Sabco® Investment's Monthly Market Report - February, 2024

Sabco® Investment's Monthly Market Report - February, 2024

Stock markets had a notably positive February, with robust economic indicators and solid corporate earnings contributing to gains since the start of the year. Meanwhile, bond markets experienced a downturn, with the Bloomberg Global Aggregate Index declining by 1.3% during the month.

In the equity domain, emerging markets saw impressive performance, with a 4.8% rise over the month, largely driven by a surge in China. Among developed markets, Japan shone particularly bright, with the Nikkei 225 Index hitting a record peak not seen in over three decades. On the other hand, the UK equity market did not fare as well.

Bond markets felt the strain as market participants adjusted their expectations for interest rate decreases to be delayed until later in 2024, evidenced by a 1.3% dip in US Treasuries in February. However, high-yield bonds that are less affected by interest rate changes did relatively better, with the euro high yield slightly up by 0.4%.

Commodities witnessed a retreat, with the comprehensive Bloomberg Commodity Index falling by 1.5% in February due to reduced gas and agricultural prices. Real estate investment trusts saw a minor 0.1% loss, as the anticipated slower pace of interest rate reductions overshadowed the positive economic activity data.

Focusing on equities: The ongoing earnings season brought reports from five of the top seven US companies, with results largely surpassing expectations, aiding in a 5.3% increase of the S&P 500 for the month. With the majority of the companies already reported, about three-fourths have exceeded earnings predictions. Economic data remained solid, with the US composite PMI indicating continued growth and the addition of 353,000 jobs in January.

European stock markets didn't perform as well, with the MSCI Europe ex-UK index rising 2.8% in February, lagging behind the 4.3% increase of the developed market MSCI World Index. This was despite a higher than anticipated rise in the eurozone PMI, which suggests an end to the continent's economic slump.

UK stocks also had a weaker performance and have decreased by 1.1% since the beginning of the year, after a fourth-quarter GDP decline indicated the UK's slide into recession last year. Furthermore, less promising earnings reports from UK firms led to a reduction in profit growth forecasts for 2024.

Japan's TOPIX Index went up by 4.9% during the month, despite a GDP figure that suggested Japan entered a recession in the latter half of 2023. A depreciating yen, which fell by 2.3% against the US dollar in February, likely supported the predominantly export-driven Japanese stock market.

Chinese stock markets started February at a five-year low but recovered following positive economic data from the Lunar New Year holiday and government support measures. The MSCI China Index subsequently rose by 8.6% over the month.

In the UK, wages grew more than expected in December, leading to a readjustment of expectations for rate cuts by the Bank of England as persistent wage inflation might indicate more enduring inflation.

In the eurozone, bonds also fell during February, with German Bunds experiencing a 1.4% decrease. However, the eurozone's budding economic recovery contributed to a narrowing of the yield spreads between Italian and German government bonds.

In summary: Equity markets in February were buoyed by the ongoing robustness of the US economy and emerging signs of recovery in European activity. This economic vigor, alongside persistent inflationary pressures, implies that central banks may maintain their current policies for some time. Consequently, bond markets faced setbacks due to the reduced prospect of imminent rate cuts. Nevertheless, core bonds are still considered to offer attractive income and act as a hedge against an economic downturn. In equities, it appears wise to concentrate on financially solid firms, given that earnings projections continue to be optimistic.