Investment Commentary January 2024

After a very strong December, asset class returns in January were a mixed bag, with the majority in negative territory. Equities, by enlarge, kept up their momentum from the fourth quarter, with most developed markets posting modest gains. Sovereign bonds sold off slightly on the back of persistently stronger-than-expected data, especially in the US. For example, US GDP growth for the fourth quarter came in at an annualised rate of 3.3%, far higher than the forecast 2%. As a consequence, rate cut bets in the US, Eurozone and UK were pared back as investors grew less confident that the first cut would occur in Q1. 

Geopolitical risks were also prominent during the period, with attacks on shipping in the Red Sea expected to cause supply-chain disruption to global trade, resulting in upward pressure on freight costs. Fears of wider escalation in the Middle East caused oil prices to rise during the period, with Brent up +6.1%.

There was further weakness in the Chinese economy with deteriorating economic data. Housing sector woes continued to weigh on the broader economy. Chinese policy makers did announce a number of stimulus measures during the period, however, they were not of a magnitude to restore confidence and financial markets continued to sell-off.

For equities, the standout performer within the developed markets was Japan. The Nikkei returned + 8.4% over the period as Japanese monetary policy remained ultra-loose. The poorest performing region was emerging markets (EM), which fell -4.6% on further weakness in Chinese markets and a stronger US Dollar. Elsewhere, the S&P 500 returned +1.7%, followed closely by the Eurostoxx (up +1.5%). Interestingly, the return of the S&P was driven almost exclusively by the ‘Magnificent Seven’ stocks, which continued to dominate the index.  The FTSE 100 had a relatively poor month, returning -1.3%. Growth stocks outperformed their value counterparts by around +1.8%. Rate sensitive stocks such as small caps and real estate were some of the poorer performers as rate cut bets were pared back.

Also reacting to these changing market expectations, global bonds were generally negative returners during the period. US Treasuries fell -0.2% and Eurozone sovereign bonds returned -0.6%. Gilts performed particularly poorly (-2.3%) after the latest data releases on UK wage growth and services inflation suggested that rate cuts from the Bank of England may not be forthcoming in the near term.

Elsewhere in fixed income, some areas within credit managed positive returns, especially in high yield. With markets still leaning towards a soft landing for the US economy, credit spreads tightened further during the period. As with EM equities, EM bonds were under pressure, returning -1.2%.

For currencies, the story was one of US Dollar strength. The Dollar index rose by +1.9% during the month, appreciating against all of the other G10 currencies.