Quarterly Markets Review – Q3 2021

A look back at markets in Q3, which started well for shares but then saw gains erased amid rising inflation and worries over China.

  • Developed market shares were flat (in US dollar terms) in Q3. Declines in September erased prior gains. Emerging market equities underperformed amid a sell-off in China.
  • Global sovereign bond yields were little changed in the quarter. The US Federal Reserve said it would soon slow the pace of asset purchases.
  • Commodities gained with natural gas prices seeing a sharp spike.   

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.


US equities notched up a small positive return in Q3. Strong earnings had lifted US stocks in the run up to August, when the Federal Reserve (Fed) seemed to strike a dovish tone, confirming its hesitance to tighten policy too fast. However, growth and inflation concerns late in the quarter meant US equities retraced their steps in September.

The Fed stated in September that tapering of quantitative easing (i.e. a slowdown in the pace of asset purchases) will be announced at the November meeting, as expected, and will finish by mid-2022. Meanwhile, the fed funds rate projections now show a faster rate hiking schedule than they did in June. The median rate expectation for 2023 moved up to three hikes from two in June, with three additional hikes in 2024. Fed officials were evenly split 9-9 on a rate hike in 2022.

The shift comes in the context of revised real GDP growth – down to 5.9% for 2021 from the 7% growth estimated in the last meeting – while inflation has risen. The Fed now sees inflation running to 4.2% this year, above its previous estimate of 3.4%. The Fed raised its GDP projections for 2022 and 2023 to growth of 3.8% and 2.5%, respectively.

On a sector basis, financials and utilities outperformed. At the other end of the spectrum, industrials and materials struggled, although September’s sell-off hit almost all sectors. Energy was an exception, rising as supply constraints drove prices to highs – particularly Brent crude.


Eurozone equities were flat in Q3. The energy sector was one of the strongest performers, as was information technology with semiconductor-related stocks seeing a robust advance. Consumer discretionary stocks were among the weakest for the quarter, with luxury goods companies under pressure amid suggestions that China could seek greater wealth redistribution, which could hit demand.

The quarter had started with gains amid a positive Q2 earnings season and ongoing economic recovery from the pandemic. The Delta variant of Covid-19 continued to spread but most large eurozone countries have now fully vaccinated around 75% of their population against the virus, enabling many restrictions on travel and other activities to be lifted.

However, as the period progressed, worries emerged over inflation due to supply chain bottlenecks and rising energy prices. Annual inflation in the eurozone was estimated at 3.4% in September, up from 3.0% in August and 2.2% in July. The European Central Bank said that it would tolerate any moderate and transitory overshoot of its 2.0% inflation target.

The end of the period saw a surge in power prices as a result of low gas supply and lack of wind over the summer, among other factors. High power prices should be positive for utility firms. However, the sector – particularly in southern Europe – is susceptible to political intervention as evidenced by announcements of price caps in Spain and other countries. The utilities sector was a laggard in the quarter.

Germany held a general election which saw the Social Democrats (SPD) take the largest share of the votes. Coalition talks are now under way over the formation of a new government.


UK equities rose over Q3 with the market driven by a variety of factors. While there were some clear sector winners (such as energy on the back of a recovery in crude oil prices) the difference between the best and worst-performing stocks, or dispersion, was quite marked. Within consumer staples, for instance, some of the more highly valued consumer goods companies performed poorly, while the more lowly valued grocery retailers performed well.

Merger & acquisition (M&A) activity remained an important theme. The period began with a recommended counter-offer for Wm Morrison Supermarkets and bid activity was seen across a variety of areas. Gaming remained an area of interest, with a proposal from US sports betting group DraftKings to acquire Entain. Within industrials there was headline-grabbing bid for aerospace and defence equipment supplier Meggitt. This in part explains the positive contribution from the consumer discretionary and industrial sectors, with the latter also helped by the easing of transatlantic travel restrictions and dollar strength against some weakness in sterling.

Small and mid cap (SMID) equities suffered in line with higher growth areas of the market more generally in September, but performed very well over the quarter a whole. SMID caps remained a sweet spot for M&A activity and made a useful contribution to overall market returns.

