January 2023 Market Insights
China’s re-opening, rate hikes to continue in Europe and the U.S. economy beat expectations in 4Q 2022.
Written by Kevin Hua Co-founder & Chief Investment Officer
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What happened to the markets in January?
Developed markets started 2023 with a bang as investors took on a risk-on stance sending equities higher across most sectors. There was an optimism that inflation had peaked, and China’s re-opening would spur the global economy.
The head of the International Monetary Fund noted that China’s pivot from its Covid Zero policy as the most important driver for global growth in 2023 and prevent a global downturn. Meanwhile, the World Bank remained pessimistic about a global recession as it forecasted global gross domestic product rising 1.7% in 2023, about half the rate forecast in June 2023. That would make 2023 the third-worst performance in the last three decades, after the contractions of 2009 and 2020.
Hong Kong markets continued their recent rally with the HSI and HSCEI Indices, up 10.42% and +10.74% respectively (local prices). The U.S. NASDAQ Index also performed strong, up +10.68% (local price).
All other major developed market indices were in the positive with no negative performers although the AUD strengthened 3.43% against the USD, which reduced AUD returns for the Trends and indices.
A slowdown in rate increases may result in a soft landing
After hitting a high of over 9% last year, inflation for December slowed to 6.5%, the slowest inflation rate in more than a year. This resulted in a 0.25% increase in early February to 4.75% with the U.S. Federal Reserve signalling that it will slow down the rate of increases going forward.
The U.S. economy beat expectations in 4Q 2022 as GDP rose at a 2.9% annualised rate, down from 3.2% in 3Q 2022. It’s the mild slowdown that the Federal Reserve is aiming for as it balances growth with reducing inflation. The labour market also remained resilient as U.S. employment bounced back to its pre-pandemic level in 2022.
Overall, the economic data is good news for the potential of a soft landing, which gave investors renewed optimism. Nonetheless, a recession remains a notable risk this year as economist warn about sustained higher borrowing costs working their way through the economy via weakness in corporate earnings, contraction in consumer sales and services activity and a slowdown in wage growth.
Rate hikes to continue in Europe
The European Central Bank remains stoic in tightening monetary policy indicating that it has at least 2 more 0.50% rate hikes in 2023 and the time to slow the pace of hikes is “still far away.” Its President Christine Lagarde told the World Economic Forum in Davos that the ECB would “stay the course” in managing its monetary policy.
Meanwhile, Britain may avoid a long-expected recession for the time being. Economic data saw gross domestic product unexpectedly rise 0.1% in November.
Investors are bullish about China’s re-opening
Investors turned positive on China’s long-awaited border re-opening, which saw markets continue their recent rally domestically and in Hong Kong. There is a view that the ending of China’s Covid Zero policy and an easing of regulation in the technology sector, that a turnaround is imminent even if questions remain on the state of the property sector.
Moreover, investors believe that China’s re-opening after three years will aid the global economy, triggering growth in services sectors such as aviation, tourism and education. Other sectors likely benefit include commodity producers as demand returns from China.
Bumper month for equities while Australia debates The Voice
In January, global tennis fans had their eyes on Melbourne for the 2023 Australia Open. And when not watching the tennis, Australians were busy debating the indigenous Voice to Parliament.
The Australian market served off 2023 with a bang, the ASX recording its best January performance in over 30 years, closing 6 %. This reversed all of 2022's losses and surprised many. Every sector rose, including technology and consumer discretionary.
This was likely in part driven by the happy news of China's a reopening earlier in the month . JP Morgan predicts it could add as much as 1% to Australia's GDP. This is because China is the largest consumer of Australian tourism and education, and the return of students and tourists to our shores is very welcome news to those sectors.
Australia’s inflation numbers are still very high – particularly, core inflation. CPI inflation over the year to the December quarter was 7.8%, the highest since 1990. With the RBA committed to restoring inflation to within target ranges, more rate rises are expected (at the time of writing, the RBA had just increased the cash rate to 3.35%).