22nd March 2023

Cappuccino Commentary

A relaxed read on the issues of the day

After a strong start to the year for most asset classes in January, February saw a retracement of many equity regions and bond markets, in local terms. However, with the weakness in sterling versus the dollar over the month, the picture was more favourable for sterling investors. The main driver was that economic data was more resilient over the month than expected, meaning any hoped-for pause in interest rate rises may be some way off. Over the month we saw interest rate rises in the US, Europe and the UK, leading to negative returns for all parts of the bond market universe.

UK and European equities were the best performing of the equity regions in February, delivering over +2% returns. In the UK, large cap companies were among the top contributors and the FTSE 100 index achieved a new record high. Also domestically focused areas of the market outperformed, as the UK economy proved more resilient than was expected. The latest GDP data revealed that the UK economy had not contracted in the fourth quarter of last year. This meant the economy dodged a technical recession by avoiding consecutive quarters of decline following the contraction in the third quarter. The Bank of England in its latest quarterly forecast, said it expected the UK to fall into recession later in 2023, however, the downturn appears to be much shallower than it had previously forecast. This in part has been driven by energy prices falling considerably.

It was a similar story in Europe, where forward looking data painted an encouraging picture for the eurozone economy. The Purchasing Managers Index (PMI) increased from 50.3 in January to 52.3 in February. A reading above 50 indicates economic expansion. Financials, industrials & telecoms were the best performing sectors over the month.

Asia & the emerging markets were the worst performing equity regions, delivering over -4% return for the month in sterling terms. This was a partial reversal of the strong returns we saw in January and was partly due to escalating geopolitical tensions between China and the US, while more resilient macro data out of the US raised the prospect of further rate hikes. Against this backdrop we saw the dollar rally, proving an headwind for Asia and the emerging markets.

Whilst returns were somewhat mixed for equity investors, there was no hiding place for fixed income investors. Global government bonds, investment grade and high yield all sold-off. With the rate hikes we saw across the US, Europe and UK, the markets concluded that interest rates would likely need to remain higher for longer. This was supported by strong macro data and PMI’s across the different regions. We saw sharp increases in yields in government debt – the US 10-Year yields increased from 3.51% to 3.92%, while the UK 10-Year moved from 3.34% to 3.71% and from 2.29% to 2.65% for German 10-Year. February saw a reversal of the strong returns that January brought for the bond markets.

Commodities also delivered negative returns for the month, with industrial metals and precious metals the worst performing part of the commodity index. Energy and agriculture were also weak.


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    Copia Capital Management

    Hamilton House, 1 Temple Avenue, London, EC4Y 0HA

    Understanding the risks

    This information is intended for professional financial advisers only. Copia does not provide financial advice. This information is not intended as financial advice and should not be interpreted as such. Model investment portfolios may not be suitable for everyone. The value of funds can increase and decrease, past performance and historical data cannot guarantee future success. Investors may get back less than they originally invested.

    Copia Capital Management is a trading name of Novia Financial Plc. Novia Financial Plc is a limited company registered in England & Wales. Register Number: 06467886. Registered office: Cambridge House, Henry St, Bath, Somerset BA1 1JS. Novia Financial Plc is authorised and regulated by the Financial Conduct Authority. Register Number: 481600.

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