The Bank of England took a more hawkish tone as inflationary pressures continued to surpass expectations. Business surveys confirmed that supply bottlenecks are constraining output. Natural gas and fuel shortages made headlines towards the period end. These developments were also reflected in higher market interest rates, which helped support financials. However, Asian focused banks were lower in the period given the growing uncertainty around the outlook for Chinese markets and the economy.


The Japanese equity market traded in a range through July and August before rising in September to record a total return of 5.2% for the quarter. The yen showed little trend against the US dollar for most of the period before weakening at the very end of September to reach its lowest level since the start of the pandemic in early 2020.

Throughout the pandemic, Japan has consistently seen a lower infection rate than most developed countries but faced a much more serious test during early summer as infections picked up rapidly. Public opposition towards the government’s approach ratcheted up again and the approval rate for the Suga cabinet fell to the lowest levels seen since he took office in September 2020.

On 3 September, in a surprise decision, Prime Minister Suga announced his intention to resign without contesting the LDP leadership election. Mr Kishida was ultimately elected as LDP party leader and becomes Japan’s 100th prime minister. An establishment politician within the LDP, Mr Kishida should be essentially a safe, if unexciting, choice to guide Japan through the next stage of its post-Covid recovery. There is unlikely to be a change in the direction of monetary or fiscal policy as a result, and the likely shape of next major stimulus package should emerge over coming weeks..

It now seems likely that the upcoming general election could be held at the earliest practical date, on 31 October or, at the latest, mid November. Mr Kishida also inherits a stronger position in the vaccination programme which has sustained strong momentum in recent months after the very slow start seen in the first half of the year.

Although corporate results for the quarter that ended in June were strong, sentiment was impacted in August by the announcement from Toyota Motor of production cuts in September and October, due to the global shortage of semiconductors. Elsewhere for corporate Japan, order trends and capital expenditure plans continue to look strong.

Asia (ex Japan)

Asia ex Japan equities recorded a sharply negative return in the third quarter, largely driven by a significant sell off in China. This was partially due to concerns over the ability of property group Evergrande to service its debts. The Evergrande situation sparked global investor concerns over potential spill over risks.

Market concerns over inflation and the outlook for interest rates also dampened investor confidence during the quarter. China was the worst-performing index market, with sentiment towards the country also weakened by the government’s regulatory crackdown affecting the education and technology sectors. Power outages in China and the rationing of energy also spooked investors, hurting production of key commodities. The downside risks in China have significantly increased against a backdrop of slowing economic activity and concerns that recent regulatory policies will further weigh on growth.

Pakistan was also sharply weaker as ongoing political upheaval in neighbouring Afghanistan weakened investor sentiment towards the country, with fears that violence and unrest could spill over into Pakistan. Hong Kong and South Korea followed China lower, with both markets sharply lower as market jitters over China spilled out into the wider region.

India was the best-performing index market during the quarter and achieved a strongly positive performance as accommodative monetary policy and the easing of Covid-19 restrictions boosted investor sentiment. Indonesia also achieved a positive return. Singapore was almost unchanged, while declines in Taiwan and the Philippines were modest compared with the falls seen in other index markets.

Emerging markets

Emerging market (EM) equities declined in Q3, which saw a sell-off in Chinese stocks, concern over continued supply chain disruptions, and worries over the implications of higher food and energy prices for some markets. US bond yields rose towards the end of the quarter. Regulatory actions in China were the initial trigger for market weakness. These were compounded by the re-imposition of some Covid-19 restrictions and supply chain disruption in August, worries about possible systemic financial system risks stemming from the potential collapse of Evergrande, and power shortages.

Brazil was the weakest market in the MSCI EM index as above-target inflation continued to rise and the central bank responded with further interest rate hikes. Meanwhile Q2 GDP growth disappointed, developments in China weighed on industrial metals prices, and political rhetoric picked up ahead of next year’s presidential election. South Korea also posted a double-digit fall amid falling prices of dynamic random access memory chips (DRAM) price and concerns over the impact of power issues in China on production and supply chains. Weaker industrial metals prices also weighed on performance of net exporter markets Peru and Chile.

By contrast, net energy exporters in general outperformed, most notably Colombia, Russia, Kuwait, Saudi Arabia, Qatar and the UAE. India delivered a strong gain, with sentiment boosted in part by the recent stream of initial public offerings. The economy continued to recover while vaccinations picked up – India is now on track to deliver at least one dose to 70% of its population by November.

