The big tech juggernaut continued to roll on in January, driving the US stock market to record highs, with strong gains from Nvidia, Microsoft, Apple, Amazon, Alphabet and Meta, six of the so-called ‘magnificent seven’ stocks. Tesla somewhat let the side down, however, with investors left disappointed by its fourth quarter earnings and production outlook. Shares were also affected by the decision of car rental agency Hertz to reduce the size of its electric fleet, citing lower resale values and expenses related to repairing the vehicles.
The magnificent seven stocks, which collectively recorded outstanding performance over 2023, are being set increasingly higher expectation hurdles to meet by investors. We anticipate dispersion between their share price performances as some clear them and some do not. In the recent past, however, the seven – minus Tesla – have been blowing away the rest in terms of their earnings expectations. With profits stagnant elsewhere they are the main reason why the US stock market has continued to make strong progress despite a weaker government bond market, and therefore higher yields from risk-free assets, in 2024 thus far.
Following the strong rally in bonds over the course of November and December, market views surrounding earlier cuts to interest rates have been tempered as both inflation and economic data have come in strong. The much-awaited 'pivot' from central banks, most crucially the US Federal Reserve, is now pencilled in for later in the year, and this has weighed on bond prices.
Changing interest rate expectations
From pricing a 90% chance of a rate cut in the US in March, markets have downgraded this to a 50% probability. Yet a cut by May is still seen as likely, and rates are still priced to fall to about 4% by the end of the year.
With inflation forecast to fall to between 2% and 3% on both sides of the Atlantic that opens up the prospect of a continued small, inflation-beating or ‘real’ return from cash. Meanwhile, there would seem to be some attractive yields on bonds and equities at current levels, though clearly if inflation were to be vanquished further and faster that would be even better, providing economic growth can hold up. The risk to this happier scenario is that inflation is more stubborn, perhaps driven by wage demands amid a tight labour market.
It’s therefore been some of the more interest rate sensitive parts of equity markets displaying more volatility, and in January there was a fall back in sympathy with the bond market across areas such as real estate, infrastructure, and smaller companies. Commodity stocks also lost ground amid generally lacklustre raw material prices, albeit there was an uptick in the oil during the month that helped awaken energy stock from their listless performance for most of the month.
Japanese stocks, meanwhile, put in a strong performance amid fresh weakness in the yen, which was helpful to major exporters, and increasing investor interest in the area. Measures taken by the Tokyo Stock Exchange to enhance attractiveness for shareholders appear to be having the desired effect, encouraging management teams to consider financial metrics when making capital allocation decisions.
Can China roar back in the Year of the Dragon?
Continued US exceptionalism stands in contrast to China, which was the worst performing fund sector in 2023 and has continued its dismal run into this year with the Shanghai Composite index hitting its lowest level since 2020. A slow-motion bursting of a property bubble is playing out following years of overbuilding and speculation.
An unwelcome milestone was reached with a ruling over the liquidation of Evergrande, one of China’s largest property developers. Although the company first defaulted on its debts back in 2021, it has limped along since. Now it appears its $300 billion debt pile is to be unwound with assets sold to repay its creditors who stand to receive just a fraction of their capital back.
Can we expect a change in fortune for China in the forthcoming the Year of the Dragon? Even a small positive change in sentiment could lead to a rally, at least in the short term, and there are some plausible reasons why this could happen. While risks around deteriorating US-China relations and policy unpredictability remain, recent talks have created communication channels that imply disputes can now be handled with minimal risk of escalation. Meanwhile, stimulus measures to boost consumer spending and the broader economy could meet with more success once the painful deleveraging of the real estate sector is closer to an end.
Even so, China exposure will still be uncomfortable for many investors. If companies, and indeed whole sectors, can suddenly be in the spotlight of government policy imperatives without warning, foreign investors are likely to continue to lack the confidence to commit their money.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for January 2024:
Top 10 funds:
Bottom 10 funds:
Top 10 sectors:
Bottom 10 sectors:
The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for January 2024: 31/12/2023 to 31/01/2024. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into about 45 sectors, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.
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