Surprise in resilient lift of US markets
Endowus conducted a market outlook survey with more than 50 fund management companies at the beginning of the year. More than half of the respondents had expected emerging markets, China, and Asia to be the regions with the best investment opportunities in 2023. Less than 10% of the respondents picked the US.
We are now halfway into the year, and 2023 has played out differently from expectations going into the year. The MSCI China Index has retracted about -8.4% while the S&P 500 has increased by 9.7%. Where is the US market drawing its strength from?
In the past few weeks, we’ve seen the fog lift from the US markets as the debt ceiling saga came to a conclusion (for now). The Federal Reserve has signalled that a pause in rate hikes may be coming, on the back of high-profile regional bank failures, and US inflation rising only at a 4% annual rate in May 2023, the lowest in the past 2 years.
We have seen mixed signals in the US economy with solid numbers in spending and labour market data versus weakness in the survey data. However, the overall hard data of the economy and corporate earnings have been more resilient than previously expected.
The labour market, overall, has been solid, with the May US jobs report continuing to beat expectations as the US labour market added more jobs than previously anticipated. On top of that, the automotive and housing markets — which could have cooled down more quickly in response to rising rates — are showing signs of recovery. Car prices have generally remained high partly due to the supply issues that arose during the pandemic. Housing prices, which came down hard last year, have also started to recover amid lower inventory.
On the other hand, wage growth has slowed down. We are seeing that job growth in goods-producing industries in the US has visibly stalled while the services sectors continued to add jobs. This puts less pressure on the Fed to immediately resume its rate hike after the probable pause in June.
While US inflation continues to cool down, it still remains far above the Fed’s 2% goal, and we expect the Fed’s future decisions will continue to be data-dependent.
Another reason the S&P 500 index has been strong this year is the strength of a handful of tech stocks that have seen stellar rallies on the back of the artificial intelligence (AI) euphoria.
The generative AI application ChatGPT reached the 100 million mark in downloads in just two months, eclipsing the likes of TikTok. Big Tech stocks linked to the AI wave have been snapped up by investors, leading the Nasdaq 100 index to rise about 31% year-to-date. The top seven Big Tech stocks in the S&P 500 index have appreciated about 72% on average in the year-to-date period ended 31 May 2023, while the index itself rose a mere 9.7%.
Webinar replay: Does ChatGPT herald a new era for AI and tech investing?
Positioning your portfolio for the rest of 2023
As a region, developed market equities have outperformed emerging market equities in the year-to-date period ended 31 May 2023, and China’s recovery has seemingly faltered. But, it is hard to predict whether that would continue to be the case for the rest of the year, given the challenges that the developed markets, especially the US, continue to face.
Many experts chose fixed income as the asset class with the best risk-return profile at the beginning of 2023, and fixed income remains a core and important part of any investor’s portfolio. Investment grade debt has historically been able to protect investors in down markets, while high yield can help meet your income needs with higher-yielding coupons. Without timing the market, investors should look to their goals, risk tolerance level, and investment horizon to determine the right mix of asset classes for their portfolio.
Even experts can get it wrong. That’s what this unusual year has shown. At Endowus, we continue to advocate investing in a globally diversified portfolio precisely for this reason — it is impossible to predict and time the markets and an investor would most likely be better off investing in the entire global market.
Likewise with fixed income, taking into account risk-return preferences and trade-offs, investors should consider investing in a globally diversified fixed-income portfolio with exposure to multiple asset classes, including investment grade, high yield, and emerging-market debt.
Endowus offers globally diversified model portfolios that are curated and designed by our Investment Office for Hong Kong investors. The Endowus Global model portfolios are made up of equity and fixed-income funds and can make up the backbone of an investor’s overall strategy for general wealth accumulation needs. For more details, click here. Webinar replay: Navigating fixed income markets in 2023 with PIMCO
May market commentary
Global markets in May 2023 were marked by nervousness over the US debt ceiling drama. A deal between the Democrats and Republicans was finally reached in the last few days of the month, averting a potentially disastrous US technical debt default. The US labour market continues to show signs of strength as job growth numbers beat expectations. The Fed has signalled a possible pause in further tightening. There appeared to be a further bifurcation of performance between different sectors as technology and AI-related industries received a boost from the increased interest in AI. The S&P 500 index was about flat for the month while the Nasdaq 100 rose 7.7%.
In Europe, markets saw a weak May as recent economic reports indicated a weaker economy amid persistent inflation, even as several countries reported a slowdown in price increases. Germany is now in a technical recession as its gross domestic product (GDP) in Q1 2023 declined further after a negative quarter in Q4 2022. The European Central Bank (ECB) signalled possible further rate hikes to combat inflation, as did the Bank of England (BoE). The MSCI Europe Index was down by about 5.9%.
Japan was one of the best-performing countries for the month. Japanese stocks continued to enjoy positive momentum, driven by positive GDP growth in Q1 2023, strong domestic demand, and recovering tourism. The MSCI Japan Index rose 1.9% for the month.
Emerging markets ex-China eked out a positive gain of about 1.4%. But the region as a whole was dragged down by China as the latter declined 8.4% in May. China saw weaker-than-expected demand and economic data sparking a sell-off by disappointed investors.
Growth stocks, led by Big Tech, outperformed value stocks in May, while global large-cap stocks continued to outpace small-cap stocks.
Bond yields generally rose in the month, leading to negative returns for fixed income across most asset classes. The Bloomberg Global Aggregate Index retracted by about 2%. In most regions, investment-grade debt outperformed high yield. The US dollar continued to show strength against the G10 currencies.
The S&P GSCI — a benchmark for investment in the commodity markets — declined by about 6% as all the sectors within the index ended in negative territory in May.
Building a long-term resilient portfolio with Endowus Hong Kong
It is almost impossible to predict exactly how macro events would play out. However, spreading your investments across asset classes and geographies will help with diversifying your risk. With market volatility comes opportunities. If you have a long-term investing horizon, as many of us do, these developments may offer an opportunity through steady, regular investing in diversified and risk-adjusted portfolios.
With digital wealth platform Endowus, you can plan and manage your money — by investing in Best-In-Class Funds and globally diversified, low-cost model portfolios seamlessly.
Click here to get started on your investing journey with Endowus Hong Kong today.
Read more:
- Introducing Endowus model portfolios — curated with Best-In-Class Funds for core-satellite strategies
- Why invest through Endowus
- Introducing the Endowus HK team
- Choosing Endowus when investing in Hong Kong
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