Global Bonds 

US and European government yields were unchanged for the quarter as an initial decline reversed in September amid a hawkish shift from central banks and continuing inflationary pressure. The UK underperformed, with a significant rise in yields on increased expectations for monetary policy tightening.

The US 10-year Treasury yield finished at 1.49%, one basis point (bps) higher. Yields fell initially, as the rapid economic recovery appeared to be moderating. However, as the market’s focus turned to rising inflation and the prospect of the withdrawal of monetary policy support, yields rose back to similar levels seen at the beginning of the quarter. The Federal Reserve (Fed) became increasingly hawkish, suggesting that asset purchase tapering could start as early as November and that it could be wound up by mid-2022, earlier than expected.

The UK 10-year yield increased from 0.72% to 1.02%, with the move occurring in September. As with the Fed, there was evidence of a marked hawkish shift among Bank of England (BoE) policymakers, with a suggestion that rate rises might be warranted before the end of the year. Recent economic indicators came out worse than expected, while year-on-year consumer price inflation rose to 3.2% in August, the highest since 2012.

In Europe, the German 10-year yield was one basis point (bps) lower at -0.19%. Italy’s 10-year yield finished 4bps higher at 0.86%. Economic activity continued at a robust pace, the region benefiting from the release of pent-up demand, having come out of lockdowns relatively late. Eurozone inflation hit a decade high of 3.4% year-on-year in August.

Among corporate bonds, high yield made positive returns, while investment grade credit was little changed. European investment grade outperformed government bonds, while the US market was in line with Treasuries. Investment grade bonds are the highest quality bonds as determined by a credit rating agency; high yield bonds are more speculative, with a credit rating below investment grade.

Emerging market government bond yields rose, particularly in September, though EM corporate bonds made a small positive return. Emerging market currencies broadly fell against the US dollar.

Over the quarter, convertible bonds could not benefit from the early tailwind provided by positive equity markets but provided some protection in September as equities declined. The Refinitiv Global Focus index, which measures balanced convertible bonds, shed -2.1% for the quarter. The valuation of convertibles cheapened slightly as a result of strong primary market activity. More than $25 billion of new convertible bonds were launched in the quarter.


The S&P GSCI Index recorded a positive return in the third quarter, driven by sharply higher energy prices caused by increased demand in the wholesale gas market. Energy was the best-performing component in the quarter, with all subsectors achieving a positive result. The price of natural gas was significantly higher in the quarter, closely followed by gains in the prices of gas oil and heating oil. Unleaded gasoline also gained strongly on stronger demand as consumers started to return to normal consumption patterns after the Covid-19 crisis.

The industrial metals component was modestly higher, with a sharp rise in the price of aluminium offsetting price declines for lead, copper and nickel. The price of zinc was almost unchanged. The precious metals component also declined, with the price of silver sharply lower. The price of gold was also lower, but the decline was more modest.

The livestock component also declined. The agriculture component reported a small decline in the quarter, with sharp declines in the prices of corn and soybeans offsetting higher prices for cotton, cocoa, Kansas wheat, coffee and sugar.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Monthly Markets Review – October 2020

A look back at markets in October when Covid-19 lockdowns were reintroduced in much of Europe and investors awaited the US presidential election.

  • Global equities declined in October. The US presidential election and rising Covid-19 cases in many countries, notably across Europe, were the main focus for investors. Corporate bonds outperformed government bonds.
  • US shares fell amid rising Covid-19 cases, uncertainty over the presidential election and lack of progress on further fiscal stimulus.
  • Eurozone shares declined, underperforming other regions, as Covid-19 infections rose sharply and a number of countries reintroduced national lockdown measures.
  • UK equities fell amid renewed fears around a pick-up in Covid-19 cases. At the very end of the month, the UK government abandoned a tiered system in favour of uniform restrictions across England.
  • Japanese shares declined, largely due to the renewed uncertainty affecting other global regions. Japan’s success in containing the virus saw it announce measures to encourage consumer spending in restaurants.
  • Emerging market equities gained due to expectations of additional fiscal stimulus in the US. The prospect of more stable trade relations with the US under a potential Biden presidency also proved beneficial.
  • In fixed income , the US 10-year yield rose (meaning prices fell) which seemed to reflect rising hopes of economic stimulus. However, European yields fell (i.e. prices rose) as Covid-19 cases increased and lockdowns returned.
  • Commodities registered a negative return. Energy was the weakest component with crude oil falling sharply on concerns over weaker demand related to the coronavirus.

