January market update

09 February 2021

January was a quiet month in the markets with investors taking stock and wondering what's next. Though, just when investors thought they were getting back to a more normal environment, a Reddit inspired short squeeze caused the markets to fall 2% in the month's closing days. 

 

Monthly update Jan 2021

[1] kōura Growth Fund based on a typical 80:20 mix, NZ Equities 20%, US Equities 36% Emerging Markets 7.7%, Rest of World Equities 16.4%, Fixed Income 20%

 

The month got off to a strong start with global markets jumping almost 3% following the Democratic wins in Georgia's US Senate runoff. Subsequently, the markets languished for the rest of the month with limited new news.   Global share markets ended the month flat, the quietest month we have had in a while. We've seen off Donald Trump, and with vaccines rolled out, we can almost ask the question "Are returning to normality?"

The S&P 500 closed the month in negative territory, down 1.1%, the first negative month since October 2020.  From the 4th to the 10th of January, markets rallied 3.4% off the back of the unexpected Democratic Senate wins in Georgia, handing control of all branches of the US Government to the Democratic party. Markets seem to believe this means Joe Biden will be able to get through an enormous stimulus package, putting more money into consumers' hands to boost spending.  

The initial gains were unwound in the month's last days due to the Reddit induced GameStop short squeeze.  The Reddit army decided on the 26th of January that it wanted to give hedge funds a bloody nose and induce the same punishment on them that they have been inducing others for years (read more about it here).  As in previous months, concerns linger that valuations are getting ahead of themselves with famed investor Jeremy Grantham writing that the stock market "has finally matured into a fully-fledged epic bubble".

With another wave of stimulus cheques expected to be in US residents' hands, the Russell 2000 (an index that better represents USA Mainstreet) marched 5.03% higher in the month, reflecting positive sentiment over future consumer activity.

The standout region was emerging markets, gaining almost 4%, taking their 3-month growth to nearly 20%. Consistent with our November market update, the emerging markets continue to outperform all other regions in the world. The strong performance has been driven by early success in fighting COVID and strong Government support for the economies.

The South Korean composite index, KOSPI, was up 3.5% for the month, due to an increase in retail investors participating in the stock market. According to the Korea Capital Market Institute, gains in the index were "led by small investors' massive net purchases, but the fast-paced growth should be under control for now." On the vaccine rollout front, South Korea has engaged its military to accelerate the vaccine's rollout, bolstering the economy's rebound.

Similarly, the Taiwan 50 index was up 6.6% in the first month of 2021. This comes off the back of substantial growth in export numbers due to a shift of China's supply chain activity into Taiwan. Semiconductor exports were a shining star for the economy as a shift to working from home lead to growth in laptops and smart phones. Furthermore, the effective handling of COVID-19 by Taiwan meant that the economy never had any severe shutdowns.  For the first time since 1990, Taiwan's economy (2.98%) outgrew China's economy (2.3%) in 2020.

The New Zealand market was up 0.3% for the month, a soft performance compared to its three-month performance of 8.6%.  January was a period of consolidation with most market participants still on holiday recovering from a torrid 2020.   In particular, energy stocks fell back to earth after the gains seen in late 2020 due to the iShares Global Clean Energy ETF.

Despite the pullback in the NZX 50, we see the theme of renewable energy doing well in the past three months and continuing to do well moving forward, with Meridian Energy being the top contributor to the gains of the NZX 50 of 2.77% over the past month and Infratil delivering 1.54% on the back of news of a takeover offer by AustralianSuper.

The Rest of the World was mostly muted, with small gains in Japan (+0.8%) offset by slight declines in Europe (-1.8%).  Europe continues to be extremely hard hit by Covid with growing infections and fresh lockdowns imposed in several markets.  To elevate concerns further, the vaccination programme has been slower than expected due to vaccine production issues. Coupled with the slow approval of vaccines by the EU's medical regulator, investors are pessimistic about the ability for Europe to recover in a reasonable timeframe.

In Japan, the greater Tokyo area entered another state of emergency starting on the 7th of Jan 2021, mainly targeting operations of bars and restaurants. Prime Minister Yoshihide Suga announced this month that the emergency was extended to the 7th of March 2021, amid growing uncertainty around the rollout of vaccines and the hosting of the Olympics later this July. Overall, Japan's market was mostly unphased about the January state of emergency, given that businesses have learned to adapt from the first emergency in April 2020.

We saw a steepening of yields in the fixed interest market in New Zealand and the USA.  Fixed Interest investors are pricing in an expectation that a successful vaccine rollout and ongoing stimulus support will lead to inflation which will require central banks to raise rates.  This will be an exciting development that the market will be fearful of, given that low-interest rates and massive liquidity from the federal reserve are the main contributors to growth in the current bull market.

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