December 14, 2023
OPTIMISM OVER IMMINENT INTEREST RATE CUTS WANES
A mixed January ended on a negative note for equities as investors responded to US Fed chair Jerome Powell’s reiteration that a March interest rate cut was unlikely. Longer dated bonds also succumbed to selling pressure.
Biggest gainer among major markets was Japan with the Nikkei 225 registering an 8.4% rise, although MSCI Asia ex-Japan fell 5.4% and the FTSE Emerging Index was down 3.5% after stimulus measures introduced in China fell short of expectations. MSCI Europe ex-UK was the second biggest gainer adding 2.0% while the UK FTSE All Share Index was 1.3% lower. In the US, the S&P500 rose 1.7%.
Wages remain in focus for Central Bank policy
Wage inflation has been an ongoing concern for central banks, with the ECB recently singling out wages as the biggest risk in its fight against inflation. In the US, wages are now 2.5% higher on an inflation-adjusted rate than before the pandemic.
“STIMULUS MEASURES INTRODUCED IN CHINA FELL SHORT OF EXPECTATIONS”
Wage growth pulled ahead of inflation last year Hourly wage growth surpassed yearly inflation for most of 2023
Conversely, the UK has seen wages become less of a risk to inflation as they have grown at their slowest pace in almost a year. Pay rose 6.6% in the period September to November versus the previous year, in line with expectations and a sharp deceleration from 7.2% in the previous three-month period.
Wage Growth in the UK slows again British annual regular wage growth dropped to 6.6% in the three months to November from 7.2% previously. CPI adjusted pay grew by 1.4%
Earnings announced by large tech companies produce volatile response
The earnings season for the “Magnificent Seven” big AI-enabled tech companies got off to a mixed start in January, highlighting the fact that investors still need to see strong earnings growth to justify their elevated price-earnings ratios after 2023’s strong bull market.
In all, the six companies in the group that have reported fourth quarter earnings so far highlight the extent to which the Magnificent Seven are dominating the business environment. According to FactSet analysis, six of them (excluding Tesla) are producing an aggregated increase in earnings greater than 60% while the other 494 companies in the S&P500 are expected to see earnings decline by around 9%.
“IN THE US, WAGES ARE NOW 2.5% HIGHER ON AN INFLATION-ADJUSTED THAN BEFORE THE PANDEMIC”
Fourth-quarter earnings, change from a year earlier
However, highly optimistic investor expectations have also meant that the largest companies are trading at levels that are priced for perfection and any disappointments may prompt a sharp sell off. Microsoft, Google’s parent company Alphabet and Apple saw their share prices drop immediately after weak spots were picked up in their fourth-quarter earnings. Microsoft’s share price came off 2.7% on disappointing earnings from its Windows, gaming and device businesses. Apple’s dropped 0.5% due to slow growth in China and Alphabet’s price declined 7.5% on lower-than-expected ad sales.
In contrast, the other members of the group, Meta Group (Facebook’s parent) and Amazon, experienced 20% and 7.9% share price rises respectively in the wake of reporting their earnings. Facebook experienced its strongest sales in two years and Amazon’s earnings benefited from robust holiday sales.
“FACEBOOK EXPERIENCED ITS STRONGEST SALES IN TWO YEARS”
Share-price performance
Microsoft’s subsequent rebound into positive territory highlights the volatility in investor sentiment towards the sector – and the difference between investors who are making decisions based on a short-term view of the sector and those who have the long term in mind.
Long-term investors are convinced that the tech sector will continue to outperform into the future based on ongoing innovation and the opportunities this will generate. They are less focused on quarterly earnings results and are spreading the net wider, looking for opportunities that haven’t been picked up widely or that are just starting to show themselves. However, investors need to be selective in their approach to this sector of the market and increased regulation of AI and social media could make for volatility and a greater need for a tactical approach.
“LONG-TERM INVESTORS ARE CONVINCED THAT THE TECH SECTOR WILL CONTINUE TO OUTPERFORM BASED ON ONGOING INNOVATION”
GLOBAL MARKET RETURNS JANUARY 2024
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