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Market Update January 2023

China reopening kick-starts 2023

  • Stock markets enjoy a strong start to 2023.

  • Recent recovery for Chinese equities continues as China reopens its borders for unrestricted travel, marking the repeal of the country's last Zero-COVID policy.

  • Inflation in the UK and US remains elevated but showing signs of easing.

  • Food prices in the UK increase sharply to 16.9% in the twelve months to December, the highest rate since September 1977.

  • Hiring in the US was stronger than expected in December but wage growth was weaker than predicted.

  • The National Institute of Statistics and Census of Argentina records a 94.8% inflation rate for its economy in 2022, the highest since 1991.

  • Croatia changes its national currency from the kuna to the euro to become 20th member state of the Eurozone.

  • Job layoffs in the technology sector continue, as Microsoft, Amazon and Google-parent Alphabet announce heavy cuts.

  • Regional airline Flybe collapses into administration with 277 job losses, while 75,000 customers are affected by flight cancellations.

  • World leaders and CEOs gathered in Davos, Switzerland, for the World Economic Forum. Key message is that urgent action is needed to tackle climate crisis.

  • Kevin McCarthy is elected speaker of the United States House of Representatives after fifteen rounds of voting, the most rounds since 1860.

Global stock markets started 2023 on the front foot, encouraged by signs that inflation is continuing to subside and wage growth is slowing. This is being seen as increasing the likelihood that central banks will ease off their rate hiking schedules and even cut rates later in the year, despite unemployment remaining low. Typically, markets do better when the headline inflation rate is falling. This is already clear from market performance since October last year, and was particularly the case in January, as things have gradually improved. Further declines in inflation rates in the months ahead should be a positive driver of returns in both bonds and equities.

US consumer prices fell 0.1% in December, in line with economist expectations. The biggest reason for the easing in inflation came from a sharp drop in gasoline prices, which are now lower on a year-over-year basis. The annual headline US CPI rate remains relatively elevated at 6.5%, although this represents the smallest increase since October 2021. In the US, both headline and core consumer price inflation peaked (in terms of year-on-year changes) in June and September respectively. In the Eurozone the peak looks to have come later, in October for the headline consumer price rate, with the core rate still rising as of December 2022. Annual UK inflation in December fell for a second month, to 10.5%, but a near 17% increase in the price of food maintains the pressure on households amid the cost-of-living crisis. Consensus forecasts for inflation for most major economies, and a range of emerging markets for 2023, are for declines.

The MSCI World Equity Index rose 4.6% during January. Defensive sectors underperformed, as risk appetite returned, whereas small companies, which are typically viewed as higher risk, outperformed. Bond prices also generally rose, helped by falling yields. The yield on the 10-year UK government bond slid back from 3.7% to 3.3% during the month. Falling yields particularly boosted growth-sensitive segments of the equity market. The NASDAQ 100 Index jumped nearly 11% in US Dollar terms during January, which represented its best start to the year since 2001.

Fourth quarter earnings season in the US started during January. Chipmaker Intel posted a larger than expected fourth quarter loss of $664 million. IBM also disappointed after it reported flat revenue growth and announced 3,900 layoffs. This follows the recent announcement from Amazon and Microsoft that they plan to cut 18,000 and 10,000 jobs respectively, as the significant job cuts within the technology sector in 2022 continue. Tesla suffered its worst year ever in 2022 but its share price bounced back in January after reporting strong demand for its cars following big price cuts. It also reported nearly $3.7 billion in profit in the fourth quarter. The share price of energy giant Chevron reacted positively following the announcement of a $75 billion stock buyback program.

The recent recovery for Chinese stocks continued in January. Foreign investors continue to return as the world’s second-largest economy gradually reopens after three long years in lockdown. This also helped the performance of European stocks given that Europe is one of China’s largest trading partners. The MSCI China Index rose 9.2%. China’s reopening is expected to fuel demand for commodities, given that it has been the world’s largest consumer for many years. In the past, China was seen as deflationary to the global market, as it pushed out low cost products to the global market and a super cheap labour force. Now, with the markets reopening, its consumption of commodities and natural gas may well prove to be inflationary. However, commodity prices generally fell in January. The Bloomberg Commodity Index slipped 4.2%, with WTI Crude Oil falling 5.5% in Sterling terms, although this is partly due to the US Dollar falling 2.3% versus the pound over the month.

Elsewhere, cryptocurrency prices, which tend to move in line with growth equities, enjoyed a strong month. The price of Bitcoin rose close to 40%, to reach its highest level since the November implosion of crypto exchange FTX.

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This document has been prepared for Ermin Fosse Financial Management LLP and is for information purposes only.

It should not be taken as advice and does not constitute a recommendation to buy or sell securities or to invest in any of the markets and/or sectors referenced.

This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product.

Information contained herein has been obtained from sources believed to be reliable, but is not guaranteed. It is not a promotion of Ermin Fosse’s services.

Please contact us before you invest / disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.

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