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.


US equities declined in October, primarily due to the continued rise in Covid-19 cases in many states. Market optimism over additional fiscal stimulus also waxed and waned, contributing to stock market movements. As the deadline for stimulus negotiations drew near, the unpredictability of the 3 November presidential election added to the wider sense of uncertainty. President Trump hinted more than once that stimulus would be announced post the election, should he win a second term.

From an economic perspective, data continued to indicate industrial activity was expanding in both the manufacturing and service sectors. Initial jobless claims also reached their lowest number since March. Even so, the Federal Reserve (Fed) maintained the message that it will keep rates unchanged until inflation stabilises at 2%, and will tolerate a moderate overshoot. Further, the Fed reiterated that additional fiscal stimulus was required.

The utilities sector – a relatively small component of the S&P 500 – was among the strongest performers in October, while the more significant communications sector made modest gains. All other sectors fell to one extent or another, with the technology, energy and healthcare sectors among the weakest areas of the market.


October saw shares fall in the eurozone as several countries reintroduced lockdowns to try and contain rising Covid-19 infection rates. France introduced a strict new national lockdown while partial lockdowns were announced in several other countries including Germany and Belgium. The European Central Bank kept monetary policy unchanged but indicated that more stimulus measures are likely to be announced at the next policy meeting in December.

Data showed that the eurozone economy expanded by 12.7% in the third quarter of 2020 as activity rebounded over the summer. However, this still leaves the economy 4.3% smaller than it was at the same time last year and expectations are that the new lockdowns will weigh on economic activity in the coming months. Indeed, business activity contracted in October according to the Markit composite purchasing managers’ index (PMI) which fell to 49.4. from 50.4 in September. 50 is the level that separates expansion in business activity from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors. Annual inflation remained stable at -0.3% in October.

October saw the bulk of Q3 corporate earnings’ releases. These were largely positive, with many companies beating expectations. Nevertheless all sectors ended the month in the red. Information technology was among those seeing the steepest falls. German software company SAP cut its revenue and profit forecasts for the year. The energy sector also fell sharply with lockdowns likely to mean reduced demand for oil. The telecommunication services sector was among the more resilient over the month.


UK equities fell over the period amid renewed fears of a pick-up in Covid-19 cases. Policymakers in Wales and Northern Ireland used devolved powers to implement new countrywide lockdowns, while Scotland introduced a tiered system. At the very end of the month, the UK government abandoned its own tiered system in favour of uniform restrictions across England, to run initially for four weeks from 5 November until 2 December.

In response to these events, the UK government announced it would extend the Coronavirus Job Retention Scheme, or furlough scheme, until December. Employees will receive 80% of their current salary for hours not worked, up to £2,500 a month. This scheme was due to be superseded by the Job Support Scheme (JSS) in November, as part of Chancellor Rishi Sunak’s “Winter Economy Plan”. 

Expectations built that the Bank of England (BoE) would use its November policy meeting to extend quantitative easing. It also emerged that the bank’s deputy governor, and CEO of the Prudential Regulation Authority, Sam Woods wrote to UK banks to ask them how ready they might be for negative interest rates.


The Japanese equity market lost ground for most of October, ending the month 2.8% lower. The yen moved steadily stronger against the US dollar, which had a slight negative impact on sentiment.

Style factors had a smaller influence on overall performance in October, although small cap stocks were weaker than the overall market, reversing some of the sharp outperformance seen in September.

With few new incentives domestically, the primary market drivers came from pre-existing factors, including the global resurgence of Covid-19, the US presidential election, and the likelihood of additional fiscal stimulus in major economies.

Japan’s experience of Covid-19, in terms of incidence and mortality, continues to be markedly different from the US and Europe. As a result, the government has been able to continue to encourage private consumption through its “Go To” campaign for domestic travel. In October, this was supplemented by the launch of “Go To Eat” discounts to support local restaurants in each prefecture. Domestic economic data continues to reflect a slow but steady recovery after a downturn seen earlier in the year that, although severe, was less dramatic then many other countries.

