The Month in a Minute
📰 Overall: January saw mixed performance across markets and assets, as investors became slightly less optimistic around expected interest rate cuts.
💪 Benchmark Performance: Wealthify’s performance was ahead of industry benchmarks for our higher-risk Plans, as regional allocation was a key driver of outperformance. However, lower-risk Plans marginally underperformed as longer-dated government bonds gave back some of their recent gains.
📈 Market Movers: Japan Shares (+8.0%); US Shares (+1.6%).
🗒️ Plan Summary: Plans with a higher allocation to shares performed better than those with a higher allocation to bonds.
🌍 Original Plans: Shares (+1.0%) provided healthy returns, whilst bonds (-0.8%) declined.
🌱 Ethical Plans: Shares (+0.7%) delivered positive returns as bonds (-1.0%) turned negative.
🕰️ Going Forward: Despite their decline in January, we continue to believe that the current risk-reward balance is in favour of bonds and remain cautiously positioned. We are optimistic that the opportunities we’ve selected will have a positive effect on Plans in 2024 (including our US bond allocation).
After a positive conclusion to 2023 for most assets, January provided a mixed picture and served a timely reminder of the importance of diversification.
On the whole, it was a month of contrasting fortunes for share markets. Strong domestic economic data drove US shares to record highs, while Japanese shares surged to their highest levels since 1990. However, Chinese shares declined to decade lows after the country’s recent stimulus announcements and economic data underwhelmed investors.
Meanwhile, modest increases in inflation across developed markets, and the resilience of the US economy, challenged global bonds. This resulted in turbulence across longer-dated government bonds, as expectations of interest rate cuts were scaled back.
Overall, this environment was more supportive for shares compared to bonds, which benefitted our higher-risk Plans. Despite this, we continue to favour bonds from a risk-reward perspective as shares remain expensive and are therefore more vulnerable to a potential recession.
At present, the US economy remains in good shape, having grown by an impressive 3.3% in the last quarter of 2023. Strong consumer activity has been a key driver of this growth, and January’s data on personal spending and retail sales signalled that this trend is continuing, with both exceeding expectations again. There were also encouraging signals from the jobs market, which added more positions than anticipated and showed a slightly lower unemployment rate than predicted.
The US Federal Reserve maintained interest rates at their current levels last month, as expected. Although January’s inflation figure of 3.4% was higher than anticipated, markets have been encouraged by its overall direction. However, interest rate expectations were adjusted after the Committee’s chair, Jerome Powell, played down the likelihood of imminent cuts.
The European Central Bank (ECB) also voted to leave interest rates unchanged, given that inflation remains above its target, despite declining to 2.9% last month. And although data confirmed that Europe narrowly avoided a recession last year, questions remain around the region’s economic outlook, as consumer confidence and retail sales fell again. A continued weakening in these data points could force the ECB to cut rates earlier than expected.
The UK economy also faces its own hurdles as January’s data showed a weakening in the jobs market, as well as in manufacturing. Inflation was 4.0% (after it was 3.9% the month prior) and fears around stubborn price levels in services sectors escalated.
Nevertheless, there were some bright spots as the domestic economy once again beat expectations, growing by 0.3% in November. And in addition to this, consumer confidence has reached its highest level in 2 years, although it does remain negative.
Concerns also remain around China’s economy, as its growth is still below historic levels. The country’s debt problems and property sectors continue to present headwinds to their consumers, with retail sales falling short of expectations again in January. While the People’s Bank of China (PBoC) announced several measures last month to help combat its struggling economy, market movements indicate that these policies may not be sufficiently supportive.
Markets
Japan was the standout performer across share markets in January, as continued inflows from foreign investors and a weakening Yen led to a rally of +7.97%.
The US (+1.6%) and Europe (+1.4%) also gained in January, helping global shares deliver positive returns (+0.5%). However, global bonds, on the other hand, declined by -1.38%.
UK shares also struggled, as the mixed economic picture resulted in the FTSE 100 and FTSE 250 retrenching by -1.33% and -1.69% respectively.
Emerging Markets (-4.7%) and Asia Pacific (-4.82%) were the biggest laggards, as double-digit losses in Chinese shares (-10.53%) weighed on these regions.
Currency
In currency markets, the cooling of expectations around interest rate cuts in the UK and US resulted in strong months for sterling and the dollar. While sterling modestly weakened against the dollar (-0.34%) as risk appetite slightly dampened, it appreciated against the Euro (+1.67%) and most other major currencies. This included the Japanese Yen (+3.68%), which struggled as inflation weakened and the Bank of Japan (BoJ) maintained negative interest rates.
Investment type performance breakdown
Our sizeable allocation to the US and overweight allocation to Japan, combined with underweight positions in Emerging Markets and Asia Pacific resulted in shares producing positive returns for our Original (+0.95%) and Ethical Plans (+0.66%) in January.
However, the slight worsening in the interest rate outlook challenged our preference for longer-dated bonds (which are more sensitive to interest rate movements), as bonds provided negative returns for Original (-0.81%) and Ethical Plans (-0.95%). This environment also proved difficult for property shares, which delivered negative returns of -4.44% for Original Plans.
Summary with Plan details
The varied returns across markets resulted in mixed performance across our Plans last month. While those with a higher allocation to shares were able to generate positive returns, Plans with a higher allocation to bonds modestly declined.
Our Investment Team continue to actively monitor the financial markets and their impact on Plans — and are always ready to act in your best interests to events as they unfold. We are constantly evaluating new market information and drivers to keep your Investment Plan on track.
It’s important to remember that it’s normal for markets to go up and down, with periods of volatility to be expected when you invest. As always, we continue to look for opportunities to position your investments, with the goal of protecting your money and achieving your long-term objectives.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
