Markets kicked off 2023 on a positive note, with stocks and bonds rising across the board. Interestingly, the correlation between stocks and bonds remained positive, like in 2022 – only this time in a positive direction. The primary driver was falling interest rates, as the benchmark 10-year US Treasury yield dipped from 3.9% to 3.5% on hopes that the US would enjoy a “soft landing”. There was more positive news as the IMF raised its global growth forecast for the year from 2.7% to 2.9%, suggesting the rich world might largely dodge a technical recession.
The UK is on course to be the only major economy to shrink in 2023, after the IMF downgraded its growth forecast by more than any other G7 nation. Things don’t look much better in 2024 either, with the UK projected to be joint-last in the league table alongside Italy and Japan. The fund blamed the downgrade on “tighter fiscal and monetary policies”.
The latest figures show the number of profit warnings from UK-listed companies rose by 50% on the year, as a combination of high costs and weak consumer spending hit businesses. The figure is similar to the highs during the 2008 crisis. In a demonstration of how separated the stock market has become from the economy, the FTSE-100 was one of the best performing equity indices, thanks to its high weightings in inflation beneficiaries such as oil. The energy giant Shell reported a record £38 billion profit – the third largest profit ever posted by a British company.
Our Gresham House Micro Cap fund did even better than the index, jumping over 6% as small-cap stocks benefitted from the risk-on sentiment.
The US economy grew faster than expected in the final quarter of last year. Preliminary figures show the world’s largest economy grew 2.9%, above the forecast of 2.6%. However, there were signs that the all-important American consumer is feeling the pinch, with personal spending growth coming in at 2.1% versus a forecast 2.9%.
The strong domestic economy has been beneficial for smaller stocks, which helped our CT American fund rise over 6% in the month.
In Washington, battle lines have hardened in the ongoing fight over the debt ceiling, which puts a legal cap on the US government’s soaring debt pile. Raising the £31.4 trillion ceiling requires a vote in Congress, which is now controlled by Republicans, who want a reciprocal commitment from the White House to cut spending. The Treasury Secretary said the government had taken “extraordinary measures” – such as postponing contributions into government pension schemes – which will stave off a breach until June.
The eurozone economy grew in the final quarter of 2022 despite predictions of a contraction, boosting hopes that the continent will avoid a recession. Mild weather and government support cushioned the impact of soaring gas prices. Within the bloc, however, the German economy unexpectedly contracted, as its large manufacturing sector is sensitive to input prices.
Our Lightman Fund, which gives exposure to European companies that look good value, was a strong performer, rising over 5%.
China began relaxing its zero-Covid rules, which fuelled a rise in inflation to 1.8% in the latest year-on-year reading, driven by higher food costs. Inflation is not yet at a problematic level, but if it continues to rise it will be a headache for policymakers, who are trying to boost the economy after shocks from zero-Covid, the energy price spike, and a property bubble.
Nevertheless, the reopening has been great news for Chinese stocks, and our T Rowe Price China Evolution fund was the top performer of the month, rising over 7%.
Brazil and Argentina have started talks on setting up a common currency. If successful, the move would create the world’s second-largest currency bloc after the euro. The aim is not to replace both countries’ respective currencies – at least not at first – but to enable trade without relying on the US dollar.
Pakistan’s rupee fell 14%, and inflation hit 25%, as fears rose that it could be the next emerging market to default. The currency hit an all-time low after authorities abandoned controls on its exchange rate, in an attempt to secure backing for an IMF bailout.
Japan’s prime minister Fumio Kishida said it was “now or never” in a grim warning about the country’s demographics. He said the world’s third largest economy was on the brink of “not being able to function as a society” due to its continued falling birth rate. Annual new births fell below 800,000 for the first time on record, compared to over 2.5 million during the 1950s, and the population shrank 0.4%.
January’s gains were welcomed by investors after a bruising year. Where markets go now depends on the Federal Reserve and how it responds to inflation. The ultra-low US unemployment rate implies further inflation, according to the Phillips curve, but there are reasons to think the relationship has broken. Many people without jobs are no longer actively searching for work, either because they claim incapacity benefits or have retired early after reaping the long boom in house prices. Looking instead at the employment-to-population ratio, which counts those not looking for work, shows plenty of room for further job growth without hitting the economy’s “speed limit”.