Blog

February was generally a good month for equities with both Developed and Emerging markets posting gains while the UK was roughly flat over the period.   By contrast, fixed income markets finished the period lower with weakness across government and investment grade bonds. Alternative investments, such as property and infrastructure posted negative returns while precious metals posted modest gains.

The market moves witnessed in late 2023 and early 2024 have been driven by uncertainty regarding the outlook for inflation and interest rate policy. In November 2023, there was growing expectations that “sticky inflation” was behind us and that Central Banks were likely to cut interest rates sooner than expected. This led to a sharp rally across equities and bonds in November & December lifting most asset classes, particularly interest rate sensitive areas such as small cap stocks and real estate. The year-end exuberance has been tempered somewhat in January & February as inflation data has ticked up and Central Banks have communicated a more cautious tone indicating that any interest rate cuts may be delayed to later in the year.  This has led to mixed results with equities continuing to rally while bonds have given back some of their earlier gains in late 2023.

All developed markets generated positive returns over the month. The best performing market was Japan (+4.3%) which is leading other regions on a year-to-date basis. After much talk and many years of disappointment, there is real change taking place which is unlocking value within that market. Unwinding of cross share ownership, huge improvements in corporate governance & management buyouts running at the fastest pace in a decade are just some of the drivers behind the Japanese stock market performance. The US (+4.1%) also posted strong gains with large cap technology stocks continuing to outperform on the back of strong earnings results as well as being viewed as the primary beneficiaries of the Artificial Intelligence ‘boom’.  Emerging Markets (+5.2%) had a particularly strong month owing largely to a significant rebound in the Chinese equity markets.    Chinese markets had hit a multi-year low coming into the month but rebounded sharply on better-than-expected economic data as well as announcements by the government to cut mortgage rates and provide supportive measures for the stock market.

Bond markets had a more challenging time in February with broad based weakness across US, UK, and European sovereign bonds. The worst performing part of the bond market was the UK government index which pulled back -1.6%. Much of the weakness is attributed to the fact that expectations that rate cuts were not as imminent as previously expected. In the US, headline inflation figures rose slightly to 3.1% while Q4 2023 GDP figures remain healthy at 3.2% leading to expectation that inflation may remain sticky for longer. In the UK, wage growth has been a major focal point when it comes to inflation and latest readings came in higher than expected (5.8% including bonuses) which also indicated that rate cuts may be put on hold for some time. In the credit market, investment grade bonds saw negative returns while US and European high yield bonds generated gains spreads continue to tighten.

It’s been somewhat of a mixed start to 2024 as equities and bonds returns have diverged. Inflation and interest rates are likely to dominate investor sentiment and market returns. At this point, better than expected global economic growth coupled with recent signs that inflation has not entirely dissipated suggests that central banks may be on hold for a little while longer.