January’s investment market commentary

Financial markets started the year full of optimism but ended the month mostly in negative territory. The late month turnaround was a response to growing worries about the spread and mutation of COVID-19, a slower than expected rollout of COVID-19 vaccinations (especially in Europe), and worries about speculations and potential asset bubbles (e.g. Bitcoin / Tesla / GameStop).

US politics was never far from the headlines in January with the unprecedented violent mobbing of Capitol Hill which led to Trump’s impeachment and Joe Biden’s inauguration as the 46^th president. The start of the month also saw the Georgia Senate runoff which gave the Democrats control of the Senate, and completed the third leg of the Blue Wave. With Democrats in control of Congress and the White House, the prospect of a significantly larger US fiscal stimulus put upward pressure on government bond yields. The rise in yields was only partly reversed after US Federal Reserve Chairman Powell reiterated a commitment to an extended period of low interest rates and reassured investors that lessons had been learnt since the ‘taper tantrum’, when a sharp rise in bond yields upset all asset classes.

However taking the ‘punch bowl away’ will be a much more difficult task than easing policy to its very limits proved to be. The taper tantrum and Powell’s attempts to raise US interest rates early in his tenure tell us a lot about how addicted markets have become to central bank largesse. Even though it is probably some way off, it’s hard to envisage an easy exit from these policies. Certainly, an early return to a more normal economic environment is a clear risk to financial market valuations.

Equity markets fell slightly (-0.9%) as measured by the MSCI AC World Index in US dollars. The best performing regions were those with a better control of the pandemic, such as Asia ex Japan (+3.7%) and Emerging Markets (+2.7%). UK equities (-0.6%) were supported by its impressive start to the vaccine rollout, while Europe ex-UK (-2.2%) lagged as the EU’s program was found wanting. The strongest sectors were ‘stay at home’ Communication Services (+0.7%), Healthcare (+0.7%), and Energy (+1.4%) after a strong rally in oil prices. The weakest sectors were an eclectic mix of Consumer Staples (-4.3%), Industrials (-2.9%), Financials (-2.1%) and Utilities (-1.6%). In terms of Style, Growth (-0.5%) outperformed Value (-1.1%), while Smaller Companies (+1.4%) outperformed Larger Companies (-0.9%).

Within fixed income, the rise in government bond yields meant that higher yielding corporate bonds, as measured by the ICE Merrill Lynch Global High Yield Index (+0.2%), outperformed investment grade credit and safe haven government bonds, with the Merrill Lynch Global Corporate Investment Grade Index down -0.8% and the JP Morgan Global Bond Index down -0.9% (all hedged to US dollars).

Commodities rose in aggregate with the Bloomberg Commodities Index up +2.2%. Crude Oil (+6.9%) was the strongest area after OPEC+ agreed to additional productions cuts. Agriculture (+4.4%) was also solid on the back of supply concerns. In other areas, Industrial Metals (-0.4%) declined slightly over the month, while safe haven Gold (-3.0%) was the weakest sector, hindered in part by a stronger dollar and rising bond yields, which increase the opportunity cost of investing in the precious metal.

In terms of currencies, the pound was strong on the back of the Brexit deal and the UK’s efficient vaccine roll-out, appreciating against the US Dollar (+0.3%), Euro (+0.9%), and Japanese Yen (+1.7%). However, the Pound saw its biggest gains against emerging market currencies, such as the Brazilian Real (+5.7%), Mexican Peso (+3.4%), and the South African Rand (+3.4%).

(Notes: All monthly data is quoted in Sterling terms unless otherwise stated).

This month’s values quoted as at 29/01/2021. The above values are sourced from Bloomberg and are quoted in the relevant currency.