Global equities near critical support levels with opportunities in defensive stocks

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As investors search for key signals of a possible global equity recovery, we observed that U.S. Equity Markets increased in January by circa 6.18%, U.S. Consumer Price Index indicated that inflationary pressures were still on the decline and most importantly the jobs market reflected that the economic outlook has to an extent stabilized. The bond market reacted favorably to the economic data releases as the U.S. benchmark Treasury Bond yields fell and prices rose, and similarly there was a positive impact on financial markets in Europe and Asia across the various asset groups.

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At the completion of its two-day meeting on February 1st, the Federal Open Market Committee (FOMC) raised the federal funds rate by 25 basis points, bringing the benchmark target range to 4.50%-4.75%. The FOMC increased rates seven times in a row in 2022 to control inflation, including four consecutive increases of 75 basis points, followed by 50-basis point increase at the final meeting in December, making 2022 a year of aggressive rate increases after prior years of significant quantitative easing.

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In Asia, restrictive COVID-19 lockdown regulations in China have been promptly relaxed by authorities, allowing China’s economy to ‘re-open’ and the manufacturing sector to start its much-needed recovery phase. Global supply chains have been significantly impacted by China's improved manufacturing, which lead to global deflationary pressure. The removal of Covid-19 pandemic restrictions, coupled with signs that the Government has pivot to refocus towards economic growth, is supportive of a rebound in economic growth. Although, the market has changed quickly, valuations are still fair and the economic outlook, particularly for industries with a local focus, has improved in the Pan-Pacific region.

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Macro-economic growth remains hampered in several developed economies by high debt levels and poor demographics. However, we think in the emerging and developing markets the potential for long-term above average returns is likely as we observed leading indicators trending in right direction.

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Morgan Stanley Investment Management, in addition to a chorus of investors who are turning away from the U.S. in favor of other nations, predicted that stocks in Emerging Markets will outperform their peers this decade. The asset class has enjoyed a great start to the year, with the MSCI emerging-markets index surging by 8.6% as opposed to the US benchmark's 4.7% increase. The gains come as investors’ position for the end of aggressive Central Bank interest-rate hikes. Estimates on Bloomberg predict that emerging economies will grow on average by 4.1% in 2023 and 4.4% in 2024.

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Globally, the recent data release in China and Europe have given investors cause for some hope. In Europe, data releases for France, Germany, and the Eurozone have seen inflation sliding lower than anticipated as energy costs continue to decline.

 

Critical to the global economic recovery is  lower commodity prices. Oil prices in January 2023 remained steady around the $80 per barrel range, as lower growth expectations in different parts of the world balance the Chinese re-opening. Internationally, as Natural Gas prices continue to decline, the Eurozone PMI unexpectedly retreated into expansionary territory. Germany's recent reports have also been a pleasant surprise, and February's consumer confidence numbers are predicted to climb for the fourth consecutive month.

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Recent concerns about the outlook for the U.S. economy have been prompted by a series of layoff announcements that have mostly been concentrated in the technology sector. Companies including Microsoft (MSFT), Amazon (AMZN), Meta (META) and the parent company of Google, Alphabet intend to cut thousands of jobs from its global workforce.

 

Such corporate restricting would impact negatively on the unemployment rate in the first half of 2023, but the labor market's robust start to the year should help consumers weather a downturn in the economy. The unemployment rate fell to 3.4% versus the estimate for 3.6%, which is the lowest jobless level since May 1969. In the immediate future, we anticipate that unemployment will remain at historically low levels, but it can increase in the upcoming years.

 

Microsoft Corp. warned of a slowdown in cloud and corporate software sales this quarter, causing the blue-chip company's shares to drop the most in three weeks. The shares were at their lowest level since January 4th down as much as 4.2%. Netflix Inc.'s stock market gained momentum at the beginning of 2023, and supporters are expecting that signs of continuous subscriber growth will ignite yet another phase of the company's rally. The stock's value has nearly doubled since its 2022 low.

 

As we move from calendar year 2022 to 2023.U.S. large-cap equities had a dismal year in 2022, with the S&P 500 index declining 19.4%. Large-cap stocks have reverted closer to the mean, with the S&P 500 up 1.5% this year through January following a 5.5% gain over the preceding three months.

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Early in 2023, the U.S. healthcare industry is still thriving, with the benchmark Vanguard Health Care ETF (VHT.IV) up more than 11% over the previous three months and 14.8% over the previous ten years. Health care equities surpassed the S&P 500 in 2022 after underperforming the market in 2021. A rebound in elective treatments has helped certain health care firms, while others are still benefiting from the COVID-19 outbreak. When interest rates are increasing and the economy is uncertain, the health care sector could be a good defensive investment.

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