What’s happened in markets?

FTSE All Share -0.94 5.69 12.71 4.36 2.92 3.33 3.67
Euro Stoxx 50 -0.73 8.48 18.65 8.73 -0.68 5.76 5.78
S&P 500 -0.65 4.07 8.84 3.55 -9.92 7.76 9.05
Japan Topix 1.25 1.28 1.83 1.86 2.07 5.88 2.80
MSCI Asia Pac. 0.96 9.59 25.19 8.86 -13.87 0.47 0.12
MSCI Emerg. Mkts. 0.64 9.02 20.28 8.40 -14.88 -0.69 -0.73
Jo’burg All Shares -0.05 8.65 20.86 8.59 9.13 14.86 9.39
UK Gov’t Bonds 0.06 2.41 3.94 2.57 -19.69 -7.60 -2.71
US Gov’t Bonds 0.09 1.42 5.46 2.37 -8.61 -2.00 0.59
Global Corp. Bonds 0.21 2.37 8.53 3.15 -9.53 -1.88 1.28
Emerg. Mkt. Local 0.02 5.12 15.32 4.68 -6.37 -3.34 -1.06
Figures in the respective local currencies as at the end of trading on 20/1/2023.

Despite news reports of redundancies in technology companies and interest-rate sensitive sectors like finance and housing, the US labour market remained resilient as weekly initial jobless claims came in lower than expected at 190,000, a decrease of 15,000 from the previous week. Inflation continued to show signs of slowing as the US Producer Price Index (PPI), which measures producers’ input costs, fell 0.5% in December (cooler than the 0.1% expected). This decline is even more marked when viewed on a year-on-year basis, at 6.24% for December 2022 down from 10.00% at the same time last year. However, it was yet another week of hawkish comments from central bankers as most Federal Reserve (Fed) officials backed raising rates above 5% and maintaining that level for most of the year, if that is what it takes to get inflation under control.

In the UK, Bank of England Governor Andrew Bailey expressed more optimism about the prospects for falling inflation during 2023 and didn’t refute market expectations that interest rates would peak at 4.5%. Inflation slowed for a second consecutive month with the consumer prices index (CPI) edging down to 10.5% in the year to December 2022, from 10.7% in November. With lower fuel prices the key driver.

In Europe, markets dipped after European Central Bank (ECB) President Christine Lagarde quashed recent market speculation that the central bank would ease the pace of its monetary tightening. Addressing delegates at the World Economic Forum in Davos, Lagarde said inflation was still “way too high” and that ECB policymakers are determined to stay the course on interest rates to bring inflation back down to their 2% target in a timely manner.

In China, gross domestic product (GDP) increased by just 2.9% in the fourth quarter but beat market expectations of 1.8%. The challenges of the government’s zero-tolerance approach to COVID-19 and a property market slump made 2022 one of the worst on record for China’s economic growth.  The sudden relaxation of its strict lockdown measures has raised hopes of an economic revival in 2023, but has also resulted in a new wave of COVID-19 cases.

In corporate news, results have been mixed. Goldman Sachs disappointed the market with weaker than expected earnings. Morgan Stanley, on the other hand, surprised markets with better earning and a positive outlook. Netflix beat expectations by adding 7.66 million paid subscribers in the fourth quarter of 2022.

In other news, the Bank of Japan (BoJ) stood firm on its yield curve control policy and continued its unprecedented monetary easing in its January meeting. Since the BoJ meeting on 20 December 2022, it has spent US$265 billion buying bonds to try to hold yields within its target range, which is equivalent to 6% of Japan’s GDP.

In terms of markets, investors enjoyed a positive start to 2023 with a broad-based rally in equity markets. The more growth oriented sectors performed the best on the back of falling inflation expectations and the prospect of lower interest rates. Emerging markets (+8.3%) continued to enjoy a higher return than developed markets (+3.7%) over the last 30 days. In terms of equity style, growth (+4.9%) outperformed value (+3.6%), while small cap stocks (+5.9%) beat large cap stocks (+4.0%) over the same period. Communication services (+9.4%) was the best sector performer and consumer staples (+0.4%) was the worst. Within fixed income markets, yields have declined a little since the start of the year, particularly on the longer duration end, despite the hawkish comments from the Fed and ECB.

The US dollar has fallen against most major currencies in the year to date, on expectations of a slowing in interest rate hikes from the Fed. Its status as a safe-haven currency had benefited strongly from the Fed’s hawkish monetary policy during 2022.

  Latest Consensus Forecast
UK GDP (QoQ) -0.3
UK PMI 49.0 48.8
UK CPI (YoY) 10.5
EU GDP (QoQ) 0.3
EU PMI 49.3 49.8
EU CPI (YoY) 9.2
US GDP (QoQ) 3.2 2.7
US PMI 49.6 50.3
US CPI (YoY) 6.5

What’s happened in portfolios?

In equities, it has been a really strong start to the year with risk assets outperforming. The TT Emerging Markets Equity Fund has been the star performer given the strength in emerging markets, and also outperformed the emerging market benchmark.

In the fixed income space, yields have continued to fall on a year-to-date basis, with our tilt towards longer duration bonds helping relative performance. The current environment with inflation coming down and less inflation premium being priced in to yields, particularly the longer end, has proved beneficial as we have been increasing our duration over the last 12 months. Our exposures to the sovereign 7-10 year bonds and also the active investment grade managers are doing really well in this environment and that is translating into some good performance for the fixed income part of the portfolio.

In terms of real assets, it’s been a good period broadly speaking. Infrastructure and gold continue their recent run of outperformance, helped by falling real yields and a weaker US dollar. We have been reducing our exposure to less cyclical real assets, such as REITs, in favour of infrastructure, which has long-term stable cash flows similar to fixed income instruments.

Alternative strategies have detracted from relative performance of late as it has been a difficult environment for them. But there have been some bright spots with Stifel upgrading Hipgnosis to a “Buy” recommendation. This is due to a bottoming out of the recent slowdown in royalties. Royalty revenues tend to work on a nine-month lag, so we saw a gradual reduction in royalty revenues on the back of the COVID restrictions, but there is now an expectation for continued growth in song royalties.

What’s happening this week?

24 January • UK S&P Global PMIs | 24 January • EU S&P Global PMIs | 26 January • US Q4 GDP Growth