The corporate results season for the June to September quarter started in late October. Initial indications are good, with a significant proportion of companies beating consensus estimates. Although the full picture will not be clear until November, the announcements made so far seem to support further upward revisions to profits across many sectors in the second half of this fiscal year.

Asia (ex Japan)

The MSCI Asia ex Japan Index delivered a positive return in October, comfortably outperforming the MSCI World Index. Nearer month-end, worries about Covid-19 resurfaced as did US election uncertainty. Indonesia was the best-performing index market, as parliament passed the Omnibus Law which incorporates a number of labour market and tax reforms. The Philippines, where Covid-19 related restrictions were eased, and China also delivered strong gains and outperformed the index. Hopes of a Biden win in the US election – and potentially a smoother road forward for US-China relations – were supportive of Chinese equities, as was the performance of its internet companies and a number of positive Q3 earnings surprises.

Taiwan, India and Korea all finished in positive territory but underperformed the index. Earnings forecasts for Taiwan’s companies increased as the outlook for growth improved. In India, the number of daily new cases of Covid-19 continued to fall after the peak in the middle of September. The weakest index market was Singapore followed by Thailand, and Malaysia and Hong Kong SAR also lagged behind.

Emerging markets

Emerging market (EM) equities posted a solid gain as expectations for additional fiscal stimulus in the US increased. It followed a widening of Democratic Party candidate Joe Biden’s lead in opinion polls, ahead of the 3 November election. The MSCI Emerging Markets Index increased in value and outperformed the MSCI World.

Indonesia was the best performing EM market, as the approval of the Omnibus Law boosted sentiment. The Philippines, where Covid-19 restrictions were further eased, Mexico and China were the only other markets to outperform the EM index. In China, strong performance from internet stocks was beneficial. The prospect of more stable trade relations with the US under a prospective Biden presidency also proved supportive for stocks.

By contrast, Poland recorded a negative return and was the weakest market in the index. Daily new cases of Covid-19 accelerated and, later in the month, protests against the government broke out across the country. Greece and Turkey also finished firmly in negative territory and underperformed the index.

Global bonds

Markets were volatile in October, with mixed performance from bonds. Corporate bonds held up well overall. Concerns around Covid-19 were heightened. A resurgence of cases in Europe resulted in renewed lockdowns in Germany and France toward month-end and case numbers remained elevated in the US.

The middle of the month saw a burst of investor optimism as US politicians said negotiations over a stimulus package were progressing. Democrat presidential candidate Joe Biden, who favours a large stimulus, continued to lead in the polls. Sentiment reversed sharply in the last week of the month, on concerns over Covid, with the US dollar gaining against the euro and finishing slightly higher on the month. 

Government bonds diverged over the month. The US 10-year Treasury yield rose by 19 basis points (bps) to 0.87%, with the 2-year to 10-year yield curve steepening by 16bps (rising yields mean falling prices). Aside from expectations of stimulus, US data was reasonably positive. Weekly jobless claims fell below 800,000 for the first time since March.

European 10-year yields fell by 10bps across the board amid the continued resurgence of Covid-19. Germany’s 10-year yield finished at -0.63% and France’s at -0.34%. In the “periphery”, Italy’s 10-year yield dropped to 0.76% and Spain’s to 0.13%. The UK 10-year yield was 3bps higher at 0.26%. Economic indicators for Europe and the UK pointed to a loss of momentum, with Europe dipping back into contractionary territory.

Corporate bonds outperformed government bonds. US investment grade debt saw a marginal negative total return (local currency), as yields rose, but was comfortably ahead of US Treasuries. Eurozone investment grade returned 0.8%. Corporate bonds held up relatively well amid the sharp reversal in sentiment in the last week of the month (Source: ICE BofAML).

The performance of emerging market (EM) bonds was mixed. Hard currency (US dollar)-denominated bonds were flat after a late pullback, mainly in high yield, while EM corporate bonds made a modest positive return. Local currency bonds were also moderately positive. EM currencies were again mixed, but slightly higher overall. The Chinese renminbi and Thai baht performed well, while the Turkish lira and Brazilian real weakened.

Convertible bonds proved very resilient versus equities. The Thomson Reuters Global Focus index, which measures balanced convertible bonds, registered a positive return in the falling equity market environment. The index returned 0.4% compared to -2.5% for the MSCI World global equity index. Convertible bond valuations became slightly more expensive, albeit from a low base.


