January Commentary
GLOBAL MARKETS
The traditional ‘Santa Claus’ rally failed to materialise, but US tech stocks still posted gains, driving growth outperformance over value, globally, from a style perspective.
US MARKETS
Witnessed a month of winners and losers
The US market was sharply divided in December. Large-cap growth stocks extended gains, while large-cap value and small-cap shares saw sharp declines, even after the mid-December Fed rate cut. The performance gap between MSCI USA Large Growth and MSCI USA Large Value reached an extraordinary 9.2%. Telecom Services, including Alphabet, Meta, and Netflix, rose 3.4%, while I.T. and Consumer Discretionary also posted gains. In contrast, the other eight GICS (Global Industrial Classification Standard) sectors declined 5–11%, with Materials performing the worst.
Down -2.5% (US 500)
UK MARKETS
Disappointing economic data weighed on markets
UK economic data remained disappointing, with Q2 and Q3 2024 GDP figures revised lower by about 0.1% each, while inflation ticked higher – a troubling combination. Although the Fed and ECB cut rates, the BoE’s ability to stimulate growth appears constrained. Business confidence fell sharply, and UK borrowing costs rose, with the 30-year gilt briefly reaching 5.16%, its highest level since 1998. Globally, the weakest sectors were real estate, materials, energy, and healthcare—an unfavourable mix for the UK equity index.
Down -1.3% (UK All Share)
EUROPEAN MARKETS
Political strife contributed to weak market performance
European shares struggled in December as the ECB cut its three main rates by 0.25%, bringing the headline rate to 3.15%, despite a slight uptick in inflation to 2.2% from 2.0%. Growth appeared to slow in Q4, even as the ECB reiterated its perennial forecast for higher growth ahead. European mid-cap shares outperformed, while the Europe 600 ex. UK dipped 0.3%. Political strife in France and Germany added to the markets’ malaise.
Down -0.3% (Euro 600 Index ex UK)
JAPAN MARKETS
Yen decline helped propel markets
Japanese stocks performed well in local currency terms, supported by a roughly 5% yen decline against the dollar, boosting profits repatriated to yen. Retail sales, services and manufacturing PMIs, and consumer confidence all improved. The Bank of Japan held rates steady at 0.25%, stating that rate hikes will continue if the economy aligns with forecasts, though the pace remains unclear. Large-cap stocks outperformed small-caps, while the Topix slightly lagged the Nikkei.
Up 3.9% (Japan Index)
Key Points
• The dollar continued to lead, with growth in the US accelerating and outstripping peers, undermining the case for more US rate cuts, as did a small increase in inflation to 2.7%.
• The pound was pulled a little by (but lagged) the dollar, while higher bond yields bolstered the case for earning interest in sterling.
• The euro traded largely sideways against sterling, but lost ground to the dollar, despite quarter point rate cuts from both the Fed and ECB, as growth outlooks diverged.
• The Japanese yen was particularly weak, continuing its sell-off from September highs, and ending the year materially weaker after a volatile period.
Key Points
• Bonds lost ground as yields backed-up, despite rate cuts from the Fed and ECB. Signs of a near-term floor in inflation data pushed up expectations for longer term rates.
• The supply overhang of debt from profligate western government borrowing continues to push up longer term borrowing costs, while corporate balance sheets are much healthier and their borrowing needs much lower, in general.
• Gilts were weak, again, hitting multi-decade high yields, but longer dated bonds struggled broadly. 7-15 year maturity US Treasuries fell in line with UK 10-year debt.
• Investment grade credit is more sensitive than High Yield to changes in interest rates, and its yields were pushed higher by the rises in longer dated interest rates, negatively impacting returns.
• High Yield credit fared better, boosted by optimism on lesser defaults in a US-tilted market. Short-dated High Yield just about broke-even, while the High Yield space overall made further gains.