Market Analysis Jan 2022

month witnessed a spike in bond yields, contributing to a challenging environment for equity investors. The looming possibility of US interest rate hikes, coupled with geopolitical uncertainties, limited options for investors. The equity landscape showed a clear divide, with growth-oriented sectors such as IT and consumer discretionary experiencing substantial losses, while energy stocks surged on the back of rising inflation concerns.

In January, US equities faced a decline driven by mounting apprehensions. Investors turned cautious as expected rate hikes and escalating tensions between the US and Russia over Ukraine loomed large. Federal Reserve Chair Jerome Powell's confirmation of an upcoming rate hike in March, attributed to high inflation and a robust labor market, added to market unease. While Powell mentioned a predictable approach to adjusting the Fed's balance sheet after interest rate hikes, concerns remained about the sustainability of inflation levels.

Chair Powell's acknowledgment of the likelihood of substantial inflation decline in the latter half of the year was offset by persistent risks of inflation outpacing expectations. Despite the concerns, early Q4 GDP growth estimates exceeded expectations, reflecting a quarter-on-quarter annualized increase of 6.9%.

The energy sector stood out with significant gains, driven by expectations that sanctions could discourage Russian activities in Ukraine. Conversely, consumer discretionary and real estate sectors faced weakness, and tech stocks underperformed as concerns over inflation outweighed short-term optimism related to the upcoming earnings season.

January brought declines to Eurozone equities, attributed to uncertainties surrounding US interest rates and the situation in Ukraine. A pronounced split between value and growth segments was observed. While the MSCI EMU Value Index registered positive returns, highly valued sectors like software, semiconductors, and healthcare equipment & services experienced notable declines. Energy and financials emerged as the strongest sector performers.

Annual inflation in the Eurozone rose to 5.0% in December, primarily driven by soaring food and energy prices. Despite calls to respond to above-target inflation with quicker rate hikes, European Central Bank President Christine Lagarde maintained the plan to leave rates unchanged in 2022, affirming a cautious stance. The Eurozone's GDP exhibited a quarterly increase of 0.3% in Q4 2021, bringing the region's economy back to its pre-pandemic size. The flash eurozone composite purchasing managers' index (PMI) reflected weakness in services due to the Omicron wave, while the manufacturing sector PMI signaled expansion.

The UK equities market displayed mixed performance in January, with large-cap equities achieving gains while small and mid-cap equities faced losses. A rotation towards previously unpopular sectors contributed to the outperformance of internationally diversified large cap resource stocks, banking, and tobacco companies. Despite market volatility, consensus earnings growth estimates for UK companies remained stable.

Positive earnings surprises from consumer-facing firms, including major UK retailers, offered a silver lining. The Office for National Statistics reported robust 0.9% GDP growth in November, surpassing consensus estimates and bringing the economy back to pre-pandemic levels. However, concerns over inflation and interest rate trends persisted, affecting market sentiment towards domestically focused companies. Additionally, worries about a cost of living crisis and the performance of travel and leisure sectors added to the negative sentiment.

In January, the Japanese stock market witnessed a decline of 4.8%, with small-cap indices underperforming, particularly in the technology-focused Mothers market. US Fed meeting minutes and expectations for US interest rates set the tone, influencing sentiment. The outlook for US interest rates also drove changes in market dynamics, leading to the outperformance of value-style stocks, particularly in financial-related sectors.

In Asia ex Japan, markets experienced a modest decline amidst a volatile trading month. Concerns about rising oil prices, supply chain disruptions, and geopolitical tensions between Russia and Ukraine weakened investor sentiment. South Korea and Chinese shares were among the hardest-hit, while the Philippines emerged as the best-performing market.

January saw a rise in government bond yields, impacting both stock and corporate bond markets. Heightened concerns about elevated inflation and an impending tightening stance from the Federal Reserve contributed to the uncertainty. The US dollar index reached its highest level since mid-2020. Fed Chair Powell's comments signaled potential for a more aggressive tightening trajectory.

US 10-year Treasury yield rose from 1.51% to 1.78%, with the German 10-year yield crossing 0% for the first time since May 2019. Corporate bonds experienced negative total returns and wider spreads. Europe fared better than the US in corporate bonds, while emerging market debt exhibited mixed performance.

Global equities' sharp declines in January had little impact on convertible bonds, with the Refinitiv Global Focus index showing a -4.1% return. Despite primary market activity, valuations became slightly more expensive.

In the cryptocurrency realm, Bitcoin experienced a price decline, possibly influenced by expectations of evolving US monetary policy.

January was marked by rising gold and WTI crude oil prices, reflecting complex global economic conditions. Agricultural commodities and industrial metals saw positive performance, influenced by supply chain dynamics, demand trends, and market sentiment.

As January unfolded, global markets navigated a challenging landscape characterized by uncertainties related to interest rates, geopolitical tensions, and persistent inflation concerns. While some sectors faced losses, others saw gains, reflecting the complexity of economic interactions on the world stage. As always, it's important to remember that past performance is not indicative of future results, and informed decision-making remains paramount in investment strategies.