by Haith Nori
January has seen an increase in global equity markets after a slightly volatile December. Central Banks are hosting their next interest rate meetings at the beginning of February, giving January a little rest. China has continued to open up after intense lockdowns with a release of 3% GDP growth in 2022, the second slowest rate of economic growth since the 1970s. Many emerging market economies are also coming back into the limelight offering lowly valued equity markets and attractive sovereign bond yields.
On 12th January, promising data presented itself for US inflation which, for the 12 months ending in December, came in at 6.5%, down from 7.3% in November and continuing its gradual decline since June, marking the sharpest monthly fall in US CPI figures since mid-2020! Furthermore, in the UK CPI data released was 10.5% for the 12 months ending in December, down from 10.7% in November and 11.1% in October. Whilst progress is slower than in other parts of the world, a trend is beginning to emerge in the UK inflation data. The next meeting about interest rates will be 31st January – 1st February for the US Federal Reserve and 2nd February for both the European Central Bank and the Bank of England. Global markets are waiting with bated breath to see how Central Banks approach their next steps in controlling inflation and if we are to see a reduction in the scale and frequency of hikes. ‘UK wages grew at the fastest rate outside the pandemic period at the end of 2022’[i] up 6.4% on an annual basis, marking the largest increase since 2001. The rise in wages strengthens the case for the Bank of England’s Monetary Policy Committee to keep raising interest rates, although any further hikes should be finely balanced in the context of weaker economic growth expectations and a more challenging housing market. Whilst wage growth is good news for households in the UK, figures have still failed to keep up with inflation. Both the US 10 Year Treasury Note and the UK 10 Year Gilt have decreased in yield since the beginning of January 2023. On Wednesday 18th January, the Bank of Japan made no policy changes as expected, keeping its yield curve control targets in place (0% for 10year yield and -0.1% for short term interest rates).
Emerging market debt has come back onto investors radar screens following a difficult period in which the US dollar rose strongly. When the dollar rises, many developing countries local currencies tend to depreciate given typically high external debt positions, which are most often financed in dollars. They will see higher imported inflation with food and oil prices. Dollar strength tightens financial conditions for some emerging market countries and can affect the availability of credit. ‘The dollar has depreciated 7% since its highs in October, pushing EM assets higher’ [ii] as the two have historically have an inverse relationship. Analysts have suggested there could be room for further outperformance from emerging markets as the dollar may continue to depreciate. Many of the emerging market countries began increasing interest rates early in 2021, long before the Federal Reserve and many other Central Banks of developed countries across the world, which has resulted in many emerging market countries offering some very attractive yields. Examples, of where some 10 year Government Bonds are yielding are: Brazil c.13.19%, Mexico c.9%, Egypt c.20.1%, Zambia c.30.19% and Turkey c.10.7% to name just a few.
The CBOE (Chicago Board Options Exchange) Volatility Index (VIX), which is a real time index representing market’s expectations for volatility over the coming 30 days, has been on a steady decrease since October which coincided with the US dollar’s all-time high. Gold has also been on a steady increase in price since October. Both Sterling and the Euro have increased against the dollar steadily since the end of September 2022. China has continued to show positive signs of growth since it began to re-open after lifting its zero-covid policy. This has been especially helpful for business over the period of Chinese New Year.
The International Monetary Fund (IMF) on Tuesday 31st January raised its Global Growth outlook for 2023. This is due primarily to demand in the US and Europe, alongside China’s re-opening and a significant easing in European energy costs. The IMF has ‘said global growth would still fall to 2.9% in 2023 from 3.4% in 2022’, [iii] however this is an improvement from the October 2022 prediction of 2.7% with the warning of the world tipping into recession. Following the 2023 prediction, the IMF has also stated that global growth would accelerate to 3.1% in 2024. Whilst progress is slow, there is at least some positivity that can be taken from their outlook, in which they revised China’s growth forecast much higher for 2023, from 3% to 5.2%.
Many countries have been answering the calls of Ukraine for additional support in the ongoing crisis with Russia. Germany made an announcement on 25th January to supply 14 military battle tanks and encouraged other European countries to do similar The US later that day also declared further aid with the supply of 31 tanks. Finland, Poland, the United Kingdom, Spain, the Netherlands and France are also considering making contributions. This is a major development in the situation.
Overall, January has welcomed back some positivity within global markets. Brent Crude dropped sharply in value at the beginning of the month but has recovered its value above the December highs, ending at just under $85 per barrel back up from the lows of December ($76.10). US and UK bond yields continue to fall and are becoming less attractive relative to some emerging market bonds, which have the potential to deliver very attractive real returns to investors.
[i] https://www.ft.com/content/b25fd8d7-f7bd-4501-8a32-21d338846f85
[ii] Look who’ emerging as the biggest star of 2023–Points of no return, John Author’s
[iii] https://www.reuters.com/markets/imf-lifts-2023-growth-forecast-china-reopening-strength-us-europe-2023-01-31/
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