February saw investors start to discount the probability of a deflationary outlook in 2021/2022 and price in a more inflationary one. Fixed income and long duration assets suffered as a result; the US 10-year Bond yield moved from a low of 1.06% to a high of 1.61% and the UK 10-year Gilt yield rose from 0.32% to a high of 0.84%. The FTSE Actuaries UK Conventional Gilts All Stocks index fell -5.7% over the month, resulting in a one-year loss of -4.2%. The JPM Global Bond Index fell -4.1% over the month. Corporate bonds also declined, however spread compression meant the loss wasn’t as large as government bonds. The IBOXX UK Sterling Non-Gilts All Maturities declined by -3.0% in February, reducing the return over the last 6 months to 1.8%. Positive sentiment continued for Sterling over the month, with the £/US$ exchange rate reaching 1.41 (£/$) in February, levels not seen since 2018.
The strength of Sterling reduced the return from the MSCI World index in February from 2.6% in local currency to 0.7% in Sterling terms. Global equity markets were led by smaller companies and by the “Value” sectors of Energy, Financials and Industrials. Certain sectors responded positively to the rapid deployment of vaccinations on both sides of the Atlantic, however the potential for increasing inflation led investors to sell out of the Pharmaceutical/Health Care and Utility sectors.
Optimism for a global recovery on the back of the Covid-19 vaccination programs was also seen in Commodity markets. Brent Crude rose 17.7% in January resulting in a 35.7% return over the last 3 months. The Copper price continued its rise, rising 15.2% during the month, rising to prices not seen since 2012. Surprisingly, given potential concerns about inflation Gold fell -6.6% during February and has declined -13.1% over the past 6 months.
The UK was the best performing of all the regions in February in Sterling terms. The FTSE All Share rose 2.0% over the month, contributing to a 12% return over the last 6 months. Small and mid-cap companies were the main contributors in February, with Basic Materials (11.1%), Oil & Gas (9.4%) and Financial (6%) the leading sectors. The more ‘Quality’ sectors of Technology (-3%), Consumer Goods (-4.9%) detracted alongside Utilities (-6.2%) and Health Care (-7.3%).
There was a similar pattern to the US market over the month, with small and mid-cap stocks up by 4.2%. Value sectors Energy (22.3%), Financials (11.5%) and Industrials (6.8%) performed well whilst Growth (0.6%) and Momentum (-0.6%) style factors lagged. However, these numbers don’t portray the change in direction that occurred in February, with Momentum and Growth style rising 8.7% and 7.3% respectively in the first half of the month before losing those returns in the last 8 trading days of February.
Within Asia Pacific, China (-2.8%) and Korea (-1.6%) fell, whilst India (3.4%) and Hong Kong (2.8%) helped the MSCI Asia Pacific ex Japan index to generate a return of 1.4% over the month , and a 1 year return of 32.2%.
In Europe the Travel & Leisure (19.1%) sector was one of the better performing, alongside other Value sectors mentioned above. Unsurprisingly, Italian (5.8%), Spanish (5.3%) and French (5.1) markets were the best performers, contributing to the MSCI Europe ex UK returning 2.6% over the month and 10.9% over the last 6 months. Again the strength of Sterling reduced these gains to 0.3% for the month and 7.5% since August.
Chief Investment Officer