Commodities, as measured by the S&P GSCI Index, registered a negative return. Energy was the weakest component with crude oil falling sharply on concerns over demand related to the coronavirus. Livestock and precious metals also lost ground, though they fell by less than the index. Industrial metals rose, aided by strong gains for copper and zinc, and agricultural commodities posted positive returns.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.

Weekly Bulletin: Upgrading Credit

Unprecedented policy actions to limit the coronavirus shock and sharply lower valuations have improved the outlook for credit, in our view. Major central banks are committed to keep rates low and greatly expand their balance sheets. This underpins demand for corporate bonds and selected sovereign credit. We upgrade our view on global investment grade credit to a moderate overweight from underweight and keep high yield as an overweight.

Key points

  • Policy & Valuations: We upgrade our tactical views on credit on extraordinary central bank support and substantially more attractive valuations.
  • Stalling Rally: The initial market rally from historic US policy actions has stalled as worsening economic data and a rising human toll dominate sentiment.
  • Data Watch: Jobless claims and consumer sentiment data this week are likely to show more signs of economic damage caused by the coronavirus.

The opinions expressed are as of April 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

Weekly Bulletin: A Shift to Sustainable Investing

It’s important to keep a long-term perspective amid market volatility – such as the extraordinary moves of recent weeks. One enduring trend we see is a move to sustainable investing: a structural shift in investor preferences leading to large and persistent flows into assets perceived as more resilient to sustainability-related risks such as climate change. Investors rebalancing portfolios after the risk asset selloff may consider leaning into sustainable assets.

Key points

  • Long-term trend: Investors should keep a long-term perspective amid market volatility, including a focus on portfolio resilience through sustainable investing.
  • Policy action: Historic US policy actions, including over $2 trillion in fiscal support and a raft of Federal Reserve measures, helped calm markets.
  • Data watch: This week’s data are likely to show further signs of economic damage caused by the coronavirus outbreak and containment measures.

The opinions expressed are as of March 2020 and are subject to change at any time due to changes in market or economic conditions. The above descriptions are meant to be illustrative only.

Monthly Markets Review – January 2020

A look back at markets in January when the spread of coronavirus saw investors favour “safe haven” assets like government bonds.

  • Global equities, as measured by the MSCI World index, declined in January as the spread of coronavirus reduced investors’ appetite for risk. Assets perceived as safe havens, such as government bonds, performed well.
  • US shares were flat overall. They carried strong momentum into the new year but mounting fears over the spread of the coronavirus erased the early gains. Energy stocks were especially hard-hit.
  • Coronavirus concerns led to a lower start to the year for eurozone equities. The weakest sectors included energy, materials and consumer discretionary. Companies with significant exposure to China underperformed.
  • UK equities fell in January. The end of the month marked the UK’s official departure from the EU and its entry into a transition period. Sterling was volatile, gaining sharply after the Bank of England kept interest rates unchanged.
  • Japanese shares fell as news coverage emphasised the spread of coronavirus. The yen was slightly more volatile against the US dollar than in recent months although the actual yen/dollar rate ended January almost unchanged.
  • Emerging markets (EM) equities also lost value. Commodity price falls weighed on sentiment towards a number of countries, notably Brazil, Chile, Colombia and South Africa.
  • Government bond yields fell significantly over the month (meaning prices rose) amid investor caution and central banks reaffirming accommodative stances.
  • Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.


US equities rallied strongly in the first half of January before giving up the gains to end the month flat. Strong momentum from the end of 2019 continued into January, with the S&P 500 hitting a new record high in the middle of the month. Trade tensions that dogged markets for much of 2019 eased with the phase one US-China trade deal, signed as expected on 15 January.

US economic data remained broadly stable. The unemployment rate remains at a 50-year low of 3.5%, but muted wage growth has kept inflation under control. This gave the Federal Reserve the flexibility to leave monetary policy unchanged, although it adjusted its description of household spending growth to “moderate” rather than “strong”. Q4 GDP was in line with expectations, growing at 2.1% quarter-on-quarter (annualised).

In the second half of the month, however, mounting fears over the spread of coronavirus, in China and beyond, erased the early stock market progress. The Trump administration has imposed a temporary travel ban upon non-US citizens travelling to the US from China. Investor concerns over disrupted supply chains and weakened demand led to fears that growth could slow.

