Following the ‘almost everything rally’ that characterised the final quarter of 2023, performance across asset classes was mixed in January. Strong growth data, coupled with pushback from some central bankers on the market’s dovish outlook for rate cuts, proved a less positive environment for fixed income. Segments of risk assets, meanwhile, were buoyed as economic data further fuelled hopes for a ‘soft landing’. This optimism was slightly tempered at the end of the month when the Federal Reserve (the Fed) struck a less dovish tone at its January meeting.
Growth stocks were the notable outperformer, returning 2.1% over the month, compared to the relatively lacklustre performance of their value counterparts, which delivered 0.3%. Developed market equities were up 1.2%, while emerging market equities were down 4.6%, despite newly announced stimulus from the People’s Bank of China (PBOC).
Commodities also performed well, with the broad Bloomberg Commodity Index rising 0.4% over January. Oil prices rallied as tensions in the Middle East worsened and disruption to shipping through the Suez Canal continued. Drone attacks on Russian energy infrastructure added to the uncertainty in the global oil market.
Real estate investment trusts and small caps – both of which are sensitive to interest rates – struggled as markets pared back the magnitude of rate cuts priced for the Federal Reserve in 2024, and ended the month down 4.0% and 2.8% respectively.
Exhibit 1: Asset class and style returns
The best performing major equity market in January was the TOPIX Index, up 7.8% on the month, continuing the strong performance seen last year. An unexpectedly weak wage print, combined with uncertainty around the economic impact of the New Year’s Day earthquake, led markets to reassess the likelihood of negative interest rate policy (NIRP) removal in the near term.
In the US, the S&P 500 Index was propelled to record highs in early January as optimism around a ‘soft landing’ scenario continued the rally in the ‘Magnificent Seven’ stocks. A number of data releases pointed to the ongoing resilience of the US economy. First, we saw a robust jobs report, with 216k jobs added to the economy in December, alongside firmer wage growth and unemployment remaining steady at 3.7%. Later in the month a blowout GDP print of 3.3% annualised for the fourth quarter was significantly above consensus expectations. Following a strong start, the S&P Index closed the month on a weaker note, as the hawkish tone at the Fed’s January 31 meeting was not taken well by risk markets. The Fed pushed back on dovish market pricing for rate cuts, and explicitly noted that a March cut seems unlikely.
Exhibit 2: World stock market returns
The MSCI Europe ex-UK Index delivered positive returns of 2.1% in January. The European Central Bank (ECB) kept rates on hold at its January meeting and re-iterated its commitment to remain data-dependent. The composite purchasing managers’ index (PMI) rose 0.3 pts to a preliminary 47.9 in January, its highest level since July. The manufacturing measure beat expectations by 1.8 points, suggesting that activity in the sector bottomed out in the third quarter.
UK equities stalled in January, with the FTSE All-Share falling 1.3%. On the one hand, there have been signs of growth momentum accelerating in the UK, with the flash composite PMI increasing 0.4 points to 52.5, and consumer confidence hitting a two-year high in January. This optimism was tempered by the latest retail sales print, which fell sharply by 3.2% month-on-month, sparking some concerns of an impending slowdown.
In China, the domestic economy continued to struggle, with disappointing retail sales and further deterioration in housing activity. Fourth quarter GDP grew 5.2% year-on-year, in line with expectations, but still historically weak. Although the PBOC announced a number of stimulus measures, it was not the policy ‘bazooka’ markets were hoping for to re-ignite activity. Ongoing concerns around the economic outlook for China likely contributed to the weak performance of the MSCI Asia ex-Japan Index and the MSCI Emerging Markets Index, which declined 5.4% and 4.6% on the month.
While strong economic data added credence to market hopes for a ‘soft landing’, it also made pre-emptive rate cuts in the first quarter look less likely. Core government bonds reversed some of last year’s gains, as markets scaled back the number of rate cuts priced for 2024.
Global government bonds were down 1.8% over the month, but it was UK Gilts that remained the major laggard, as sticky services inflation and still elevated wage growth made the prospect of imminent rate cuts from the Bank of England (BoE) look unlikely.
Exhibit 3: Fixed income government bond returns
Within credit, the European high yield bond market was the outlier in posting positive returns, delivering 0.9%, while its US counterpart delivered flat returns over the month. Global investment grade credit, meanwhile, posted negative returns in January despite spreads tightening. A stronger US dollar was a headwind for emerging market debt, which fell 1.2% on the month.
Exhibit 4: Fixed income sector returns
Following the excitement seen at the end of last year, January offered mixed results for investors. While equity markets were initially boosted by the strength of recent activity data, performance was pared back by the hawkish tone at the Fed’s January meeting. Bond markets were volatile, as strong growth data did not justify the magnitude of rate cuts priced in at the end of last year. Despite this recent re-pricing, we still have high conviction in core bonds, both for their income offering, but also their diversification potential. If the resilience of the economy does fade, bonds will play a critical role in a diversified portfolio.
Exhibit 5: Index returns for January 2024