Global equity markets ended last week broadly unchanged in both local currency and sterling terms. This was the third week of little change but, as in the previous two weeks, there was considerably more action than suggested by the superficial calm at the surface.
Performance diverged significantly between regions with US equities down 1.2% in sterling terms compared to a gain of 2.4% for the rest of the world. The renewed underperformance of the US market has been one of the most pronounced trends seen so far this year with US equities down 0.8% versus a 7.3% gain for other markets.
The US underperformance has been driven primarily by the weakness of the tech sector, particularly the Magnificent Seven, but has also been reinforced by a fall in the dollar on the back of renewed concerns over the direction of US policy. This underperformance continued last week with tech overall down 1.2% and the Mag. Seven down 3.1%.
The massive AI-related capital spending of the Mag. Seven is an increasing concern for markets. Last week even saw Alphabet launch a 100-year sterling bond as part of its efforts to finance such spending. The other and more recent worry is over the disruption threatened by the AI tools now being released, with sectors ranging from software to wealth management all viewed as vulnerable.
In marked contrast to the global tech sector, which is down 2.6% this year, the basic materials and energy sectors are up a sizeable 16.7% and 12.9% respectively. Even defensive sectors, which have long been out of favour, have had a good run with consumer staples up close to 10% so far this year.
At the regional level, Japan is the star performer both last week and year-to-date with gains of 5.8% and 13.4% respectively in sterling terms. This comes on the back of the recent stunning electoral success of PM Sanae Takaichi. Still, the weak GDP numbers out this morning showed it may not all be plain sailing from here. Activity hardly recovered at all in the fourth quarter from the decline seen the previous quarter, highlighting the continuing weakness of the economic recovery.
Meanwhile, emerging markets were also up a strong 3.3% over the week, taking their year-to-date gain to 9.5%. Korea and Taiwan have led these increases fuelled by strong gains in their very own tech titans. TSMC, Samsung and SK Hynix have seen gains ranging from 30% to 75% over the last three months even while the Mag. Seven have fallen 4% over this period. The Mag. Seven have been far from the only game in town for some time now.
This leaves the UK and Europe sitting in the middle of the pack in terms of performance with gains of 0.8% and 0.4% respectively over the week and returns of 5.2% and 4.0% so far this year.
We expect the recent broadening out of equity market performance, across both sectors and regions, to remain a major feature over the coming year.
Bonds had a good week, with both US Treasuries and UK gilts returning 1.0% on the back of a decline in yields. 10-year Treasury yields have fallen to close to 4.0% from a high of 4.3% earlier this year, while 10-year gilt yields are down to 4.5% from their peak of 4.8% in the run-up to the Budget.
Slightly better than expected US consumer price numbers helped drive the fall in yields. The headline inflation rate fell in January to 2.4% while the core rate edged lower to 2.5%. The reassuring inflation data offset news of a significantly larger than forecast gain in payrolls in the same month. Altogether, this left the market continuing to expect the next cut in US rates to occur in June.
As for UK gilts, they saw a bit of a wobble last Monday when speculation of an early challenge to Starmer was at its peak but recovered when the Cabinet – at least for now – all rallied round in support. Later in the week, softer than expected GDP data reinforced hopes that rates will be cut again in March. GDP rose a modest 0.1% both in December and the fourth quarter overall, leaving growth for the year at 1.3%.
This coming week, US growth and inflation numbers for the fourth quarter, as well as February business confidence data – all out on Friday – will be the centre of attention. But we also have UK labour market, inflation and retail sales figures out on Tuesday, Wednesday and Friday.
Rupert Thompson – Economist