Energy stocks were especially hard-hit. The oil price fell steeply as the virus outbreak led to expectations of lower Chinese demand, adding to already cautious guidance from major oil producers. More defensive areas such as utilities performed better, with IT also holding up well in light of the trade war ceasefire.


Eurozone equities had a weak start to the year amid fears over the potential impact of the coronavirus on global economic activity. The MSCI EMU, an index of large eurozone companies, returned -1.7% in January. The weakest sectors during the month included energy, materials and consumer discretionary. Industries with significant exposure to China – such as luxury goods – underperformed.

The top performing sector during the month was utilities. Utilities is seen as a safe haven sector that tends to perform well in times of uncertainty. Additionally, the sector drew support from news that the German government will pay €2.6 billion compensation to RWE as part of the country’s move to switch from coal to renewable energy sources. Meanwhile, EDF benefited from reports that the French government may introduce new price regulation for the wholesale nuclear power market.

The flash GDP estimate for Q4 2019 showed growth of just 0.1% quarter-on-quarter in the eurozone, down from 0.3% growth in the previous quarter. Annual inflation ticked up to 1.4% in January from 1.3% in December – still well below the European Central Bank’s target. Jobs data remained encouraging with the unemployment rate down to 7.4% in December, the lowest rate since May 2008.

Forward-looking data showed stabilisation at low levels, with the flash composite purchasing managers’ index (PMI) for January steady at 50.9. (50 is the level that separates expansion from contraction. The PMI surveys are based on responses from companies in the manufacturing and services sectors).


UK equities fell over the period. The end of January marked the UK’s official departure from the EU and its entry into a transition period. Sterling was volatile, recovering sharply towards month-end after the Bank of England (BoE) kept interest rates unchanged, confounding market expectations which had predicted a cut. The Monetary Policy Committee voted to hold rates steady as indicators of future activity started to recover following the decisive general election outcome in December.

Data released in January covering the end of 2019 was mixed. Latest growth numbers from the Office for National Statistics (ONS) showed that UK GDP rose 0.1% in the three months to the end of November, but shrank by 0.3% in November itself. Meanwhile, the ONS also reported that retail sales volumes fell 0.6% in December month-on-month. The data prompted speculation the BoE would cut rates, pressuring sterling, which initially gave back some the strong gains it had made at the end of 2019.

However, forward-looking indicators suggested there has been a sharp recovery in the confidence of the UK consumers and corporates since the election. IHS Markit/CIPS confirmed that its composite purchasing managers’ index (PMI) had recovered above the 50 mark which separates expansion from contraction. Meanwhile, the CBI’s quarterly industrial trends survey found that the proportion of manufacturers expecting business conditions to improve was 23% larger than the share predicting them to worsen.


The Japanese market fell 2.1% in January as news coverage emphasised the spread of coronavirus. Sentiment in early January was also hit by the sudden escalation of tension over Iran. The yen was slightly more volatile against the US dollar than in recent months as a generally weaker trend was punctuated by the buying of yen as a perceived safe haven. Nevertheless, the actual yen/dollar rate ended January almost unchanged.

Japanese consumer confidence has picked up in the last two months, following the consumption tax increase on 1 October. However, the recovery appears somewhat muted compared to previous tax rises. Some of this may be the result of one-off impacts from warm winter weather and natural disasters, but the data completes the picture of a greater-than-expected economic impact from the tax rise.

The reporting season for the October to December period has started, but the overall picture will not emerge until early February when the bulk of companies report. The potential for the current heightened global uncertainty to be transmitted through a stronger yen may lead to continued caution in companies‘ outlooks.

At the individual stock level, there were further examples of ground breaking Japanese corporate activity in January. The battle for control of components of the Toshiba Group, which began with Nuflare Technology in December, escalated in January. An activist investor launched a tender offer for Toshiba Machine. Later in the month, a seemingly straightforward move by Maeda Construction to acquire 100% of Maeda Road was rebuffed by the subsidiary company. Maeda Road is now looking at a potential third-party or “white knight” to help it escape from its parent company.

Asia (ex Japan)

Asia ex Japan equities declined in January amid concerns over the impact of the coronavirus outbreak in China on economic growth. This was despite an initial improvement in sentiment mid-month, as the US and China signed a phase one trade deal as expected.

