There are clear signs of rotation in the equity markets on both sides of the Atlantic. Investors have turned their attention to new companies and sectors at the beginning of the year.
The investment markets have had an eventful start to the year, with slightly more price fluctuations than at the end of last year. The stock markets have generally developed positively, and interest rates have been on a slight rise in both Europe and the USA.
The raw material markets have been turbulent in recent days. Prices of precious and industrial metals, as well as energy prices, rose significantly in January. The strong rise in January, especially in precious metals, has been wiped out in just a couple of days, however, as the clear price decline that started last Friday has almost completely erased the high returns from the previous month.
In Japan, both the interest rate and currency markets, as well as the political situation, have been stormy in recent weeks. Interest rates have risen significantly, and the country’s 10-year government bond yield is already at 2.2 per cent. At the same time, the yen has depreciated against the euro, and there are also tremors in the political arena. The country’s Prime Minister, Sanae Takaichi, dissolved the parliament last week, and new elections are scheduled for 8 February.
In the equity markets, there has been a rotation at the beginning of the year, in which investors replaced high-reward equities and sectors with new ones. Formerly high-flying US tech stocks lagged in January, while other sectors saw their stock prices rise. Likewise in Europe, the baton appears to have been passed on from the financial sector, which has performed strongly in recent years.
In the USA, particularly companies in the energy and materials sector and producers of consumer staples have shown positive development early in the year, while in Europe, the rise in stock prices has been driven by the energy, materials and IT sectors.
However, the equity market rotation is not limited to just switching from one sector to another. For nearly 15 years, ever since the global financial crisis, value companies have performed relatively poorly compared to growth companies. However, over the past three months, value stocks have clearly been the strongest in the markets. Especially in the USA, value stocks have significantly outperformed the rest of the market, and they have also performed stronger than the rest of the market in Europe. Small- and mid-caps have also performed relatively well.
The earnings season for the last quarter has, as usual, started in the USA slightly ahead of Europe. The start of the earnings season has been strong, with about a third of companies having reported their earnings so far.
Earnings growth of roughly 15 per cent clearly exceeds market expectations, and the average seven per cent earnings growth in revenues is also stronger than anticipated. As usual, growth in the tech sector has been strong, but the industrials sector has also clearly gained momentum.
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