January review: Consolidating not stalling
Perhaps there is little surprise that after a very strong end to 2020, January 2021 would start on a slightly softer note. However, this was not the case for most of the month and the negative stock market numbers only came about during a short sharp sell off during the last week of January – much of this drop already being recovered during this first week of February.
The jury is still out whether the general downdraft was caused and driven by the upheaval caused by rebellious retail investors in the US or the gradual rise in fixed interest yields over the course of the month which was responsible for the negative returns in bonds (given the negative relationship between yields and bond prices).
At a high level, global equities declined just 0.9% in £-Sterling terms, but this slight fall masks some performance differences at a regional level. European, US equity and Japanese markets were a little weaker during the month, down around 1.7% on average. The performance of developed markets stands in contrast to that of gains seen in Emerging Markets and specifically the technology sector in the US, rising by 2.6% and 1% respectively.
There are understandable reasons for this divergence. Western markets are still largely under lock-down measures and that has once again increased the attractiveness of those companies (NASDAQ) that benefit, not suffer when people have to cope with staying at home. On the other hand, the rapid vaccine roll-outs in the UK and US provide a clear path towards economic normalisation and possibly support for more cyclical (economically leveraged) sectors as their respective economies march towards reopening.
Emerging Market equities benefited from three factors, a weaker US dollar (only against Emerging Market currencies), rebounding agricultural & industrial commodity prices, along with improving demand for exports, particularly in high-tech areas like semiconductors used in TVs, games consoles and electric cars – which helps explain the performance of the tech-heavy US Nasdaq stock index. Global supply chains for semiconductors are largely concentrated in South East Asian Emerging Markets of Taiwan, South Korea and China. Meanwhile, commodity producing countries like those in Latin America saw the benchmark commodity index rise 4.5% on the back of a near 6% jump in oil prices.
January also is the start of the corporate earnings announcement season for the last quarter of 2020. So far, company earnings are proving to be far more resilient than earlier forecasts. While there are always pockets of strength at a sector level, as earnings are generally ‘snap-shots’ of what did well at that certain point in time, companies more broadly appear to be in far better financial shape than anticipated. Not a bad start to the year at large, in the combination of some market consolidation against an improving backdrop, both in corporate fundamentals as well as the macroeconomic outlook Overall not a bad starting position for the year. A combination of rebounding consumer demand and improvements in the underlying economy may well provide a solid foundation for the next leg higher in global equity markets in 2021 and beyond.
Asset class returns at 31 January 2021
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