Economic Data Watch and Market Outlook
The MSCI World rose 16 bps on the week with a major contribution coming from Japan’s Nikkei 225 which climbed 4.31%. Meanwhile, the S&P 500 fell -0.35% with growth stocks driving this downward move. We had some key data releases last week with CPI on Tuesday and PPI on Friday. Core CPI came in at 0.4% in January, above expectations of 0.3% while Friday’s Producer Price Index release came in at 0.3%, above expectations of 0.1%. On top of CPI and PPI, the University of Michigan’s Consumer Sentiment gauge rose to a 31-month high. Focusing on CPI, we saw the largest monthly increase since September 2023 with natural gas, hospital services, airline fares, and electricity seeing the largest percent increase while fuel oil, used cars and trucks, and gasoline fell. Notably, PPI showed a pickup in its portfolio management and investment advice component which jumped by 5% in January.
New data released by the Chinese Ministry of Transportation shows that the Chinese consumer could be returning slowly. According to the report, there was a notable resurgence in rail traffic, pushing travel numbers to their highest level in 5 years, with 61 million rail trips taking place during the first 6 days of the Chinese New Year holidays. Simultaneously, tourism is returning to the region as well with Shanghai reporting 8.8M tourists visiting before the holiday, a 50% increase from a year earlier.
According to a new report by Moodys, the US is much better positioned than the EU when it comes to these impacts. Europe relies much more heavily on the Suez Canal which connects the Red Sea to the Mediterranean, and the attacks could create delays of over two weeks. In the first half of 2023, the Suez Canal made up 12% of global trade and 30% of container traffic. The US on the other hand can source more products from Asia directly to the west coast and then transport those products by rail to the east coast.
Equities
There were mixed results this past week for equities in the US with some indices up and some down. The S&P 500 declined 35 bps (after being up 14 of 15 prior weeks) while the Dow Jones Industrial Average eked out a 2 bps gain. Most of the S&P’s decline can be attributed to technology as the Russell 1000 Growth Index declined 121 bps whereas its value counterpart rose 95 bps. The same could not be said for small-cap indices as the Russell 2000 rose 117 bps getting contribution from both growth AND value (R2K 2000 Growth + 94 bps, R2K Value +140 bps). Looking outside the US, all major indices we track were positive for the week. The MSCI World rose 16 bps, MSCI EAFE +147 bps, MSCI Europe +127 bps and MSCI Emerging Markets +211 bps. Asia led the way for the week with the Hang Seng HIS +376 bps and the winner for the week Japan’s Nikkei 225 +431 bps.
Regarding sectors, most sectors were positive for the week except consumer discretionary and real estate which were both down slightly (-44 bps and -16 bps respectively) and technology. The tech sector declined over 2.5% for the week following a stronger than expected CPI report that was released Tuesday leaving investors fearing the Fed will need to leave rates higher for longer. There was some recovery following the decline, but still leaving tech stocks down a fair amount for the week (also dragging down the S&P 500).
The AI theme will be in focus this upcoming week with Nvidia set to report earnings on Wednesday with options pricing in an 11% move. Both Home Depot (HD) and Walmart (WMT) report earnings before market open on Tuesday, kicking off retail earnings season. Consensus estimates for HD are to be down ~15% and WMT down ~4%. Walmart will undergo a 3:1 stock split after Thursday’s market close. YTD, WMT’s stock has outperformed the S&P by a couple percentage points.
Fixed Income
Treasuries climbed across the board this week with the 2-year Treasury yield rising 16 bps to 4.64%, the 10-year Treasury yield rising 13 bps to 4.30% and the 30-year Treasury yield rising 8 bps to 4.45%. All major bond indices fell this week with the Bloomberg US Aggregate Bond Index falling -0.55%, the Bloomberg US Corporate High Yield Index falling -0.32%, and the Bloomberg US MBS Index falling -0.63%. YTD the Bloomberg US Agg is off to a relatively poor start, down -2.01% on the year. Investors offloaded more $18.4B of cash this week, the most in 8 weeks, with $11.6B flowing into bonds during the same period. Sovereign market debt sales from developing nations reached a record of $47B in January. The sales were led by Saudi Arabia, Mexico, Hungary, and Romania. The start of the year is typically a busy time for debt sales. Meanwhile, flows into emerging market debt funds have been poor, with investors having pulled $1.6B out of EM debt funds following outflows of around $40B in 2023, and $80B in 2022.
