January was a difficult month for global equity markets, which declined 4.0% for £-Sterling investors, on the back of expectations of further tightening of monetary policy and geopolitical tensions.
The US equity market returned -4.3% for the month. The US technology sector significantly lagged other markets, down 8.1% following uncertainty over the valuations of growth stocks.
After increasing 27% in 2021, US markets opened the year significantly weaker, led by the prospects of higher interest rates and tapering of liquidity. The price to earnings ratio for the S&P 500 ended January at around 20x earnings, down from 27x in December. However, giant technology firms such as Microsoft and Apple continued posting strong earnings growth. The most exposed firms were those with high leverage and weak balance sheets, as well as those presenting a softer earnings outlook than analysts had expected.
The UK equity market ended the month positively with a return of 1.1% and thereby one of the very few positive markets during the month. Equities were supported by strong returns in the energy, financials and mining sectors, benefiting from global commodity inflation. Dropping coronavirus case numbers without tighter restrictions also helped boost optimism surrounding the UK economy, with growth and equity valuations increasing as the UK government reverted to ‘Plan A’ and the economy reopened.
European equities ended January in negative territory, delivering a return of -5.3% as investors worried about upcoming European Central Bank (ECB) decisions, supply chain issues and growing tensions between Russia and Ukraine. While markets typically do not price-in geopolitical risks which threaten to upset progress temporarily, tensions over Ukraine have added fresh momentum to concerns over energy. Russia is the dominant supplier of natural gas to Europe, making up anywhere between 40-50% of European gas imports. Any conflict and resulting sanctions imposed by the West would be damaging. Oil prices increased by 15.9% in January over concerns around tighter supplies.
Emerging Markets (EM) were more resilient over January, dropping just 1.1%. China, the main driver of performance in the EM index, saw its central bank cutting interest rates and bank reserve requirements in an effort to stimulate demand, while also pledging to further ease its monetary policy.
Government bond yields climbed higher as stock markets fell, while corporate bonds also declined. However, despite the apparent growing wall of worries, investors might find comfort from what is shaping up to be yet another solid quarterly reporting season, with companies posting robust sales and profits growth. This could provide the support the market needs to ease some fears.
Asset Class returns at 31st January 2022
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