Thailand and the Philippines were the weakest markets in the MSCI Asia ex Japan index, with tourism expected to be impacted by reduced visitors from China. South Korea lagged as the prospect of weaker global growth, and the risk of component shortages from China weighed on the outlook. China and Taiwan underperformed by a more modest margin. In Taiwan, President Tsai-Ing-Wen was re-elected for a second term.

By contrast, Pakistan posted a small gain and was the only index market to finish in positive territory. India recorded a small negative return but outperformed the index. The economy is less open than other regional markets and less exposed to global growth. Hong Kong performed broadly in line with the index.

Emerging markets

Emerging market (EM) equities lost value in January, as the outbreak of the coronavirus in China increased concerns over global growth. The Chinese authorities responded by imposing travel restrictions and cancelling Lunar New Year events. As the outbreak escalated, the re-opening of factories after the new year holiday was delayed.

Given the negative implications for Chinese economic growth, global commodity prices came under pressure. Against this backdrop, Brazil, Chile, Colombia and South Africa all underperformed, with currency weakness amplifying negative returns. In South Africa, the central bank unexpectedly cut its headline interest rate by 25bps, amid ongoing weakness in economic growth.

China slightly underperformed the broader EM index, although the mainland markets were closed for the new year holiday from 24 January to month end. A number of Asian EM, including South Korea, Thailand and the Philippines, also underperformed.

By contrast, Turkey recorded a positive return and outperformed as the central bank cut its headline interest rate by 75bps, more than expected, to 11.25%. Egypt was the best-performing market in the index, supported in part by currency strength. The central bank left its key interest rate unchanged, against expectations for a 50bps cut. Mexico posted a small gain, as trade-related uncertainty eased following President Trump’s signing of the US-Mexico-Canada-Agreement (USMCA).

Global bonds

Government yields declined in January (meaning prices rose) as investors sought lower risk assets amid an outbreak of coronavirus in China and uncertainty as to the potential economic impact. The Federal Reserve (Fed) and Bank of England (BoE) left policy rates unchanged.

The Fed changed its description of household spending growth to “moderate” from “strong”. The BoE dropped forward guidance for “limited and gradual tightening”, cut growth forecasts and said it expects inflation to remain below target until the end of 2021.

The US 10-year Treasury yield fell from 1.92% to 1.51%, while the two-year yield fell from 1.57% to 1.31%. As expected, developments in impeachment proceedings against President Trump indicated the case would most likely be thrown out by the Senate. US economic data remained healthy overall.

In Europe, the German 10-year yield fell from -0.19% to -0.43% with France’s falling from 0.12% to -0.18% and Spain’s from 0.47% to 0.24%. Italian bonds outperformed as the populist Lega party lost a regional election. The country’s 10-year yield fell 47 basis points (bps) to 0.94%. The UK 10-year yield declined from 0.82% to 0.52%. The eurozone economy showed further stabilisation at low levels, with the flash composite purchasing managers’ index for January at 50.9.

Corporate bonds produced positive overall returns (in local currency), led by investment grade, as global yields declined, but underperformed government bonds. US energy lagged after strong performance the previous month. UK investment grade corporate bonds proved an exception, outperforming government bonds, led by capital goods. Investment grade bonds are the highest quality bonds as determined by a credit ratings agency; high yield bonds are more speculative, with a credit rating below investment grade. In high yield, certain sectors in the UK and Europe performed well.

Emerging market hard currency government and corporate bonds produced positive total returns, although EM currencies fell overall. Latin American currencies broadly weakened given the renewed uncertainty around Chinese growth.

While the overall MSCI World equity index lost 0.6% in January, convertible bonds as measured by the Thomson Reuters Global Focus index gained 1.8% in US dollar terms. Convertibles in the US and Europe became cheaper in January while Asian and Japanese convertibles continue to trade below our estimate of fair value.


The S&P GSCI Spot Index saw a double digit fall in January, as global growth concerns weighed on the demand outlook for commodities. Energy was the weakest index component. Crude oil prices fell sharply on expectations of weaker demand, especially from China given the likelihood that the spread of coronavirus and measures to contain it will weigh on economic activity. Industrial metals also fell on weaker demand expectations. Agricultural commodities recorded a small negative return, led lower by coffee and soybeans. Conversely, precious metals generated a positive return, with gold and silver both moving higher.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.