Market Commentary - Dart Capital
Following the gains of November and December, it was a more muted month for equity markets, with resilient economic data tempering market hopes of imminent interest rate cuts by the major Central Banks.
Having outperformed our peer group last year, in part due to our additions to the most profitable large-cap technology companies in 2022 at a time when that sector was highly out of favour, we continue to use to our advantage the short-termism which drives much of the day-today movements in financial markets.
In particular, we believe the current my topic focus of traders on the timing of a potential economic recession and Central Bank interest rate decisions is creating the opportunity to own good quality assets at attractive valuations, particularly in less high profile areas such as mid-cap stocks, thus providing a solid platform for portfolio performance over coming years.
Title here
Data out of the US was very strong over the month, knocking investors’ hopes that slowing inflation and economic activity could pave the way for rate cuts as early as March of this year. Most notably, the preliminary GDP figures for the fourth quarter of 2023 indicated that the economy grew at an annualised pace of 3.3% over the period, well ahead of consensus economist expectations of c.2% growth, driven by strong consumer spending and business investment.1
Furthermore, December’s employment report also came in strong during the month, with payrolls rising by 216,000, well ahead of the 170,000 expected by economists.2
The Federal Reserve’s monetary policy committee (FOMC) held the Federal funds rate at 5.5% in their meeting on the final day of January, with FOMC chair, Jerome Powell, citing that inflation remains too high.3
Following December’s FOMC meeting, equity markets rallied after the Fed signalled it expects 75 basis points of cuts in 2024 and that a soft landing could be on the horizon. Following the aforementioned data overshoots, investors’ expectations have reduced with Powell stating its now unlikely the Fed will have a level of confidence by the time of the next meeting in March. Despite this, the S&P gained 1.6% in US Dollar terms.4
Counter to economist expectations, UK inflation increased in December for the first time in 10 months based on data released over the month, with the year-on-year figures for the Consumer. Having fallen sharply over the last two months of last year, Gilt yields rose 25 basis points over January 6 reflecting scaled back expectations of how soon the Bank of England will start cutting interest rates. The MSCI UK All Cap declined 1.40% in capital return terms.4
The Eurozone narrowly escaped a recession in the fourth quarter according to preliminary data released over the month, with GDP flat over the fourth quarter,7 helped by stronger than expected growth in the periphery regions such as Spain, Belgium, and Portugal. The annual inflation rate for the currency bloc remained at 2.9% to the end of December,7 with the two largest eurozone economies, Germany and France, undershooting economist expectations, adding to investors’ hope that the European Central Bank will be able to cut interest rates soon.
Japanese stocks enjoyed a strong month to start the year, aided by changes in their domestic tax saving program coming into effect in 2024. International investors are hoping the revamped Nippon Individual Savings Account (NISA) with higher tax-free investment limits will encourage the 2,100 trillion yen of assets in cash to be invested in Japanese equities.8 MSCI Japan gained 8.5% in local currency terms,4 although these gains were tempered by the fall in the value of the Yen over the month, which declined c.3.6% against the Pound.4
China’s equity market remained turbulent during January as Chinese property development giant, Evergrande, was ordered to liquidate after failing to provide a convincing restructuring plan after an 18-month long court hearing.9 For the first time since 2016, China now offers a superior dividend yield to that of Emerging Market equities, following the sharp share price decline the region has suffered.10 Investors’ attention remains sharply focussed on the latest government policy changes to boost the economy and the subsequent equity market. MSCI China H ended the month down 4.2% in local currency terms.4
Important information
This document does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individuals. This document has been prepared with all reasonable care and is not knowingly misleading in whole or in part. The information herein is obtained from sources which we consider to be reliable but its accuracy and completeness cannot be guaranteed. No responsibility is taken for any losses, including, without limitation, any consequential loss, which may be incurred by anyone acting on information in this document. The opinions and conclusions given are those of Dart Capital Limited and are subject to change without notice.
The value of investments and the income from them are not guaranteed and can fall as well as rise and clients may not get back their original investment.
It should be remembered that past performance is not necessarily a guide to future performance.
The return on investments denominated in foreign currencies may increase or decrease due to the movements in exchange rates between sterling and the foreign currency.
Investments in cash, bonds and gilts will reduce in value if the return is less than the rate of inflation.
Some investments e.g. property funds may be less liquid and investors may not be able to realise their investment immediately or the price may reflect a forced seller discount.
MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data shown. The MSCI data may not be further redistributed or used as a basis for other indexes or any securities or financial products. This guide is not approved, endorsed or reviewed by MSCI.