he second quarter of 2023 started for global equities with a modest monthly gain of 1,3% in April, which was a second straight month of positive return. Economic data continued to bring mixed signals, as corporate earnings were largely above (lowered) expectations. European markets led again in April as inflationary pressures continue to subside, fueling hope that European Central Bank (ECB) would ease its monetary stance. The US equities rose largely on strong earnings from the technology sector as market returns have become concentrated into a few very largest stocks. Emerging markets lagged with China falling more than 4% despite a very strong GDP growth number, as investors remain unclear about the prospects of future economic growth. Global bonds returned 0.4% with a large part of this driven by investment grade credit which returned 1.2% over the month. The US yield curve inversion steepened in April whereas Europe began to flatten with the continent’s better inflation results.
In the U.S. consumer spending remained strong despite the higher interest rates, propped up by the resilient labour market. Inflation kept stubbornly high around 5%, as U.S. unemployment claims actually declined in April. Falling energy prices helped bring headline inflation down in the major developed economies (in the US falling below 5% y-o-y) with the contribution from energy turning negative in the U.S. and the Eurozone. This positive economic momentum supported risk assets despite further stress in the banking sector. Dispersion in sector performance was moderate with energy and consumer staples stocks leading in the month, while information technology and consumer discretionary stocks lagged. Communication services stocks also performed well, helped by a rally in Facebook’s parent Meta Platforms. The strong performance of Meta and other large cap stocks with heavy weights in the index masked weaker performance for the average stock: for example, an equally weighted index of S&P500 stocks rose only 0.24% for the month (excluding dividends) versus 1.46% for the index itself. Discounting the future, investors still assume U.S. interest rates to go up by 25 basis points (0,25%) in May, but then the Federal Reserve is expected to cut rates towards the end of 2023. Bond prices felt supported and the Treasury yields of mid- and long-term securities modestly decreased. Credit spreads on corporate bonds also narrowed slightly, indicating that investors were demanding less additional yield to compensate for the bonds’ higher risk relative to Treasuries.
In local currency, the pan‑European STOXX600 Index rose on optimism about an economic recovery and hopes that interest rates were near their peak. However, a number of central bank comments that rates could stay higher for longer cooled the mood and curbed previous gains. Major equity indexes in Germany, France, Italy, and the UK also ended the month higher. Economically, the Eurozone data generally surprised to the upside in April though manufacturing remained a weak spot and the divergence between the manufacturing and service sectors further expanded. The manufacturing PMI was 45.5, implying a tenth consecutive month of contraction, while the services index jumped to 56.6 (for both indices 50 marks the difference between contraction and expansion). The divergence is the widest in over a decade, and such strength of services kept the Eurozone GDP growth positive in Q1, with the economy growing 0.1% quarter on quarter. Although the Eurozone headline inflation fell sharply - the consumer price index fell from 8.5% y-o-y in March to 6.9% in April. Core inflation, however, increased by 0.1% to 5.7% year on year. This, combined with upside surprises on economic growth and continued wage pressures, means that markets think the ECB has more room to raise interest rates. While the market expected 25 bps increase in May rather than 50, it still has a total of 75 bps of hikes priced in before the winter.
In a month that was generally positive for global stock markets, April brought modest losses for Bulgarian indices. This emphasized again the diversification advantage of the domestic market combined with a global portfolio, due to the low correlation in their performance. The only BSE index to post a monthly gain was BG REIT (Real Estate), which added almost 1.5% to its value, while the others ended down by about half a percent. The best performer during the month among the local companies was the battery maker Elhim Iskra AD, whose price rose nearly 16%, and the worst was the food maker Zarneni Hrani Bulgaria AD, whose stock fell more than 9%.