January 2024 Monthly Market Review

The hangover from an exceptional Christmas rally led to some downdraft at the start of the month, but after these teething problems, January turned into a half-decent month for investors. Previous optimism was based on expectations for the coveted ‘soft landing’, where central banks can ease financial conditions without causing outright recession with all the associated damage to growth and company earnings. Coming into the new year, capital markets were anxious that they had got ahead of themselves, and that interest rates or inflation might indeed remain ‘higher for longer’ as central bankers had suggested in the autumn. These fears dissipated somewhat as the month went on and major central bank meetings coupled with the latest inflation figures seemed to vindicate market confidence. In the end, global stocks gained 0.7% in sterling terms. The table below shows January returns for key assets and indices.

The 0.7% return may appear meagre, but is actually quite impressive when considering the rally that came before it. December brought plenty of gifts for investors, meaning that equity markets started the year from an elevated base. Crucially, they started with higher valuations, in terms of price-to-earnings ratios. This was particularly so for the US, whose assets have been preferred by investors for years, to the point where its equity market looks comparatively expensive.

The S&P 500 nevertheless gained 1.8% in sterling terms, making it the month’s second best regional performer after an even more impressive 4.7% from Japan, as this month’s leader. Again, better than expected growth and expectations of forthcoming looser Federal Reserve (Fed) policy were the key factors. Figures released last month show that the US economy grew 3.1% year-on-year in the last quarter of 2023, an increase on the previous quarter that showed the impressive resilience of US consumers and businesses. The Fed, meanwhile, had been happy to guide interest rate expectations down – with markets pricing a near 50% likelihood of a March cut – until the final day of the month, when the latest central bank meeting communications poured cold water on such early timing expectations.

For investors, these signals came together for a proverbial goldilocks’ environment. Enduring US strength means that earnings will remain strong, but the steady decline in price pressures means that monetary policy can ease and hence support growth and valuations. The S&P accordingly broke to new all-time highs toward the end of January, almost touching the 5000 points level at the start of this week. However, as we have written extensively, investors might be overly excited about the prospect of Fed easing and continued US outperformance. The reasons for US equity strength are genuine, but some valuation aspects of current US stocks are a little nerve-wracking.

Taking the lead from the US on the last day of the month was Japan, whose stock market gained an impressive 4.7% through January in sterling terms. Japanese stocks were boosted last month by the Bank of Japan’s decision to maintain negative interest rates. Easier financial conditions buoyed the stock market, and a weakening of the yen bolstered expectations of export-led growth. Whether Japanese optimism can continue is hard to say – the country’s financial assets have had many false dawns over the years – but we note the continued improvements in its economic and corporate structures. Given how unloved Japanese stocks have been by global investors over the years, there is plenty more room to grow.

Closer to home, UK market returns turned negative for the month on the last day. The FTSE 100 lost 1.3% for the month in the end, while Eurozone equities gained a mild 0.3%. Investors have little to get excited about with domestically exposed UK assets at the moment, thanks to a weak economy and a Bank of England still apparently committed to keeping interest rates ‘higher for longer’. That being said, international large caps dominate the FTSE 100, most notable in Energy, materials, consumer discretionary and finance. What the market lacks is a strong big tech player as in the US. In any case, the fact returns were only mildly negative means that UK stocks mostly held onto the gains seen in November and December. The FTSE is still up 4.9% over the last three months, a decent base as we head into a new global growth cycle.

This is arguably even more so for Europe, whose mild equity upswing in January comes off the back of impressive full-year returns in 2023. The European economy is undeniably weak, backed up by the most recent growth and inflation data, providing higher conviction for investors that the European Central Bank will have to cut interest rates in spring. If global demand starts to pick up just as that happens, Europe’s exporters – who make up a sizeable chunk of the economy – could stand to benefit. Moreover, the fact that European equities’ valuations are comparatively cheap versus their American peers mean that further growth just on this based on this metric could be on the horizon.

Lagging behind the other major regions are emerging markets (EM). The MSCI EM index lost 4.5% in sterling terms through January, despite the fact that EM currencies have stabilised. The biggest drag on EM assets remains China, making up around 27%  of the wider Index. Disappointment in Beijing’s lack of willingness or ability to arrest its economy’s decline is still being felt. The support measures being pursued now are significant, but the lack of private sector confidence runs deep. For wider EMs, they should at least be able to look forward to looser Fed policy and, eventually, a pickup in global demand.

All in all, January turned out much better for globally diversified investors than could have been hoped for after the very strong yearend rally and poor initial start. Gains from November and December were not just solidified, but in most instances extended. The current monetary policy backdrop bodes well for asset values and growth from here.

 

Please note: The value of pensions and investments can fall as well as rise, and you could get back less than you invested.

 

 

Important Information
The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.

Tatton is a trading style of Tatton Investment Management Limited, which is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 733471. Tatton Investment Management Limited is registered in England and Wales No. 08219008. Registered address: Paradigm House, Brooke Court, Wilmslow, Cheshire, SK9 3ND.

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