Source: Written by Gilles Coens, investment expert at MeDirect
January was an incredibly good start to the year. A reassurance for many investors after an eventful year 2022. February, however, is a little more difficult. There was more divergence in the performance of the indexes from different regions.
Sticky Inflation in the U.S.
In the United States, we saw the S&P500 index move flat earlier, but since mid-February there has been a pullback. This had to do with the January inflation figures that were announced. Inflation did fall further, but less than expected. Consumption figures also increased in the US in January.
As in recent months, inflation figures have a major impact on investor sentiment. Investors hoped that in 2023 the US central bank (Fed) might proceed with interest rate cuts. Now, however, there is a good chance that she will continue to raise interest rates further in 2023, which will further slow down the economy and have consequences for business results.
One of the causes of this sticky inflation is the wage-price spiral. Wages continue to rise. The US has a strong labour market: unemployment is low and this makes it difficult for companies to find suitable workers. Here, too, the principle of supply and demand works and wages rise. These rising wages have a positive effect on consumption, which is inflationary.
Europe shows resilience.
Despite the expectation that the European central bank (ECB) will raise its interest rates further, European stock markets continued to perform positively in February. Good business results have supported the stock markets. Overcoming many crises caused by the war in Ukraine also contributes to positive investor sentiment in Europe. Europe, meanwhile, has been able to survive the winter without power cuts and is largely less dependent on imports of Russian gas than in the past.
Fears of a recession are further diminished in Europe. This can be concluded from the latest publication of the euro area PMIs[1]. These improved in February from 50.3 in January to 52.3 on 22 February. The service economy PMI in particular made progress, and the manufacturing PMI also returned above the 50 mark for the first time since May 2022.
Chinese balloons punctured
The reopening of the Chinese economy after the strict lockdowns is positive for the global economy. The escalating geopolitical tensions between the US and China around the weather balloons (whether or not for espionage purposes) could mean that the Chinese economy could recover less sharply and quickly. It can be observed that the Hang Seng Index (Hong Kong) recorded a negative result in February. As a result, the index loses all the positive results of 2023.
Positive news from China comes from the real estate sector. Due to the zero-covid policy, this sector came under strong pressure. Property prices fell consecutively over the last 16 months. From the latest figures, this trend seems to have broken for the first time and property prices are stabilizing.
Staying balanced and on track
These first two months of 2023 are a good example that shows that one must always stay on track and avoid market timing. In December 2022, many analysts were very pessimistic about the first half of 2023. However, this half is not yet over. Those who were not active in the markets in January 2023 will probably have missed out on a lot of recovery potential after 2022. The first period of a recovery is usually the best and will often reward the patient investor.
Building a balanced and diversified portfolio that reflects your strategy and objectives remains essential! Not all eggs may be placed in one basket. February is a good example of this. In the United States, inflation seemed to be under control. It was even talked that in 2023 the Fed would even proceed with interest rate cuts (Fed Pivot). However, they are still taking into account possible interest rate hikes today. The predicted 0.25% could potentially jump to 0.50% to combat ever-present inflation.
We should also not forget bonds in 2023. Now that negative interest rates are behind us, there is room for bonds again. They now not only provide attractive interest rates but can also provide a counterweight to the riskiest asset classes such as equities.
So regularly review the composition of your portfolio and ask whether you still have the right spreadto navigate through 2023. Would you rather not do this yourself? Then use MeManaged, the new asset management solution by MeDirect.
[1] Purchasing Managers’ Index: Economic indicator resulting from monthly surveys of companies. It reflects the confidence of purchasing directors. A PMI below 50 indicates a contraction of activities, above 50 indicates positive confidence and an expansion of economic activity is expected.
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