The year has kicked off in a similar mood to the start of last year, as market rotation has returned with a vengeance. At the same time, there have been slight glimmers of light from the US labour market, and economic figures have exceeded expectations on both sides of the Atlantic.
At the beginning of the year, the stock markets picked up where they left off last year, and the start of the year has not brought about any major changes. The only exception is Japan, where the stock market has performed well. Emerging markets, Finland, and to some extent all of Europe have also performed positively, while in the USA, returns have been weaker, especially when measured in euros.
Pricing in the equity markets, in turn, has stabilised compared to a year ago. In Finland and Japan in particular, the price-to-earnings ratios of stocks have clearly risen faster than in the rest of the world. In the USA, P/E ratios have largely remained at the same levels as a year ago, and it is still clearly the most expensive market compared to the rest of the world and its own history.
In recent weeks, especially smaller emerging markets have performed better than larger countries, mainly China. South Korea, South Africa, Brazil and Mexico have performed strongly.
Market rotation, where investors turn their attention from previously strongly performing themes, sectors and market areas to new ones, began once again at the end of last year. Since then, rotation has been clear in terms of both factors and sectors.
Among the factors, value stocks have performed strongly in the USA, and the yield differences between value and growth stocks have been significant. In recent years, growth stocks have outperformed value stocks, but since the beginning of the year, the tables have turned. Small-cap companies have also fared well.
In Europe, the situation has been more stable, with solid yields across all factors. As in the USA, the strongest performers on this side of the Atlantic have been value stocks.
In terms of business sectors, the baton has passed from US tech companies to other sectors. In Europe, almost all sectors have performed strongly, with growth driven especially by basic industries and consumer goods. Only discretionary consumption, which includes the luxury and automotive sectors, has underperformed.
In the USA, there are differences between sectors, and in recent weeks, for example, software companies have delivered weaker returns. In turn, more cyclical sectors, such as industrials, and the energy sector recorded robust returns, far exceeding the levels typical of recent years.
In terms of the economy, the so-called economic surprise indices, which track published economic data relative to expectations, have trended positively since December, with the exception of China. In particular, the figures reported from the USA, Europe and emerging markets have been stronger than expected.
Good signals have emerged from various parts of the economy over the past month – for example, positive momentum has been seen in industrial production, manufacturing PMIs and shipping data. More cyclical economic sectors seem to be rallying in both the USA and Europe.
Glimmers of light have also been seen in the US labour market. The latest employment figures released last week were significantly higher than expected, and job growth significantly exceeded expectations. The number of unemployment benefit applications has also been decreasing recently. Although it is too early for certainty, given the limited and very volatile data lately, it appears that the slowdown in the labour market is moderating.
Nothing presented here is or should be taken as an investment recommendation or solicitation to subscribe for, buy or sell securities. When making investment decisions, the investor must carefully familiarise themselves with the information given on the financial instruments and understand the related risks. The investor must base their decision on their own assessment, goals and financial situation. Risk is always inherent in investment activities. The value of the investment instruments may increase or decrease. The past performance of investment instruments is no guarantee of future performance.
