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Monthly markets review - January 2022

February 1st, 2022 Back To News & Insights

Highlights

  • US stocks fell in January. Investors had already been eyeing expected rate hikes with caution when escalating tensions between the US and Russia over Ukraine added to worries, putting markets in reverse.
  • Eurozone shares fell in January amid caution over the outlook for US interest rates and the uncertain situation in Ukraine. There was a sharp divergence between value and growth segments of the market. The MSCI EMU Value Index registered a positive return. Lowly valued areas of the market such as energy and financials were the strongest sector performers.
  • Government bond yields lurched higher in January, while stock markets fell sharply and corporate bonds also declined, as investors focused on continued elevated inflation and impending tightening from the Federal Reserve (Fed). The US dollar index hit its highest level since mid-2020.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

US stocks fell in January. Investors had already been eyeing expected rate hikes with caution when escalating tensions between the US and Russia over Ukraine added to worries, putting markets in reverse.

Comments from Federal Reserve (Fed) Chair Jerome Powell suggested a hike in March is extremely likely, underpinned by high inflation and a strong labour market. Chair Powell said: "reducing our balance sheet will occur after the process of raising interest rates has begun. Reductions will occur over time in a predictable manner primarily through adjustments to reinvestments so that securities roll off our balance sheet."

On the inflation outlook, he noted that, while the base case remains that inflation will decline substantially in the second half of 2022, there are risks that it could continue to surprise on the upside. In the meantime, early estimates put Q4 GDP growth at 6.9% (quarter on quarter, annualised), above expectations of a 5.5% increase.

Europe

Eurozone shares fell in January amid caution over the outlook for US interest rates and the uncertain situation in Ukraine. There was a sharp divergence between value and growth segments of the market. The MSCI EMU Value Index registered a positive return. Lowly valued areas of the market such as energy and financials were the strongest sector performers.

By contrast, highly valued areas, especially those that had performed well in 2021, were among the main laggards. In particular, within the IT sector, software and semiconductors saw steep falls, as did the healthcare equipment & services subsector.

Data showed that eurozone GDP increased by 0.3% quarter-on-quarter in Q4 2021, taking the region’s economy back to its pre-pandemic size. The flash eurozone composite purchasing managers’ index slipped to an 11-month low of 52.4, given weakness in services due to the Omicron wave, which saw some countries impose restrictions on activity.

UK

UK equities were broadly unchanged over January. Large cap equities rose, with some sectors recording very strong absolute returns, while small and mid cap equities recorded losses. The internationally diversified large cap resources stocks, and banking and tobacco companies outperformed. These sectors were, respectively, the three largest positive performance contributors as investors rotated towards some deeply out of favour areas of the market.

In contrast to the volatile market conditions, consensus earnings growth estimates for UK quoted companies remained steady in January. Meanwhile, a number of consumer-facing companies were able to deliver positive earnings surprises in the month, notably some of the UK’s biggest retailers.

Fears that the full impact of inflationary and interest rate trends had yet to fully hit home, however, continued to impact sentiment towards many of the domestically focused companies. Worries around a potential cost of living crisis also weighed on sentiment. Many Covid restrictions introduced before Christmas to tackle the Omicron variant were lifted. Despite this, a number of the companies in the travel and leisure sectors, which are reliant on economies reopening, extended share price losses from last year following negative earnings surprises.

Asia

Asia equities recorded a modest decline in January amid a volatile month of trading sparked by the Fed’s plan to tackle higher inflation by raising interest rates, starting in March. With investors already concerned about rising oil prices, global supply chain problems and geopolitical tensions between Russia and Ukraine, the prospect of sustained hikes in the cost of borrowing by the world’s biggest economy further weakened sentiment towards many Asian markets.

South Korea was the weakest market in the MSCI Asia ex Japan Index, as foreign investors became increasingly risk averse. Chinese shares also ended the month in negative territory as global concerns over the Fed’s rate hike plan sparked selling by overseas investors, with losses led by the technology sector. Malaysia also ended the month in negative territory, while declines in India, Singapore and Taiwan were more modest.

The Philippines was the best-performing index market in January, with more muted gains achieved by Hong Kong, Indonesia and Thailand.

The Japanese stock market ended January with a loss of 4.8%. Small cap indices yet again underperformed the broader market, with particularly sharp declines seen in the technology-focused Mothers market.

Emerging Markets

Emerging market (EM) equities recorded a negative return in January as markets priced in more aggressive policy tightening by the US Fed. South Korea was the weakest market in the MSCI EM index, exacerbated by disappointing Q4 corporate earnings results. Russia was firmly down as tensions with the West in relation to Ukraine continued to rise. China underperformed the index by a smaller margin. Macroeconomic data remained mixed and the authorities announced some modest monetary easing. Mexico, Taiwan, Malaysia and India also finished behind the index.

By contrast, net EM oil exporters, ex-Russia, were beneficiaries of higher energy prices; the result of rising geopolitical tensions in Russia, one of the world’s largest oil & gas producers. Saudi Arabia, Kuwait, Qatar, Colombia and the UAE all outperformed in MSCI EM index.

The Latin American markets of Brazil, Chile and Peru all finished ahead of the index. Brazilian equities and the currency rallied as economic activity proved more resilient than markets had anticipated. Meanwhile, ahead of the October presidential election, former president and candidate Luiz Inácio Lula da Silva indicated that he would seek to form a broad alliance. A moderation in political concerns was also supportive of the Chilean and Peruvian markets, as was a pick-up in copper prices.

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