Same Headlines, Different Market Rally

Global stocks bounced 7% (in USD terms as measured by the MSCI ACWI Index) in January, notching a strong start to 2023. European markets were the standout performers tied to a confluence of positive developments. First, a warmer-than-expected winter helped the Continent avert the long-feared energy crisis. Second, inflation showed signs of moderating, even as individual countries’ GDPs generally proved more robust than anticipated — prompting some to speculate the world may avoid widespread recession in 2023. Stocks in France rose over 11%, while in Germany they rose more than 12%. In the UK, which faces ongoing economic malaise, still-high food prices and faltering worker productivity, stocks rose a more modest 6.5%.

Despite a rosier outlook, though, potential headwinds remain — including a strengthening euro, which will make exports from European economic leaders like Germany relatively more expensive. And inflation, which seemingly peaked over the last few months, nevertheless remains a concern with which the European Central Bank will likely have to contend over the course of the year.

Asian markets also had a strong January on the back of China’s full economic reopening, which simultaneously prompted a boom in demand for domestic services and concerns that a fully operational Chinese economy will intensify inflationary pressures globally. Leading the way were Chinese (12%), Korean (12%) and Taiwanese (12%) stocks. As in Europe, though, the outlook remains cloudy — particularly for China, which faces the prospect of a population in decline for the first time since the 1960s, a tight labor market and the aftermath of the housing market’s implosion, which eroded many families’ wealth. Whether China’s economy can rebound this year from its historically low 2022 growth rate remains to be seen.

In Latin America, Mexican stocks gained a robust 17%, while Brazilian stocks were up nearly 7%. Canadian stocks delivered solid returns in January, too, rising just over 9% alongside rising oil prices.

All sectors in the MSCI ACWI ex USA Index were again in the black in January, led by information technology, up nearly 14%, consumer discretionary, up roughly 13%, and communication services, up almost 11%. Financials turned in a strong month, too, rising 8%, as banks benefit from a rising rates environment, which generally improves net interest margins and profitability. Turning in the most tepid month were utilities and health care, each up roughly 2%, as the risk-on backdrop favored a resumption of leadership among more growth-oriented sectors — though how lasting this rotation proves naturally remains to be seen.

Markets’ seemingly rosy outlook aside, there are ample sources of uncertainty globally — and conflicting signals about the likely path ahead. For example, while countries like Germany have announced they anticipate economic growth this year — and indeed, the eurozone’s economy grew faster than the US’s and China’s in 2022 — big corporations in industries beyond just technology have indicated they will lay off staff in the period ahead. Then, too, the economic mood at the recent World Economic Forum in Davos was decidedly somber, with many speakers indicating they anticipate recession at some point in 2023. China, too, as we alluded to earlier, poses a series of rather confounding economic questions — will economic reopening goose inflation? will the economy be able to bounce back quickly? how will demographic forces impact both these things? — the answers to which will likely impact the shape of 2023’s global economic picture.

Given this level of uncertainty, we wouldn’t be surprised if markets remained volatile in the months ahead — particularly as global central banks react to the shifting landscape. Though markets seem to be anticipating generally more dovish stances from most central bank heads, countries like Japan, where inflation is heating up for the first time in decades, undoubtedly face a tricky monetary policy path forward. It is amid precisely such uncertainty that we are grateful for our dedicated focus to a five-year time horizon, during which we will undoubtedly encounter short-term bumps, but beyond which we believe we are able to help position our clients well to capitalize on the long-term trajectory.

Exhibit 1 — January Total Returns for Major Markets (USD) (%)

Source: FactSet, as of 31 Jan 2023.