Global Market Commentary - January 2023

Global markets accelerate into the new year, led by higher long term return expectations following a turbulent 2022 that lowered prices across asset classes and regions. The MSCI World Islamic Index rose by 5.7% and the Dow Jones Sukuk Index rose by 1.6% in January.

The pace of the market rebound in January surprised some market participants who expected continued pain in the first half of the year given the likelihood of a recession in the US and other developed economies this year. At first glance, the market gains appeared to be another “bear market rally” that would capitulate ahead of a difficult earnings reporting season.

Instead, markets remained optimistic throughout the month. In the US, with inflation falling as expected and GDP growth slowing modestly, there was renewed hope that the Fed rate hiking cycle might bring inflation under control without causing a significant recession. If achieved, the market would have more attractive valuations and growth potential than previously anticipated; this prospect kept sentiment positive throughout the month.

The question of whether the January rally was genuine or a ruse continued to worry market participants who were positioned defensively to start the year. In particular, many were confused by the fact that the US unemployment rate remained stubbornly low even as big tech company layoffs were dominating the headlines. A tight labor market would keep upward pressure on prices and may prolong the interest rate hiking cycle. On the flip side, the economic impact of high interest rates may not yet be fully reflected in the official data, and the Fed’s contractionary policy responses may diverge from the conditions on the ground.

Elsewhere in the world, as January progressed, other developed and emerging markets rallied even further than the US, retracing some of the excess losses they faced in 2022 compared to the US.

Market participants have been anticipating that the European Central Bank will ease its monetary policy after inflation started to subside towards the end of 2022. Meanwhile, the Bank of Japan did not make any changes to its monetary policy, which surprised market participants who were expecting that Japan would have to raise rates at some point. If these central banks diverge too much from the US Federal Reserve, it could adjust the path of the Fed’s interest rate policy as well in order to keep pace.

The momentum in emerging markets was strong to start the month as China came out of its zero-Covid strategy but slowed down slightly towards the end of the month as a large Indian conglomerate, the Adani Group, was accused of defrauding investors and China-US tensions started to deepen.

With markets as volatile as they are, we continue to take a longer term view, which has significantly improved since the pullback last year. There will be volatility as markets go back and forth between believing that they are oversold and overbought. We remain steadfast in our belief in the need for geographic diversification, as unemployment and inflation rates vary across regions, and different governments and central banks will take different measures to stabilize their economies.

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