Investment Commentary February 2024

Risk assets took things up a notch in February after a fairly modest start to the year, with a number of equity markets hitting major milestones. The S&P 500 went through the 5,000 mark for the first time and the Nikkei finally surpassed its previous high set in 1989. These were set against a backdrop of continued optimism over the global economy, with data released during the period remaining robust generally. That being said, there were a few areas of weakness. Both the UK and Japan entered into a technical recession after two consecutive quarters of negative GDP growth. China was forced to announce a number of stimulus measures during the period to support its flagging economy (as well as market interventions such as curbs on short-selling).

In contrast to other asset classes, it was not such a good month for bonds. Some stickier-than-expected inflation readings forced markets to re-price their previously aggressive bets on the degree of interest rate cuts in the US, pushing back the timing of these cuts. As a consequence, sovereign bonds experienced another month of negative returns. Of these, US Treasuries, Gilts and Eurozone sovereign bonds returned -1.4%, -1.3% and -1.2% respectively. Less rate-sensitive areas of the bond market were the best performers once more, with high yield corporate bonds in positive territory.

For equities, another solid quarter of earnings saw the US perform strongly once more, with the S&P 500 returning +5.3%. Strong earnings from most of the ‘Magnificent Seven’ stocks saw the Nasdaq returning +6.2%. Faring even better than the US was Japan, with the Nikkei continuing its tremendous run, returning +8% for the period. After a dismal start to the year, Chinese stocks did rebound during February, with the Shanghai composite up +8.1%. This dragged up emerging markets more broadly, which returned +4.8%. European stocks underperformed somewhat, returning +2%. The UK remained the main laggard, however, barely positive on the month at +0.4% and remaining in negative territory for the year. Commercial real estate losses continued to weigh on US regional banks, with the KBW Regional Banking Index down -2.8% in the period.

In terms of style returns, global growth stocks outperformed value stocks by around +4% (+6% vs. +2% respectively). Global small cap stocks produced reasonable returns of +3.2% but generally underperformed global large caps.         

In currencies, the story remained one of a stronger US Dollar, with a +0.9% gain against a basket of currencies. Sterling was slightly weaker against both the UD Dollar and the Euro. Of the major trading pairs, the Japanese Yen was the worst performer, returning -2% against the Dollar.

For commodities, the CRB Index was in positive territory, returning +0.6%. Oil was the main contributor towards this, with a modest return of +2.3% and +3.2% for Brent and WTI respectively. However, this did mask some underlying weakness in a number of commodity markets. Copper fell -1.8% and agricultural commodities were weaker across the board. The price of natural gas in Europe continued its precipitous fall, down -17.8% in February. The gold price remained fairly subdued during the period.