Hedge Funds (as of February 15, 2024)
Performance for the week has remained steady with each strategy finishing the week positive for the second week in a row. Over the week, the average global hedge fund (HF) posted gains of 25 bps vs. the MSCI World Index up 40 bps. US equity L/S funds fared the best in relative terms this week, with the average US L/S fund up 29 bps, outperforming the S&P which was up only 12 bps. Europe-based funds were up +23 bps and Asia-based funds were +30 bps compared to their benchmarks (Euro STOXX 600 +81 bps and MSCI Asia 110 bps).
Flows this week were quiet globally, despite the more volatile intraweek price action. Starting with North America (NA), the hotter than expected CPI print caused rates-related and lower quality names to sell off on Tuesday, however, HFs did not participate in the net selling as their flows remained neutral to these themes except unprofitable tech. Outside of Tuesday’s flows, cyclicals saw the bulk of the net selling in NA, particularly within materials and consumer discretionary, whereas defensive companies were more net bought via consumer staples and healthcare. Even at the factor level, HFs were not inclined to take a directional stance this week.
For the rest of the world, Europe and Japan had similar net activity to NA where net flows were muted over the week. However, EU defensive companies were the area where HFs were the largest net buyers. In Asia-ex Japan as it had the most directional flows, HFs were net buyers of the region by a mix of long buying and short additions. Although with the Lunar New Year, volumes this week were significantly below 12-month averages. Across both Asia ex-Japan and Japan, tech buying drove the majority of the net flows.
Private Equity
Private equity fund performance showed a significant rebound in early 2023 following negative returns at the close of 2022, according to PitchBook’s Global Fund Performance Report. The asset class demonstrated a promising improvement, with a one-year horizon IRR of 6.6% in Q2 2023, compared to the -1.5% annual growth rate in Q4 2022. Quarter-over-quarter, there was a notable enhancement in performance, with the one-year IRR surging by 5.7 percentage points from Q1 to Q2 2023.
Following several quarters of negative performance, PE fund returns shifted to positive in Q4 2022 and continued to rise throughout 2023. This turnaround was substantial, with fund returns reversing from -2.82% in Q2 2022 to 2.94% in Q2 2023 on a year-over-year basis. Particularly, funds valued at over $1 billion experienced a significant quarterly improvement, jumping from a one-year IRR of 0.6% to 6.7% in Q2 2023.
On the other hand, smaller funds under $250 million performed exceptionally well in Q2 2023, achieving a one-year IRR of 9.2%. These smaller funds consistently outperformed their peers in the four preceding quarters. However, in the latter half of 2023, factors such as high interest rates and decreased exits led to a slowdown in deal flow and capital distributions to LPs, making it the second weakest year for global M&A activity since 2020.
Preliminary data from the report indicated a decline in PE returns to 0.3% in Q3 2023, suggesting a potential decrease in fund performance toward the year’s end. The scarcity of deals also hindered the recovery in fund performance across all asset classes, with preliminary data showing only a marginal increase of 0.2% in returns in Q3.
Authors:
Jon Chesshire, Managing Director, Head of Research
Elisa Mailman, Managing Director, Head of Alternatives
Katie Fox, Managing Director
Michael McNamara, Analyst
Sam Morris, Analyst
Data Source: Apollo, Barron’s, Bloomberg, BBC, Charles Schwab, CNBC, the Daily Shot HFR (returns have a two-day lag), Goldman Sachs, Jim Bianco Research, J.P. Morgan, Kiplinger’s Personal Finance, Market Watch, Morningstar, Morgan Stanley. Pitchbook, Standard & Poor’s and the Wall Street Journal.