NEI Monthly Market Insights: January 2023

Feb 22, 2023

Markets start strong in January

The markets began the year with a stunning rally. U.S. bonds had the best January since 1988, stocks had the best start since 2019, providing a favourable backdrop for the 60/40 balanced portfolio after a horrendous 2022. Market breadth around the rally started off narrow but has since widened. The Europe 600 Index rallied nearly 16% since falling to its October lows to reach a new high on January 18. China’s CSI 300 also extended its rally since hitting a bottom at the end of September, to rise nearly 16% by the end of January. The remarkable improvement on sentiment was fueled by speculation that the central banks will reach the end of the monetary tightening and will start easing rates later this year, in addition to China’s re-opening and Europe’s stronger-than-expected growth momentum. The subpar start to the Q4 earnings season for the S&P 500 has not been enough to derail price momentum, as a number of large technology companies had surprise negative earnings.

The NEI perspective

China’s surprise reopening has provided a strong tailwind to global growth. Economies globally have benefited from China’s rapid economic growth and the rising demand for goods over the past two decades, but also poses upside risk for inflation as commodity prices rise with demand.

Europe’s warm winter has provided much needed breathing room for natural gas prices following previous predications of a potential energy crises through the winter. With headline inflation in the Euro-zone coming down due to the sharp drop in energy prices, the NEI team sees opportunity in the region given attractive relative valuations.

Positive economic signals are showing the unexpected strength of the global economy despite persistent fears of a recession. Although the economic surprise index, inflation surprise index and labour market data indicated that the economy is more resilient than expected, NEI still sees downside risks due to concerns about softer earnings, elevated valuation, and heightened recession risks.

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