Market Analysis Apr 2023

In April, US equities eked out modest gains. The prospect of the Federal Reserve adopting a more tempered monetary policy fueled investor confidence, albeit dampened by the central bank's caution about potential economic growth deceleration. The impending collapse of First Republic added uncertainty to the banking sector, a situation only further affirmed and the US government took over. This event minimally impacted the aggregate performance of US banks in the S&P 500 index, though concerns lingered for smaller banks.

Economic indicators signaled waning growth, a softening labor market, and recent months' controlled inflation, collectively fostering consensus around a 0.25 percentage point rate hike by the Fed in May, followed by a policy tightening pause.

Technology stocks, including prominent index constituents, exerted influence on equity market performance by garnering gains. However, the industrial and consumer discretionary sectors, especially automobiles, incurred negative effects. Tesla experienced share price decline attributed to intensifying global competition in the electric vehicle market, affecting its profitability.

April saw Eurozone equities ascending, with all sectors, barring information technology (IT), advancing during the month. The uplift was buttressed by robust corporate earnings releases, enabling sectors that had previously underperformed in the year to-date, such as energy and real estate, to register notable gains. Utilities similarly benefited from share price increases. Nevertheless, the IT sector underwent decline following warnings from several semiconductor companies, both within Europe and globally, of prolonged demand sluggishness.

Data revealed that the Eurozone economy rebounded in Q1, expanding by 0.1% quarter-on-quarter, in contrast to the zero growth observed in the last three months of 2022. While Germany's economy encountered stagnation, economies like Spain and Italy experienced more robust expansion. Furthermore, inflation pace in Germany slackened, with April's projected year-on-year rate at 7.2%, down from March's 7.4%.

Forward-looking data showcased the flash Eurozone Purchasing Managers' Index (PMI) reaching an 11-month pinnacle of 54.4 in April. This growth was buttressed by the services sector, even though manufacturing output experienced a dip. The PMI indices, relying on survey data from manufacturing and services sector entities, register contraction below 50 and expansion above 50.

UK equities charted an upward trajectory in April, with financials and globally diversified energy groups taking the lead. The banking sector's recovery, aligned with global trends, bolstered the financials sector, while oil price recovery stemmed from Saudi Arabia's unanticipated oil production reduction.

Despite lackluster inflation and wages data, sectors oriented toward domestic affairs held firm. The Office for National Statistics (ONS) reported headline UK inflation hovering above 10%, with consumer price inflation marginally slowing to 10.1% in March, slightly below the Bank of England's 9.2% expectation. Core inflation, shedding light on underlying trends, held steady at 6.2% from February. April's robust wage data raised concerns of a potential Bank of England rate increase post-May's Monetary Policy Committee meeting to sustainably curb inflation.

April saw the TOIPX Total Return index in the Japanese stock market continuing its ascent, climbing 2.7% in local terms. The yen's ongoing depreciation bolstered investor confidence, though dampened returns for overseas investors pegged to sterling or USD. Robust foreign investor uptake of Japanese stocks was in part attributed to Tokyo Stock Exchange initiatives fostering corporate value growth and the "Buffett effect," inspired by Warren Buffett's augmented Japanese equity investments.

Japan's macroeconomic environment evidenced recovery signs, especially in inbound consumption. Persistent historically high CPI inflation and accelerated wage growth following spring wage negotiations between major corporations and trade unions signaled a positive outlook for corporate profits, supported by positive quarterly earnings from retailers and resilient full-year results for the Japanese fiscal year.

In contrast, Asia ex Japan equities experienced negative performance in April, with declines in China, Taiwan, and Thailand overshadowing gains in Indonesia and India. China, despite exceeding first-quarter economic growth expectations, exhibited the weakest index market due to ongoing tensions with Western nations over Taiwan. Share prices in Taiwan also concluded the month negatively impacted by lackluster global growth. Indonesia, conversely, claimed April's best-performing index market status owing to its foray into the global electric vehicle supply chain. Robust real estate and IT stocks propelled India's equity prices.

April witnessed a gradual uptick in bond yields, rebounding from March's downturn spurred by banking sector stresses. Market sentiment projected near-term rate hikes by the Federal Reserve, Bank of England, and European Central Bank. UK gilts underperformed as resilient activity data and inflation surprises prevailed. The Bank of Japan's new governor vowed to maintain the existing loose monetary policy for now, while announcing a review of past monetary policy actions.

In April, the US 10-year yield slightly receded from 3.47% to 3.42%, with the two-year rate moderating from 4.03% to 4.01%. Germany's 10-year yield edged up from 2.29% to 2.31%, while the UK's 10-year yield surged from 3.49% to 3.72%, and the two-year rose from 3.44% to 3.78%.

Positive returns characterized investment-grade and high-yield credit markets, rebounding from March's volatility. Tightened spreads and favorable total returns encompassed investment-grade and high-yield segments, with the former enjoying high credit quality and the latter showcasing a more speculative nature.

Against the euro and sterling, the US dollar weakened, whereas the Japanese yen experienced depreciation against the dollar post Bank of Japan announcement. The US dollar index maintained relative stability.

In April, the Refinitiv Global Focus convertible bond index saw a -1% decline, as convertible bonds couldn't leverage stock market tailwinds due to a convertible market bias toward information technology and an underweight exposure to financials. Nonetheless, robust primary market activity persisted, with $5.7 billion new issuances, primarily stemming from the US region, alongside substantial Asian convertible issuance.