January 2024 Commentary

January proved to be a month of mixed fortunes for markets, where performance amongst financial assets diverged.

Economic data continued to pleasantly surprise for the most part, fuelling the upward trajectory of equities that had begun in late 2023. The S&P 500 soared to a new all-time high, with both economic growth and unemployment data nullifying fears that a US recession is imminent. Even the Euro Area was able to defy market expectations, as the region managed to sidestep a technical recession in Q4, with GDP remaining unchanged. Naturally, economic robustness was met with central bank resolve as officials from the Federal Reserve, European Central Bank and Bank of England decided to hold rates steady, whilst also signalling that rate cuts during the first quarter of 2024 was unlikely. The cautious stance adopted by the major central banks is of little surprise when considering the events of the 1970s, which saw central banks ease policy too soon and inflation re-emerge.

Unfortunately, the start of 2024 also saw a continuation of the geopolitical concerns that punctuated much of last year, with the Houthi rebels launching attacks on commercial shipping in the Red Sea which resulted in the US and UK conducting retaliatory air strikes. Towards the end of January , a drone attack claimed the lives of three U.S. troops in Jordan, heightening concerns about a broader escalation in the region, which is yet to materialise. Finally, China was dealt another economic blow after a Hong Kong court ordered the liquidation of property developer Evergrande Group after a breakdown in its debt restructuring talks. This comes two years after the company officially defaulted on its debt and, unsurprisingly, has done little to improve sentiment within the world’s second-largest economy which has been plagued with property issues ever since.

In terms of market returns, global equities (+1.2%) were positive in January, however there was a large variation across regions. Japan (+8.5%) was by far the best performing area with investor sentiment supported by the countries favourable macro backdrop of accommodative monetary policy, economic growth and inflation (the latter of which being something that Japan has been trying to engineer for some time!). The US (+1.5%) and Europe excluding the UK (+1.3%) also performed well whilst emerging markets (-3.5%) were held back by the developments in the Chinese property market. In terms of equity styles, growth stocks (+1.3%) outperformed value (-0.1%), and small-cap stocks (-2.6%) lagged large caps (+1.2%). This was reflected in sector performance, with information technology (+3.2%) and communication services (+3.0%) the strongest two sectors, whilst materials (-5.4%) and real estate (-4.7%) lagged significantly.

Fixed income markets were also mixed, with higher quality government bonds underperforming the lower quality credit space. The hawkish rhetoric from central banks pushed back market expectations for rate cuts and forced bond yields higher, meaning that the Global Aggregate bond index fell -0.2% over the month. Strong macro data dominated the narrative on the credit side however, meaning that global investment grade (+0.1%) and the risker Global High Yield (0.5%) were positive over January.

In the real assets space, both global real estate (-4.1%) and global infrastructure (-3.1%) underperformed, reflecting their sensitivity to rising interest rate expectations. Commodities displayed mixed performance over the month, such that whilst the broad index was positive (+0.4%), there was significant divergence within the index. Picking out the highlights, crude oil (+6.1%) rose sharply on the back of developments in the middle east, whereas gold (-0.7%) fell given the market’s expectation for slower cuts by central banks and a stronger US dollar.