Market Analysis Jan 2021

January saw US equities decline due to heightened market volatility triggered by unconventional and specifically targeted trading activity by retail investors. This dampened the risk appetite that had propelled the S&P 500 to new heights. This volatility overshadowed prior optimism stemming from the anticipated economic boost following President Biden's inauguration. The Federal Reserve acknowledged the decelerated pace of the US economic recovery. Among market segments, consumer staples and industrials experienced weakness, whereas energy and healthcare exhibited greater resilience.

In January, Eurozone equities experienced a decrease due to concerns over the sluggish distribution of Covid-19 vaccines, compounded by political instability in Italy following Prime Minister Conte's resignation. Additionally, the European Commission's consumer confidence survey indicated a decline of 1.7 points compared to December. The German economy reported modest growth of 0.1% in Q4 2020, while French GDP contracted by 1.3%.

In the market, the healthcare and IT sectors performed robustly, while real estate and consumer staples lagged behind.

The FTSE All-Share index in the UK reported negative returns for January, as the financials, industrials, and consumer goods sectors underperformed. Conversely, gains were witnessed in the oil & gas and basic materials sectors.

While the pace of vaccine distribution accelerated, the imposition of lockdown restrictions dampened economic activity. The composite purchasing managers' index, which gauges activity in the service and manufacturing sectors, decreased from 50.4 in December to 40.6 in January, indicating contraction below 50.

Japanese equities registered a slight gain of 0.2% in January, initially boosted by positive news from the US Federal Reserve. Small caps experienced weakness during the first half of the month. Despite the yen's strengthening against the US dollar in 2020, it concluded January with slight depreciation. However, the Japanese economy dipped into deflation again due to transient factors such as lower utility prices and mobile phone charges.

Asia ex Japan equities recorded robust gains in January, driven by optimism concerning the global distribution of Covid-19 vaccines and anticipated US fiscal stimulus. The index was spearheaded by China, where domestic economic indicators remained sturdy, and Taiwan, buoyed by strong performance in the technology sector. Nevertheless, apprehensions regarding a protracted recovery from the pandemic triggered a sharp end-of-month sell-off. Hong Kong, Singapore, and South Korea underperformed the Asia ex Japan index, even though they ended the month higher.

Concerning fixed income, government bond yields rose early in January, leading to declining prices. The Democratic Party's victory in Congress bolstered expectations of increased fiscal stimulus, causing an 18 basis point (bps) elevation in the US 10-year yield to 1.09%. A comparable trajectory was observed in the UK, where the 10-year yield increased slightly over 13 bps to 0.33%. European yields initially surged but were tempered by perceived hawkishness from the European Central Bank (ECB) and rising political risk in Italy. The German 10-year yield concluded 5.5 bps higher at -0.52%.

Investment grade credit experienced negative total returns, whereas high yield bonds, characterized by credit ratings below investment grade, displayed a more speculative nature. US credit outperformed US Treasuries, while the euro and sterling markets aligned with government bonds. Global high yield credit markets delivered modest positive returns, primarily driven by income. Hard currency emerging market (EM) debt decreased by 1%, with EM corporate and local currency debt recording slight declines.

Despite an initially positive start, global stock markets closed the month with losses. Nonetheless, convertible bonds exhibited resilience, participating in the strong performance of the initial three weeks while also providing protection during downturns. The Refinitiv Global Focus index, measuring balanced convertible bonds, advanced by 0.3%. Due to robust demand, valuations for convertible bonds increased, particularly within the US market.