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Markets tread water as world hits demographic tipping point

market snapshot

28 April 2023 |
Investors remain in wait-and-see mode ahead of key data drops.
  • India’s population forecast to overtake that of China this year.
  • Positive earnings seasons lifts mood music – at least for now.
  • Softer US data points to underlying tensions in the broader economy.

India is forecast to overtake China as the world’s most populous country this year, according to the United Nations Population Fund. India’s population set to hit 1.428 billion by mid-year, exceeding China by about three million people1.

Against this emerging market demographic tipping point, news flow in developed markets remained subdued as investors continued to take a wait-and-see approach based on leading indicators.

The S&P 500 fell slightly over the course of week, closing 2.5% lower by market’s close on 26 April. The FTSE 100 took a similar path over the seven days, closing 0.7% lower. The Hang Seng fared less well, dropping 4.8% on concerns about the uneven pace of economic recovery and heightened geopolitical uncertainty2.

Figure 1: China and India’s population crossover point

Population, 1950 to 2100. Forecasts based on the UN’s medium-fertility scenario.

Source: Our World in Data, United Nations World Populations Prospects, April 2023

Lewis Grant, Senior Portfolio Manager for Global Equities, Federated Hermes Limited, noted that as earnings seasons has progressed the macro and geopolitical clouds of earlier in the year have begun to retreat. Most notably, he said, positive company fundamentals have been received well, particularly in the tech sector, where firms are beginning to bear the fruit of earlier cost efficiencies.

“Mega-cap tech’s rally into earnings season leaves many of these names trading at lofty valuations, and yet thus far much of the speculative optimism has been rewarded,” he said. Nonetheless, against the backdrop of high investor expectations and stagnating economic growth, companies from this point will need to find other ways to deliver. “Growth is not free,” says Grant, “and we expect firms who have cut costs early to recycle those efficiencies into either cost or investment competitiveness.”

Despite the recent uplift in mood music, investor sentiment remains fragile – and with fears only marginally assuaged by the recent positive earnings data the longer-term outlook remains uncertain. “Hence we remain positioned for the investment opportunity in quality companies that have re-focused their operations to increase resiliency when faced with market and economic uncertainty,” he adds.

Softer US data; robust in Europe

For Silvia Dall’Angelo, Senior Economist, Federated Hermes Limited, the generally weaker tone US economic data3 in recent days suggests the impact of protracted monetary tightening is gradually spreading across the real economy. The recent stress in the banking sector has likely also taken a toll on sentiment, she says.

Nevertheless, the US Federal Reserve is widely expected to increase rates by a further 25bps next week – which could lift the Federal funds rate above 5% for the first time since 2007 – before taking a pause in June.

In contrast, European economic data has remained robust, Dall’Angelo adds, which will embolden the European Central Bank’s (ECB’s) resolve to continue raising rates for some time to tackle stubbornly high inflation.  

Recent survey developments suggest the fallout from the recent stress in financial markets on economic activity has been limited so far

“Recent survey developments suggest the fallout from the recent stress in financial markets on economic activity has been limited so far,” she says. “Indeed, the Euro Zone flash PMI surveys for April signalled ongoing improvement, notably in services sectors, suggesting domestic demand has remained strong. That was confirmed by the German IFO survey, which also came in slightly better than expected in April.”

Despite inflationary concerns remaining front and centre, the current hiking cycle has been the fastest in the ECB’s history. For Dall’Angelo, this underlines the argument for slowing down the pace of tightening to assess its impact on the financial system and the real economy. “Indeed, the risk of a serious accident in financial markets – impairing the smooth transmission of monetary policy – has increased significantly as monetary conditions have abruptly shifted from extremely accommodative to somewhat restrictive,” she adds.

For further insights on European equities please see our recent article It’s time to take a chance on Europe.

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