This note contains an overview of our market views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.
At a glance
- US stocks continue to climb as growth beats expectations: US equities continued to rise to make new record highs last week. US Treasury Secretary, Janet Yellen, said that inflation is now under control. While we believe getting to the 2% target could be tough, any potential inflation rise, for example triggered by disruptions in the Red Sea, should be short-lived and relatively contained. Couple that with a better-than-expected annualised growth rate of 3.3% in Q4 2023 and the US seems on track to avoid a recession (certainly a deep one).
- Markets react positively as the ECB holds rates: The pan-European STOXX 600 index jumped over 2% across the week, supported by the European Central Bank (ECB) decision to keep the main refinancing at 4.5% and strong company earnings reports in the region. Despite the pushback on imminent rate cuts from the ECB, markets still expect the first to come in April; we think a first cut close to mid-year is more likely.
- UK consumer confidence reaches two-year highs: UK equities rose last week as consumer confidence reached levels last seen in January 2022. It seems that, despite December’s inflation re-acceleration, fears of continued price pressures and high interest rates seem to be dissipating.
- India’s equity market overtakes Hong-Kong: Last week, India overtook Hong Kong as the fourth-largest equity market in the world (behind the US, China, and Japan). While China as a whole remains the second largest, more than $6trillion has been knocked off the value of Chinese and Hong Kong equities since their peak in 2021.
- China’s stimulus intensifies but remains gradual: The People’s Bank of China has announced plans to support its economy as growth slowed at the end of 2023. Overall, China’s economy met the government’s 5% growth target last year, but it’s post-Covid recovery was disappointing. The stimulus could be a short-term tailwind for the weakening equity market and ongoing crisis in the property sector. However, we don’t believe it’s likely to be a long-term game changer for the struggling economy.
How we’re positioned in flagship portfolios
- Maintain defensive equity positioning: As described in our 2024 investment outlook, we made some changes to portfolios in early December. These included a slight increase to our equity allocation in UK and developed Pacific equities (excluding Japan).
- Fewer risky and more safer bonds: We also reduced our exposure to higher-risk credit while increasing our US Treasury holdings as yields are attractive and risks low.
- Commodities as a portfolio diversifier: Finally, we diversified our commodity exposure into a broader allocation.
- For full details of our flagship portfolio positioning, please visit our website.
What we’re watching
- The timing of the first rate cuts: This week the US Federal Reserve (Fed, Wednesday), Bank of England (BoE) and Sweden’s Riksbank (Thursday) meet to decide on any interest rate change. While it’s likely that both will keep rates unchanged, the market will look for any hints on the timing of the first cut. Our view remains that the Fed and BoE will likely start cutting rates close to mid-year, but we’ll be keeping a close eye on the messaging from this week’s meetings; all else equal, any hints of imminent rate cuts could cause us to tweak portfolios.
- US jobs report: The most important and potentially market-moving data point is US employment growth, which is expected to have slowed this Friday. While not particularly forward-looking, the unemployment rated should have ticked up a little, but from a very low level, underscoring US resilience. And wage growth is likely to have stayed steady, maintaining a pace that now looks like more moderate.
- Eurozone Q4 growth: On Tuesday, the Eurozone’s Q4 growth figures are released, and we expect them to be trending around 0% with no signs of any imminent recovery or deterioration. Given this stagnation, Thursday’s Eurozone inflation data release will be key in determining whether inflation is under control enough for the ECB to start cutting rates to stimulate the economy.
- Timing of rate hikes in Japan: In Japan, the job report is due on Tuesday. Although it won’t reveal shed much light on wage trends, it could matter for markets as it could shed light on if and when the Bank of Japan could normalise its negative interest rate policy at some point in 2024.
- Technology company earnings: The earnings season for the fourth quarter is progressing. This week, the market will likely focus on the reports of the large tech companies, including some of the so-called ‘Magnificent Seven’ (the seven tech stocks that saw very strong price increases in 2023) such as Alphabet, Amazon, Apple, Meta and Microsoft.
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Information correct as of 29 January 2024.
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