January Issue 2023
Summary
January’s positive equity performance reflects a market that is looking well into the future. Investors appear to have moved ahead of the inflation and interest rate story, through a weak economy and straight to later in the cycle.
Equity Snapshot
| United States | • | US stocks advanced strongly in January, as further signs that inflationary pressures were easing boosted hopes that the US Federal Reserve (US Fed) may be nearing its terminal interest rate. For the broad-based S&P 500 Index, January was the best month since October, while the growth-focused Nasdaq Index posted its strongest monthly gains in six months. The start of the earnings season was mixed, although restructuring and cost-cutting measures mean US companies are now in a more resilient position to withstand a sluggish growth. |
| • | The US economy grew by a stronger-than-forecast 2.9% on an annualised basis in the fourth quarter, buoyed by consumer spending and a build-up of inventories at manufacturing and utilities companies. The flash estimate of S&P Global’s US composite purchasing managers’ index rose to 46.6 in January, with activity in the services and manufacturing sectors showing some improvement compared to that in December. Job growth remained solid, while wage growth eased to a year-on-year rate of 4.6% in December, the lowest annual growth rate since August 2021. Headline inflation fell to an annual rate of 6.5% in December, the sixth consecutive decline, with inflation now running at the lowest level since October 2021. | |
| Europe | • | European equities started 2023 on a robust footing, with the FTSEurofirst 300 Index touching a nine-month high. Sentiment was lifted by growing hopes that the region may avoid a recession given the fall in energy costs and China’s zero-COVID pivot. Consumer discretionary, information technology, real estate and financials stocks were amongst the strongest performers, while laggards included defensive sectors, such as healthcare and utilities, as well as energy companies. |
| • | The euro-zone economy proved more resilient than expected in the fourth quarter of 2022, with GDP growing 0.1%, as modest contractions in Germany and Italy were offset by expansions in France and Spain. The flash estimate of S&P Global’s euro-zone composite purchasing managers’ index (PMI) moved back into expansion territory for the first time in six months in January. Services activity expanded for the first time since July 2022, while manufacturing activity contracted at the smallest pace since June of the same year. | |
| Asia | • | Asia Pacific equity markets rebounded sharply in January, with improving sentiment due to the growing optimism over China’s reopening and a further easing in inflationary pressures in major economies. A weaker tone to the US dollar was also supportive for the region. It was a broad-based advance with only India in negative territory. |
| • | China’s indices hit five-month highs, amid growing optimism that the economy would rebound once the current COVID-19 exit wave has passed. Economic data for January was stronger than expected, despite high infection levels. Elsewhere, shares in Taiwan and South Korea delivered double-digit gains, supported by a recovery in technology stocks. Australia’s stocks closed near a nine-month high despite inflation rising to 7.8% in the fourth quarter of 2022. | |
| Bond | • | Global bonds strengthened, as easing inflationary pressures boosted hopes that central banks may be nearing the end of their rate-hike cycles. The 10-year US Treasury bond yield closed January near 3.5%, a decline of more than 30 basis points over the month. The benchmark German government bond yield fell by a similar amount, closing January around 2.3%. Japanese government bonds proved to be the exception, with the 10-year yield rising towards the top of its wider permitted trading band. The US dollar weakened as the US Federal Reserve was perceived to have already done the heavy lifting in terms of interest rate increases. In contrast, the British pound strengthened, as sticky UK inflation was seen to increase the chances of further substantial rate hikes from the Bank of England. Elsewhere, while the euro weakened against the sterling, it rose against the Japanese yen reflecting the European Central Bank's hawkish stance, while the Bank of Japan maintained its ultra-loose policy. |
| Outlook | • | January’s positive equity performance reflects a market that is looking well into the future. Investors appear to have moved ahead of the inflation and interest rate story, through a weak economy and straight to later in the cycle. The extent to which investors are right in so doing is likely to dictate the path for equities in the coming months. |
| • | At the time of writing, markets expect that by July the US Fed will be in a position to cut interest rates. The US Fed itself, however, has not endorsed this position. When asked about this matter at a recent meeting, Chair Powell replied, “We’ll just have to see. We have a different view, a different forecast, really.” This divergence matters not just for the multiples on growth stocks, which contracted sharply in 2022, but also the extent to which inflation is likely to continue eroding economic growth. | |
| • | Headline inflation is certainly moderating. The US Consumer Price Index fell to 6.5% in December, and data are similarly cooling in the UK and Europe. This is partly due to the cyclical effect of easing supply chains and lower energy prices. Oil and gas are down around a third and a half from where they were one year ago. However, with the latest US jobs data showing that unemployment is at 3.4%, its lowest in 53 years, core inflation may yet remain resilient. | |
| • | Alternatively, the job market’s ability to withstand higher interest rates may reflect a so-called “soft landing”. Central banks have long claimed their desire to cool inflation, without necessarily inflicting a prolonged or damaging recession. With Europe’s energy crisis seemingly averted in the near term and China’s reopening at a greater-than-expected speed, there are hopes that this may come to pass. | |
| • | After the sharp multiple compression of 2022, earnings results will be a key driver of equity performance in the medium-term. So far, in the Q4 numbers for portfolio holdings, we have seen good top-line demand and beats, with relatively few companies missing margin expectations. Typically, the latter have been due to higher labour and costs, increased marketing expenditures and unwinding inventories. | |
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Substantial disappointments in earnings and consistently softer outlooks could paint a gloomier economic picture. In this event, a swifter return to accommodative monetary policy might be likely. We believe our companies would have an advantage at such a time, due to their higher quality earnings and structural growth exposure. Companies like Microchip, Novo Nordisk and Thermo Fisher are continuing to boost revenues and defend margins, thanks to product launches, pricing power and in some cases, cost-cutting initiatives. | |
| • | As our clients know, we do not seek to take a position or even a strong view on the matter. Rather, we seek to own the companies most likely to outperform through a range of macroeconomic environments. With most market participants so intently focused on the near-term, we are best positioned to find profitable growth opportunities that could compound the wealth of our clients over the long-term. | |
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The information herein is issued by Allianz Global Investors Asia Pacific Limited. No warranty is made by Allianz Global Investors Asia Pacific Limited as to the accuracy; suitability or completeness of any such information and no liability in respect of any errors or omissions (including any third-party liability) is accepted by Allianz Global Investors Asia Pacific Limited or its affiliates. Some of the information contained herein including any expression of opinion or forecast has been obtained from or is based on sources believed by us to be reliable but is not guaranteed and we do not warrant nor do we accept liability as to adequacy, accuracy, reliability or completeness of such information obtained from or based on external sources. The information is given on the understanding that any person who acts upon it or otherwise changes his or her position in reliance thereon does so entirely at his or her own risk without liability on our part.
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February Issue 2023
Summary
Despite being well into the new year, the dominant theme for global equities in 2023 continues to be the influence of inflation and interest rates.