January 2023 market commentary

The beginning of the year brought a glimmer of hope with strong equity markets, falling energy prices and easing inflation. Global growth forecasts improved as China re-opened, and the World Economic Forum identified climate change as the most pressing risk to global growth in the next decade.  

Over the 10-year period, the top three risks all relate to climate change, with biodiversity loss in fourth place, highlighting the critical importance of addressing environmental impacts. 

Risk assets posted strong gains over the month, a stark contrast to last year’s poor performance. Better inflation data, the re-opening of the Chinese economy and falling energy prices all added to positive investor sentiment. European equity markets saw very strong gains with the Euro STOXX 50 returning 9.7% over the month. In the UK the FTSE 100 closed 4.3% higher and the FTSE 250 ex Investment Trusts up 6.5%. In the US, equity markets also had a strong start to the year with the S and P 500 gaining 6.2%.  

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/01/2023 – 31/01/2023)  

Falling energy prices and easing inflation  

Wholesale energy prices declined significantly, particularly in Europe, where natural gas fell around 25% over the course of the month. Falling energy prices have been a result of well stocked gas storage facilities, alongside lower demand resulting from a mild winter and efforts from households and businesses to cut energy usage. The fall in energy prices has led to more optimism about an “easier path” out of the current inflation crisis according to the Governor of the Bank of England, Andrew Bailey. The latest UK inflation figures showed that inflation eased to 10.5% in December – “the beginning of a sign that a corner had been turned” according to Bailey, with most recent forecasts showing UK inflation falling rapidly from the spring last year. High inflation levels in both the Euro Area and the US continued to show signs of cooling in January leading to positive investor confidence.  

A brightening macro picture in Europe  

The macroeconomic outlook for Europe has started to look a little brighter. Eurozone inflation continued its pattern of easing – inflation for January was 8.5%, down from 9.2% in December and falling for the third consecutive month. Sentiment also improved with consumer confidence at the highest level in almost a year, beating analyst expectations. The improving macro picture has led some economists to positively revise their forecasts for a Euro Area recession and supported very strong returns for European equities.  

Improving global growth forecasts as China re-opens  

The International Monetary Fund (IMF) has raised its 2023 global growth outlook due to “surprisingly resilient” demand from the US and Europe and the reopening of China’s economy. The IMF expects the global economy to grow 3.2% over 2023, an increase of 0.5% on its October forecast. China will be an “engine” that benefits other countries according to the IMF chief economist, with its growth forecast to be 5.9% in 2023, more than double the Fund’s October estimate. However, the recovery of the world’s second largest economy continues to have its headwinds domestically. China’s recovery could stall amid greater-than-expected economic disruptions from current or future waves of Covid. Furthermore, the Chinese property market is experiencing liquidity issues and years of lockdowns have led to many small and medium sized companies going bankrupt.  

The World Economic Forum identifies climate change as the most pressing risk to global growth over the next decade 

The World Economic Forum took place in Davos in January where leaders from around the globe gathered to debate and plan for solutions to the world’s most pressing economic challenges. The latest World Economic Forum Global Risks Report considers the greatest risks to the global economy, considering both the likelihood and severity of the risks. The report examines economic risks over both the short (two years) and long term (10 years). Over the next two years the ‘cost-of-living-crisis’ was the most pressing risk to the global economy, with ‘natural disasters and extreme weather events’ and ‘geoeconomic confrontation’ next in line. Over the 10-year period, the top three risks all relate to climate change, with biodiversity loss in fourth place, highlighting the critical importance of addressing environmental impacts. 

A key debate at the forum included Biden’s Inflation Reduction Act (which authorised $369 billion in spending on climate solutions) and whether this would lead to “discriminatory” provisions around local production. In response the European Commission laid out its own plans for a green incentive package where it plans to give tax credits for green investments.  

Scope 3 was another discussion point with the International Sustainability Standards Board outlining reporting frameworks for companies disclosing sustainability data. There was a growing backlash from companies having to report scope 3 emissions (emissions from suppliers and the use of a company’s products). Companies are worried about legal liabilities they could incur, with the Securities and Exchange Commission cracking down on misleading and overstated commitments to sustainability. Companies are also facing significant challenges in gathering the granular data needed to report on scope 3 emissions. 

Conclusion 

January was a strong month for equity markets, with investor sentiment buoyed by falling energy prices, easing inflation and China’s economy re-opening. Whilst we are starting to see glimmers of positive economic momentum, there are still many headwinds to economic growth and facing companies. Inflation remains high and sticky across major economies, with the UK, European and US Central Banks warning of more interest rate hikes to come. Our investment portfolios are tilted in favour of defensive, quality stocks; businesses that are well placed to ride out turbulent times, particularly given the challenging outlook for global growth. We continue to focus on investing for the long term, finding opportunities in companies that deliver products and services supporting sustainability trends, which are underpinned by long-term structural drivers.