MONTHLY SUMMARY

What a difference a month makes! While December posted a large drawdown in stock prices, January saw one of the strongest starts of a year ever. The widespread pessimism and hence relatively low equity exposures at the end of 2022 quickly changed into a risk-on sentiment, much to the chagrin of many large investment banks who had predicted further downward movements. This was not least seen in the losers of 2022. US technology companies and other high-multiple names, for instance, saw their stock prices soar in January, leading to an increase in the Nasdaq index of more than 10 percent.

Q4 earnings held up well 

Another positive ingredient to the investment community’s increased risk appetite was the start of the Q4 reporting season. Even though many companies had communicated uncertain outlooks for 2023, earnings held up well, again contradicting the doomsday view that permeated last year.

Central banks stayed in focus 

As has been the case for more than a year, investors’ focus remained firmly on central banks’ rate decisions. Following a period of fear that steep hikes would continue for an extended period, the general view changed slightly in January to a belief that many central banks would successively dampen the increases and then await the effects of a stricter monetary policy.

Warm winter winds in Europe 

Another (unusual) development that influenced investors positively was the weather in Europe. The much warmer than usual winter mitigated the disrupted flows of energy from Russia. Natural gas prices fell below pre-war levels, helping economic activity in the region. Subsequently, European equity markets outperformed the broader US markets as the negative effects of the war in Ukraine seemed to be less severe than expected going into 2023.

Increased support to Ukraine, and negotiations deemed far away

As far as the war in Ukraine was concerned, the stakes seemed to have been upped. Russia was observed to be amassing additional forces, presumably as preparations for a renewed offensive later this winter or early in the spring. The western powers, led by the US, pledged additional support, ranging from tanks to long distance missiles. The prospects of any negotiations were deemed to be more distant than ever.

Other news struggled to make headlines 

Apart from interest rates, earnings and the war, little else made headlines. The difficult process to appoint Kevin McCarthy as the speaker of the US House of Representatives following resistance from other Republican congressmen, was largely ignored by investors. Also, the looming debt ceiling faded into the background. The European Commission proposed wide-ranging subsidies to various industrial sectors in a response to the Biden administration’s IRA (Inflation Reduction Act), which could be seen as hampering global trade.

Remarkable comeback in January

Following a very tough year for equity investors, the world index made a remarkable comeback in January. With the exception of healthcare, which saw a marginal retreat, all global sectors advanced led by information technology and consumer discretionary. Geographically, all major stock markets rose with the Nasdaq and Hong Kong at the forefront, while Japan and the broader S&P500 trailed the MSCI world index.

OUTLOOK

The strong development in the world’s financial markets surprised many. With the benefit of hindsight, it is easy to find explanations. The earnings season began with relatively few profit warnings and many companies announced better than expected results. Stock sales due to tax considerations are common in many markets, and after a weak year, many such sales tend to take place in December and then decline significantly. This was the case this time around. After a sharp decline in the stock market, many growth stocks have now come down to levels that many long-term investors perceive as more reasonable. Once the market then stabilizes and rises, hedge funds will also be back in and cover short positions in order not to take excessive risks of ending up wrong-footed relative to the market, not least critically at the beginning of a new year.

The beginning of the end of interest rates hikes?

Most importantly, markets are now seeing the beginning of the end of interest rate hikes by the Fed, which historically tends to be a period of decent stock market developments. Inflation in the US is coming down significantly from very high levels and is expected to continue down markedly during the first half of the year. At the same time, the Chicago Fed’s measure of Financial Conditions (a measure of how favorable the climate is for financial assets) has improved for the stock market since last fall. In short, the conditions for the financial markets have become more generous, and accordingly asset prices are rising.

The sector may lag in this environment

The healthcare sector tends to lag in this type of market and may do so for some timeWe are hopeful of a stronger year this year if inflation continues to decline and then stabilize. Inflation is crucial. The lower the inflation, the lower the interest rates, and thus better are the conditions for growth companies.

The earnings season for the sector has just begun. Nothing indicates that it is weak, quite the opposite in fact. However, several companies are still suffering from tough comparisons due to Covid sales or the fact that the labor market has not yet succeeded in re-employing important specialists in healthcare. We are hopeful that this will happen. The longer the year goes on, the better the conditions for our sector will be. Other parts of the stock market may nevertheless have better outlooks when the economy’s wheel begins to spin and inflation gradually subsides. We believe the long-term prospects for growth in the healthcare sector are still good.