Market Analysis Jan 2019

January saw a significant recovery in US equities from the substantial declines experienced in December. Despite keeping its policy rate unchanged, the Federal Reserve indicated a greater willingness to adjust rates based on economic momentum, rather than gradual hikes. This stance was supported by US economic data showing signs of weaker momentum and subdued inflation pressures. Additionally, President Trump's announcement of plans to meet with China's President Xi Jinping in February to address the ongoing trade dispute boosted risk assets on a global scale.

The US labor market remained robust, with 304,000 non-farm payroll jobs added in January, surpassing the projected 165,000. However, year-on-year average earnings growth cooled slightly from 3.3% to 3.2%, and December's headline inflation experienced a decline. While the Q4 earnings season unveiled more positive surprises than disappointments, influential market players like Caterpillar, Amazon, and Apple expressed caution due to global economic challenges.

All sectors of the S&P 500 achieved gains in January, with industrial and energy stocks standing out as particularly strong performers. Defensive sectors such as consumer staples, utilities, and healthcare also yielded positive returns, albeit not as robust as in other areas.

Following a weak conclusion to 2018, Eurozone equities rebounded in January, with the MSCI EMU index delivering a 6.3% return. Nearly all sectors, excluding communication services, which performed well in December, displayed positive growth. Notably, the automotive and semiconductor sectors experienced substantial gains, driven by positive developments in trade relations, ongoing discussions between the US and China, and the EU's proposal for a zero-tariff trade agreement with the US concerning industrial goods, including automobiles.

However, economic data continued to reflect fragility in the Eurozone, with Q4 GDP growth at 0.2% quarter-on-quarter, mirroring Q3 performance. Furthermore, Italy entered a recession with two consecutive quarters of economic contraction, and the flash composite purchasing managers' index hit a 66-month low of 50.7 in January, indicating a near-stall in business growth. The unemployment rate held steady at 7.9% in December, marking its lowest level since October 2008.

The European Central Bank (ECB) acknowledged increased downside risks to the Eurozone's growth outlook and maintained its stance to keep interest rates unchanged "at least through the summer of 2019."

UK equities demonstrated positive performance in January, with the FTSE All-Share index rising by 4.2%. However, their performance lagged behind global equities due to the underperformance of defensive components in the market relative to the resurgence of risk appetite. The FTSE 100, with its international focus, achieved a 3.6% increase, hindered by the strength of the pound.

This comparatively weaker performance can be attributed, in part, to UK large-cap stocks outperforming at the close of 2018 amid concerns about the global economy, US monetary policy shifts, and political uncertainties. Nevertheless, the pound rebounded in January, fueled by optimism that the UK would avoid a "no deal" Brexit scenario.

The FTSE 250 (excluding Investment Trusts) index, which encompasses many domestically focused sectors, also experienced a rebound from previously low levels. Diminished fears of a "no deal" Brexit, coupled with encouraging trading updates, led to a strong recovery in the index, which surged by 7.6%. UK retailers shared positive Christmas updates, with some top performers reporting mid to high single-digit growth in like-for-like sales over the holiday period. Additionally, trading conditions for businesses significantly affected by changes in the UK high street did not appear to deteriorate further.

The Japanese market underwent a steady revival in January, achieving a 4.9% rise after substantial declines in December. The market was closed for New Year public holidays, coinciding with notable volatility in global currency markets during the year's initial days. Despite the yen's appreciation against all currencies, its strength against the US dollar only increased by 0.7% for the month.

Corporate results for the September to December quarter indicated a slightly higher number of negative surprises than positive ones. However, concerns regarding a global recession eased to some extent in January, driven by various cyclical or economically sensitive sectors that had experienced overselling during the late 2018 market downturn. Conversely, defensive sectors like railways and foods performed less impressively, while the retail sector declined throughout the month.

In Asia excluding Japan, equities rebounded in January amid mounting optimism that the US-China trade standoff would reach resolution. Chinese and South Korean stocks demonstrated double-digit gains. Nevertheless, apprehensions persisted over China's economic deceleration, as evidenced by a 4.4% year-on-year decline in exports, a 7.6% drop in imports, and contraction in the manufacturing sector. Fourth-quarter GDP growth settled at 6.4% year-on-year, and the People's Bank of China implemented an additional cut to banks' reserve requirement ratios.

Among ASEAN countries, Thailand witnessed the most significant gains due to increased clarity about upcoming elections scheduled for March 24. This will mark the first general elections since the 2014 military coup. The Philippines and Indonesia continued to outperform, while Singapore and Malaysia experienced relative lag. The Indian market closed lower due to fiscal concerns leading to a weakened rupee.

January witnessed a decline in global government bond yields, coinciding with a rebound in riskier assets. This shift came in response to the US Fed's dovish stance and a moderation in economic data from Europe and China. European government yields experienced more pronounced movements compared to those in the US, driven by subdued economic activity. Peripheral European markets outperformed core markets due to a cautious tone from ECB President Mario Draghi. Simultaneously, high yield corporate bonds demonstrated robust gains, outshining government bonds as spreads contracted substantially. Emerging market bonds, particularly those denominated in US dollars and local currencies, experienced a strong month. Global equity markets achieved substantial gains, with the MSCI World index delivering a 7.8% return in January. Convertible bonds benefited from this favorable environment, as evidenced by a 3.9% increase in the Thomson Reuters Global Focus index, implying a 50%.