Please see below article received from Brewin Dolphin yesterday evening, which discusses the markets’ strong end to 2023.
The Santa rally continued broadly last week, albeit at a more moderate pace, after an ascent of over 15% on the MSCI World Index since late October.
The last trading day of the year was uneventful. The S&P 500 index fell 0.3% on the day, though miniscule compared to the +24.2% gain in 2023 and after nine consecutive weeks of gains. The Nasdaq 100 index had its best year since 1999 and the global bond market experienced its biggest twomonth gain on record.
It is a reminder that market volatility is normal, and that staying invested and strategically adding to investments during periods of market weakness can benefit portfolios over the long term.
To the markets. And as you can imagine, the festive period and the last trading week of the year is usually a quiet one. However, while western markets saw dull trading sessions, the Chinese stock market experienced some hefty moves in the positive direction.
Unpredictability continues in China
You may recall in our last Weekly Round-up, we wrote about how Chinese authorities were imposing strict regulations on the gaming industry that could challenge companies’ revenue models. This stance has since softened, which may have something to do with the $80 billion market rout led by Chinese tech companies like Tencent and Netease. Chinese authorities have now said they will listen to feedback from both companies and players on how to improve the new rules. But that wasn’t all. In what was seen as a further boost for the gaming industry, China also approved 105 domestic games.
Chinese stocks surged on the back of the change of tone. There was also a boost for investors hunting for bargains, as the mainland’s stock market is set for an unprecedented third consecutive year of declines.
So, are Chinese stocks sustainable in 2024?
We cannot rule out that Chinese stocks may go higher in the near term due to momentum and a reversal of extreme pessimism. And for those of us who are superstitious, 2024 is the year of the dragon, which is perceived to be a powerful and positive zodiac animal.
However, for long-term investors, the challenges that come with investing in China haven’t changed. Yes, the Chinese authorities may have sounded a bit more forgiving with the gaming sector, but that just shows the extreme and unpredictable nature of the policy setting. Policy risks and politics are making China borderline un-investible, with significant market volatility and high risk becoming the norm. The property market also remains a source of concern – especially the risk of a financial contagion.
China is not the only place sending mixed signals to investors though.
Japan – land of the rising rates?
Seen as the laggard of developed market central banks in terms of policy normalisation, the Bank of Japan (BOJ) has kept traders guessing on when it will exit the world’s last negative interest rates. It has been moving towards policy normalisation, notably with the near abandonment of yield curve control. With inflation in Japan at 2.8% and the official interest rate at -0.1%, higher rates seem justifiable; the BOJ just wants to be sure inflation is persistent.
The annual wage negotiations in spring will be crucial for the BOJ to gauge the inflation outlook, with speculation it will consider policy changes following the event. However, the BOJ’s governor, Kazuo Ueda, said this week they may not need to wait for the full results of the wage data, raising expectations that the BOJ may move before April. That said, the latest BOJ board minutes indicate that some members see no rush to exit its ultra-loose policy. The Japanese yen has reacted on these noises and Japanese stocks have displayed their usual negative correlation with the yen.
It is unlikely the BOJ will pre-commit or provide clearer guidance like the US Federal Reserve (the Fed). As a result, markets will have to live with confusing signals from the BOJ for the time being. For those of us choosing to ignore the more immediate market noises, the BOJ exiting negative interest rates is a matter of when, not if.
The Japanese bond markets have priced in a more than 50% chance of a rate hike by April 2024. If that happens, the BOJ will be tightening policy while other major central banks are cutting interest rates – potentially a key macro theme of policy divergence. This will have significant implications and present opportunities to market participants such as macro traders and asset allocators. One market dynamic will be via the yen and Japanese assets’ sensitivity to it. Another dynamic will be the cross-asset implications of higher Japanese government bond yields.
We watch Japanese policy developments closely because Japan is not only part of our regional exposure, but it has the potential to impact global markets. We have been paying particular attention to the possible knock-on impact of higher Japanese government bond yields on global bond yields. So far – and to our relief – the impact has been more on its currency rather global bond yields. This suggests the removal of the last anchor of low interest rates in Japan may not be an obstacle to the sustainability of a rally in global bonds in 2024.
2024 – the year of the soft landing?
At the end of the day, the elephant in the room for global assets remains the Fed. Like us, the Fed is watching the incoming data closely to decide on its next steps. In a week of limited economic data releases, we saw US data continue to broadly lean towards a soft landing. One notable data release was the personal consumption expenditure price indices, which are the Fed’s preferred measures of inflation. Both headline and core measures of the inflation gauge came in lower than expected in November. Notably, the headline Personal Consumption Expenditures Price Index has contracted by 0.1% month-on-month.
Meanwhile, US personal spending adjusted for inflation rose by 0.3% on the month, suggesting US consumers remain in spending mode going into the holiday season. US consumers have been supported by excess savings, resilient job market conditions and falling gasoline prices. For the labour market, the latest release of initial jobless claims figures hovered around the low 200,000s; a pace consistent with the low and stable unemployment rates seen in recent times. In summary, it is no surprise markets are feeling buoyant as we wave goodbye to sharp interest rate hikes (well, maybe not in Japan), expectations rise of the Fed pivoting to easier monetary policy in 2024, and US data points to a higher chance of a soft landing.
Please check in again with us soon for further relevant content and news.
Chloe
04/01/2024