market #intelliGENce Feb 23

A detailed analysis of what's been moving markets over the last month

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In a nutshell

• Inflation numbers continue to fall

• China gradually re-opens its economy

• Mild winter weather in Europe prevents a power crisis

• Inflation still elevated and economic data is mixed

What’s Moving Markets

After a very difficult 2022, January brought a degree of renewed optimism in markets.

Inflation figures continued their downward trend from their peak around last September. In the US, core CPI dropped to 5.7% over the year to December 2022, driven by falls in petrol prices. While inflation last year was relatively higher in Europe and the UK compared to the US, it’s moved in the right direction, falling to 9.2% and 10.5% in Europe and the UK respectively.

UK food prices remain very high – increasing 14.6% in 2022. This, coupled with rising mortgage costs, is clearly squeezing wallets and UK consumer confidence has plummeted to record lows. New ONS data shows that UK retail sales volumes fell by 5.7% over Q4 but sales values rose by 4.5%, with consumers paying considerably more in return for fewer goods.

While inflation is heading in the right direction, it’s still significantly above the 2% long-term target. As anticipated, the Fed held a meeting on the 1st February and raised rates by 0.25%, while the European Central Bank and Bank of England met a day later and increased rates by 0.5%. There’s a risk to bond markets if central banks are more aggressive than expected. Central banks need to slow inflation down further, and will be nervous about taking their foot off the brakes in case it starts surging upwards again.

There was mixed economic data during the month. The US Institute of Supply Management (ISM) manufacturing index remains below 50, suggesting the economy is contracting. And while US unemployment is at a 50-year low, several large companies have announced significant staff layoffs in a bid to reduce costs, particularly in the tech sector. Some of the biggest are at Amazon (18,000 job cuts, 6% of their corporate workforce), Alphabet (12,000 job cuts, 6% of workforce), Microsoft (10,000 job cuts, 4.5% of workforce) and Salesforce (8,000 job cuts, 10% of workforce).

According to a Bank of America global fund manager survey, average cash balances are at a relatively high level of 5.3%, although this is down from 5.9% last month – reflecting tentative signs of investor optimism for 2023.

Asset class implications

Against January’s backdrop of gradually improving market sentiment, all major asset classes in our core solutions ended the month in positive territory. Within bonds, longer duration issues outperformed shorter duration issues as yields fell. There were also positive returns for alternative asset classes. Property and infrastructure gained 0.2% and 0.7% respectively over the month (as measured by the IA UK direct property and IA infrastructure sectors).

Equities were the strongest asset class. This was led by China, whose stock market rebounded 9% in sterling terms, boosted by the gradual re-opening of the economy with Chinese tech and property companies the biggest winners. European industrials and banks also performed very strongly. Indeed, all the major regional equity markets saw positive returns, although these were slightly reduced for UK-based investors as sterling appreciated versus most currencies, meaning the foreign currency returns were lower when translated into sterling.

At a more granular level, companies in the autos, consumer, tech and travel & leisure sectors delivered the strongest returns in January. Having been the top performers during 2022, the energy, defence and tobacco sectors lagged the broader market. The weakest sectors over the month were healthcare and pharma. Generally, smaller and mid cap companies outperformed their larger peers. After value stocks dominated markets during 2022, January saw more of a balance between the performance of growth, quality and value styles of investing.

As we move into 2023 and markets normalise, this should lead to a broader range of companies performing well across different industrial sectors and sizes (large, mid, small).

January has seen an encouraging start.

Source: FE Analytics, GBP total return (%) to last month end