January ushers in a broad market recovery
Financial markets began 2019 in positive fashion, with most asset classes seeing a bright start to the year. After a gloomy December, in which all asset classes except property delivered negative returns, January saw a general rebound with global equities experiencing their best month in three years.
January’s stronger returns were delivered against a background of ongoing political uncertainty and some indicators of economic slowdown. The Chinese government released economic growth figures showing China grew at its slowest rate in 28 years, with export and import data seeing their biggest drop in two years. There were also signs of an economic slowdown in Europe, where a steady drip feed of disappointing economic data showed slowing exports and a drop in business and consumer confidence. Germany, the EU’s largest economy, narrowly avoided falling into a recession, while Italy, the Eurozone’s third-largest economy, did fall into recession this month.
The ongoing uncertainty over the UK’s relationship with Europe continued as Prime Minister Theresa May saw her Brexit plan defeated in the House of Commons. The issue of the Irish border proved to be the main sticking point and May resolved to return to Brussels to seek concessions from the EU. The ebb and flow of the negotiations in Parliament caused the value of the pound to fluctuate. Sterling rose against the euro and the dollar over the first three weeks in January, as the prospect of a ‘no deal’ exit appeared to recede, before falling back towards the end of the month as uncertainty set in once again.
The cumulative effect of these economic headwinds caused the International Monetary Fund to downgrade its forecast for global growth for 2019 and 2020. However, it was not all doom and gloom. The UK and the US continued with their long-term trend of falling unemployment, and markets were also boosted by the US Federal Reserve (Fed) becoming less hawkish – that is, softening its outlook for future interest rate increases. The resumption of trade talks between the US and China was also seen as a positive factor and helped support the rally in risk assets.
Emerging market (EM) equities posted the biggest gains for the month, with the MSCI Emerging Markets Index up 5.3% (total returns in sterling). EM markets were encouraged by the Fed’s less aggressive tone and a weaker US dollar, as a high percentage of emerging economies hold vast dollar-denominated debt.
Many developed markets also produced robust gains. The start of the quarterly reporting season for US firms was mixed, with strong results from companies including Goldman Sachs and Boeing helping to offset some disappointment from retailers and airlines. A rally in technology stocks later in the month also boosted the S&P 500 Index, which produced a total return of 8% for January. The Euro STOXX 600 Index was up 4.5%, while the Japanese Nikkei 225 Index lagged most developed markets and produced a total return of 1.5% over the month. In the UK, the political uncertainty meant many investors remained wary of UK markets. A total return of 4.2% for the FTSE All-Share Index disguised a mixed picture: a strengthening pound saw the domestically focussed stocks of the FTSE 250 Index return 7.1%, while the more international FTSE 100 Index posted a total return of 3.6%.
The US Fed’s decision to leave interest rates unchanged also provided support for fixed-income investors in January. Corporate bonds experienced a strong rally over the month, particularly in the US where a series of better-than-expected employment numbers and the Fed’s more dovish tone helped US investment-grade corporate bonds provide their best monthly return since March 2016. High-yield corporate bonds saw an even stronger rally, but global government bonds saw a more modest rise.
In the UK, returns from fixed income were more muted. The ICE BofAML UK Gilts All Stocks Index ended January up 1.1%, with the Sterling High Yield Index returning 1.8% (total returns hedged to sterling).
Oil also rose over the course of the month after a sharp pick up in the oil price at the start of January. Gold, copper and a number of other commodities also saw modest increases and helped 2019 get off to a good start.