Market update – January 2024

Insights — February 2024

We share our latest observations on global asset markets regarding T8 Energy Vision

World equity markets ran out of steam during January after three consecutive months of positive returns. The main catalyst for the rally in stocks in November and December last year had been related to the expectation that interest rates in the United States were likely to have peaked and easing was coming into view.

During January, while solid economic data (especially related to the US consumer and employment) alongside cooling inflation increased the likelihood the US economy will avoid a recession in 2024, it also pushed out expectations around the timing for interest rate cuts. This negatively impacted sentiment and risk appetite and saw yields on 10-year US Treasuries rise (+3 basis points) after falling by more than 100 basis points in the last quarter of 2023.

There was a large divergence in returns between developed and emerging markets (+1.2% versus -4.6%, respectively), with the weakness in China equity markets the main detractor to emerging market returns.

Hong Kong and China finished January as the worst performing equity markets (-9.2% and -6.3%, respectively) in US dollar terms, following on from large drawdowns in 2023. Hong Kong is one of the most attractively valued equity markets to start 2024 with a forward price-to-earnings multiple of only 8.0x and a dividend yield 4.6%.

In US dollar terms, Japan was the best performing equity market in January (+7.8%) followed by Denmark (+6.5%) and the Netherlands (+4.0%). However, European equities (+0.2%) lagged the United States (+1.7%) in US dollar terms, while Asia excluding Japan retreated by -5.5%.

Growth stocks outperformed value companies in January (+2.5% versus 0.0%, respectively), reversing the trend from December. Momentum, especially among large cap Technology stocks, was the main factor driving US equity market returns in January (+5.8%).

Below the surface, the rally was extremely narrow with only five stocks accounting for nearly 70% of the S&P 500’s return for the month.

The utilities sector (which features in the clean energy universe and is typically associated with low volatility) was one of the worst performing sectors falling by -3.1% in January due to its sensitivity to rising bond yields. It also finished 2023 as the worst performing sector (-10.2%) but one of the most attractively valued going into 2024 (forward price-to-earnings multiple of 16.7x and a dividend yield of 3.6%).

The Clean Energy Index gave back the strong return from December, falling by -15.8% in January as small cap companies (-3.9%) underperformed the return of large caps (+2.3%). In 2023, small cap companies lagged large caps (due to their sensitivity to interest rates) by 15.7% and this trend continued during January as expectations for interest rate cuts were tempered. The underperformance of small cap companies and the impact of higher interest rates on electric utilities have been the key headwinds for the Clean Energy Index over the last 2-3 years since the world emerged from the COVID-19 pandemic.

Within clean energy, solar stocks were by far the worst performing segment in January, giving back their strong returns from December and falling by -20.6%. In context, during the whole of 2023, solar stocks fell by -26.9%, their worst annual return since 2016 driven by interest rate sensitivity and temporary indigestion in the European and Californian markets which you will recall we have written about previously. Electric vehicles and wind were the next weakest segments falling 7.8% and 7.0% respectively.