modest uptick, while the general trend leaned disinflationary. In contrast, core inflation across the eurozone remained persistent, possibly prompting a more hawkish response from the European Central Bank (ECB).

The US dollar weakened against most developed market currencies, with the Australian dollar performing strongly on the back of better-than-expected inflation and optimism surrounding China's reopening. Emerging market currencies also gained strength, as US interest rates were projected to peak.

Convertible bonds benefited from tailwinds in the equity market, yet they didn't fully partake in the upside. The Refinitiv Global Focus trailed behind the MSCI World index, but primary market activity remained robust, with USD 5.4 billion of new paper issued across the US and Europe. Convertibles traded approximately 1% below their fair value, with Asia being the region of relatively cheaper options.