April 2023 Market Insights
Developed markets were generally positive although Hong Kong markets and U.S. technology and growth companies underperformed the broader market.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in April?
Developed markets were once again generally positive despite ongoing concerns about the credit quality of the global banking sector. The collapse of First Republic Bank in the U.S. and subsequent purchase by JPMorgan highlighted the risks that remain. Indeed, the International Monetary Fund has warned that the banking breakdowns will likely be a drag on global economic growth. It also trimmed global growth projections by 0.1% due these financial sector stresses and tighter monetary policy. It now believes that GDP will likely grow 2.8% this year and 3.0% next year.
Added to this are concerns about global demand from the mobile and PC industries remaining soft due to geopolitical pressures and both consumers and businesses reducing their spending. Nonetheless, investors have pushed equities higher on the belief that the aggressive rate-hike cycle is nearing an end.
Positive performers were led by U.K.’s FTSE 100 Index, up 3.13% and Japan’s Nikkei 225 Index, up +2.91% (local prices). Weakness came from Hong Kong’s HSCEI and HSI Index, down -3.83% and -2.48% respectively (local prices).
Weakness of the AUD by +1.06% against the USD and +0.83% against the € helped AUD returns for the Trends and indices.
Plenty of headwinds remain in the U.S.
Although many investors are expecting that the interest tightening cycle is a near and end, the U.S. Federal Reserve have signalled another interest rate rise moving the benchmark rate above 5% this year to dampen inflation towards a goal of 2%. The general view is that inflation is not yet under control despite headwinds in U.S. banking sector, a slowdown of consumer demand and risks to corporate profits.
Inflation remains elevated in Europe
European equities rallied on generally strong corporate earnings. However, the European Zone grew only marginally in 1Q 2023, at a rate lower than market expectations.
April's inflation data remained elevated at a record high of 7.0%, causing the European Central Bank to raise interest rates again by 0.25%, its seventh consecutive increase.
However, the increase marks a slowdown from recent 0.50% rises, potentially signaling that the ECB may be entering the final stage of its most aggressive tightening stance on monetary policy since the start of monetary union in 1999.
Chinese and Japanese stimulus
China’s economy grew by 4.5% in 1Q 2023, putting the country on track to meet its growth goal of 5.0% for the year. Chinese exports rose in March by 14.8% as demand from most Asian countries and Europe improved and the factories resumed production post the country’s extended lockdown. The challenge will be whether this can continue in the second half of the year as the U.S. economy slows and the impact of higher interest rates on China’s foreign trade will increase.
President Xi Jinping’s priority is to revive the Chinese economy as it recovers from the impact of its policy of Covid Zero and regulatory clampdowns.
The Bank of Japan has stopped issuing guidance on future interest rate levels and left its low benchmark interest rates and asset purchase settings unchanged. The decision to keep its stimulus pushed Japanese markets higher as Berkshire Hathaway raised its investments in Japanese equities to 7.4% from about 5% in 2020 with potential for more increases.