December Issue 2022
Summary
At its latest meeting the Fed sought to stamp out once and for all any notion that a return to easy monetary policy is imminent. While US consumer price inflation appears for now to have peaked at 9.1% in August, core inflation ex-housing remains stubbornly elevated.
Equity Snapshot
| United States | • | After November’s strong rally, US stocks sold off over December as hawkish statements from Federal Reserve (Fed) policymakers dashed hopes of a pivot to a more dovish stance. The tech-heavy Nasdaq Index dropped more than the S&P 500 Index, as value stocks held up better than growth-focused ones. |
| • | Economic data painted a mixed picture of US economic health. Non-farm payrolls rose by a stronger-than-expected 263,000 in November, with data for the previous two months also revised higher. However, the flash estimate of the S&P Global US composite purchasing managers’ index (PMI) dropped to 44.6 in December, the joint lowest reading in two-and-a-half years. The manufacturing PMI fell to 46.2, the weakest reading since the height of the pandemic in 2020, while activity in the services sector slid to 44.0, one of the lowest readings since 2009. Retail sales also disappointed, falling 0.6% over November as holiday season spending was dampened by high inflation and interest rates. Yet measures of consumer sentiment were surprisingly strong, with the University of Michigan’s index unexpectedly jumping to 59.1 in December and the Conference Board’s index hitting an eight-month high of 108.3 for the same month. | |
| Europe | • | European equities retreated over December as sentiment was knocked by hawkish statements from the European Central Bank (ECB). Early in the month, EU member states reached agreement on a USD 60 per barrel price cap on purchases of Russian oil and this was later followed by an agreement to cap EU gas prices when they hit EUR 180 per megawatt hour for three days. European gas prices eased sharply over December on news that the EU’s gas storage facilities were more than 80% full, despite bitterly cold weather, thanks to record imports of LNG, a pick-up in German wind power and greater nuclear generation in France. |
| • | Economic data indicated that the outlook for the euro-zone economy may be improving. The flash estimate of the S&P Global euro-zone composite purchasing managers’ index (PMI) rose to 48.8 in December, the highest level in four months, helped by improving supply conditions, lower price pressures and an uplift in business confidence. With inflationary pressures appearing to be easing, the ECB raised rates by 50 basis points (bps), a slowdown from the 75-bps hikes implemented at its two previous meetings. However, ECB president Christine Lagarde promised at least two more 50-bps increases in the first quarter of 2023, saying the central bank had “more ground to cover, we have longer to go”. | |
| Asia | • |
Equity markets in the Asia Pacific region delivered mixed returns in December. In general, stocks gained in the first half of the month, boosted by signs that China was relaxing its strict zero-COVID policy, before falling back towards month-end as Chinese COVID-19 infection levels soared and major central banks reaffirmed their hawkish stance. Chinese equities, in particular, rebounded strongly at the start of December amid growing evidence of a pivot towards reopening. Australian shares lost ground over December. The Reserve Bank of Australia raised rates by 25 basis points (bps) to a 10-year high of 3.1% and indicated that further hikes would be needed to bring inflation under control. Stocks in South Korea and Taiwan also retreated in December as economic concerns weighed on tech shares. ASEAN markets retreated modestly, with Thailand and Malaysia being stronger relative to the Philippines, Singapore, and Indonesia. Indian markets also fell, though the annual inflation rate eased. |
| Bond | • | Global bonds weakened in December. European bonds sold off as the European Central Bank (ECB) and Bank of England indicated further substantial rate hikes were likely, and US bonds were undermined by hawkish statements from the US Federal Reserve (Fed). Unusually, the Japanese bond market was a hive of activity as the Bank of Japan (BOJ) unexpectedly amended its yield curve control policy, widening the target band around zero to +/- 50 bps from the previous permitted range of 25 bps. The yield on the 10-year Japanese government bond rose towards the top of this band after the move, reaching its highest level since mid-2015. |
| Outlook | • | At its latest meeting the Fed sought to stamp out once and for all any notion that a return to easy monetary policy is imminent. While US consumer price inflation appears for now to have peaked at 9.1% in August, core inflation ex-housing remains stubbornly elevated. Chair Powell is particularly focused on rising wages, observing that “it feels like we have a structural labour shortage out there”. |
| • | To counter this, central banks around the world are committed to engineering weaker aggregate demand. A recession of some form has now become the broad consensus. However, Q4 2022 was many developed economies’ first unrestricted festive period in three years. With over three trillion USD distributed to US consumers and businesses in the pandemic alone , this past Christmas will have afforded an unrivalled opportunity to run down savings, potentially postponing economic weakness. Bullish investors have also helped drive bond yields down and share prices up, effectively loosening financial conditions. | |
| • | The combination will do little to persuade central banks to swerve from their mission. Stiff rhetoric from the Fed, ECB and Bank of England suggest that a pivot is not forthcoming. Rates will move upwards more slowly, but remain elevated for longer than the market expects. Even the Bank of Japan has taken the decision to adjust its yield curve control policy moderately upwards. Yet markets are now pricing a peak in US interest rates for June 2023, with a steady reduction towards 4% by the end of the year. | |
| • | China’s protracted return to economic normality may complicate matters further. The zero-Covid approach is being abandoned, and government officials are making increasingly pro-business comments. This year may also see a return to more proactively stimulative fiscal policy. However, investors also need to ask what impact China’s reopening will have on commodity prices? Could energy prices cause inflation to spike once again? Political and trade tensions only increase the potential for the global economy to take increasingly divergent paths. | |
| • | Companies, for their part, are managing down expectations. Across the MSCI ACWI, 2023 EPS growth forecasts have roughly halved since the start of the year according to IBES data. Weaker demand, higher costs and in some cases a backlog of inventory that had been purchased at higher prices, all threaten to erode corporate profitability. Money once again has a cost, and growth can no longer be funded with limitless debt. However, expectations may need to fall further before central banks consider their monetary policy objective complete. | |
| • |
Ultimately, this development is healthy and may promote a survival of the fittest approach amongst companies. At the same time, companies with exposure to structural drivers which are uncorrelated from the broader economy – such as digitalisation, electrification and ageing populations – offer greater growth visibility for investors. The current environment has created favourable opportunities in quality growth names for stock pickers mindful of valuations. We believe that opportunistically adding to such high conviction names will lay the necessary foundation for performance. | |
> download
This is not an offer to buy or sell or a solicitation or incitement of offer to buy or sell any securities referred to herein. It should also be appreciated that under certain circumstances the redemption of units/shares may be suspended. Investment involves risks, in particular, risks associated with investment in emerging and less developed markets. Please refer to the relevant prospectus for details.
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.
Want to view more?
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.