Following a strong start to January, most sharemarkets gave back their gains as the month ended.
The US sharemarket declined over January with the US Federal Reserve warning that the pace of the US economic recovery had weakened. Despite this, the US sharemarket sell-off towards the end of the month is best explained by abnormal retail investor activity (that came to be known as the ‘Gamestop frenzy’). As small and heavily shorted stocks rallied, some hedge funds were forced to close out their short positions and sell some of their long positions in order to raise capital, resulting in a modest, technically-driven market sell off.
The Eurozone and UK sharemarkets also posted negative returns in January. Across the Eurozone, a disruption in vaccine supply to the EU raised serious concerns, whilst political unrest in Italy compounded negative sentiment across the region. In the UK, the vaccine rollout picked up speed, although prolonged lockdown restrictions led to a decline in economic activity.
The MSCI World Index ex-Australia (hedged into AUD) (-0.8%) fell over January. In developed markets, Sweden (3.7%) and the Netherlands (3.0%) outperformed the broader market, while Germany (-8.5%) and Italy (-3.2%) underperformed. The MSCI Emerging Markets Index (unhedged) rose by 3.7%, outperforming unhedged developed markets (-0.4%). Unhedged returns were marginally higher than hedged returns as the AUD weakened against the USD over the month.
The Australian sharemarket outperformed peers as positive economic data boosted returns. December quarter inflation exceeded expectations (+0.9%), whilst employment rose and the unemployment rate fell to 6.6%. Despite largely positive news, business confidence fell due to the COVID-related sporadic lockdowns and border restrictions seen across much of the country during December.
Australian sharemarket (S&P/ASX 300 Index) rose 0.3% in January. The top performing sector was Consumer Discretionary (+4.8%), which was driven by strong retail sales. Financials (+2.3%) also outperformed, driven largely by the big four banks. Real Estate (-4.1%) and Industrials (-3.1%) were the key detractors.
The Australian Dollar was mixed against the four major currencies over the month, depreciating against the USD (-0.6%) and GBP (-1.0%), but rising against the Euro (0.1%) and JPY (0.8%). Major bond yields generally rose over the month, with both the US and Australian 10-year yields finishing the month at 1.09%.
Note: For a review of the financial year to 30 June 2020, click here.
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