Market Opinion - February 2023

Market Opinion - February 2023

February brought a mixed bag of outcomes for global equity markets. Building upon the strong start of 2023, the UK and European markets experienced a positive month, primarily driven by improved company earnings. On the other hand, the United States faced challenges as inflation proved to be more persistent than anticipated, impacting the economy. This, in turn, had a ripple effect in Asia due to the expectation of higher and longer-lasting US interest rates. Additionally, emerging markets underperformed developed markets during the previous month.

European markets concluded February on an upward trajectory, buoyed by an enhanced outlook resulting from updated guidance provided by companies. Communication services emerged as the best-performing sector, while real estate lagged behind. The European Central Bank raised interest rates by an additional 0.5%, reaching the highest level since 2008. France and Spain experienced slight increases in consumer prices during February, reinforcing the ECB's commitment to its planned program of interest rate hikes. On the political front, the EU reached a new agreement on Northern Ireland trading rules, receiving praise from European Commission president Ursula Von der Leyen for the constructive approach displayed by both parties. The deal is expected to be voted on in the UK parliament soon.

Similar to the European markets, the UK also witnessed positive market performance, driven by higher company earnings and signs of easing inflation. In January, inflation reached its lowest level in five months, measuring 10.1%, with declining petrol prices playing a significant role. Despite this trend, the Bank of England proceeded with a series of interest rate hikes, raising rates by an additional 0.5% last month. The UK's gross domestic product (GDP) remained unchanged between the third and fourth quarters of 2022, successfully avoiding a technical recession after a contraction in the three months leading up to September. Retail sales in the UK experienced growth between December and January, following a decline in the previous month.

Equity markets in the US faced a less favorable outlook, with all three major indices experiencing losses, although the technology-focused NASDAQ performed relatively better. The US Federal Reserve raised interest rates by 0.25%, aligning with expectations. However, Fed Chair Jerome Powell cautioned that "disinflation" still has a way to go, indicating that further interest rate increases are likely if macroeconomic data continues to trend upward. The information technology sector led the way in February, driven by Nvidia's strong performance and exceeding expectations for the fourth quarter. Healthcare and communications sectors, on the other hand, experienced the most significant setbacks.

Asian Pacific equities declined, primarily influenced by expectations of prolonged higher interest rates in the US. China faced the poorest market performance, as tensions with the US escalated due to ongoing disagreements surrounding the Russian-Ukraine conflict. Taiwanese equities recorded slight losses but outperformed regional indices. Sentiment in the technology sector dampened due to worse-than-expected earnings. In Korea, foreign investment declined following government plans to regulate banking and telecommunication companies. In India, December's quarterly GDP growth fell below expectations at 4.4%. However, January's consumer price index (CPI) experienced a surge to 6.5%, while November's industrial production figures showed signs of improvement.

Emerging market equities underperformed developed markets in February. This was attributed to re-escalating US-China tensions, a rally in the broad dollar index, and fading hopes of the US Federal Reserve (Fed) cutting interest rates. Among regions, Asia had the poorest performance, followed by Latin America and Europe, Middle East & Africa (EMEA). Colombia, China, and Thailand experienced the most significant declines, while the Czech Republic witnessed the largest rise, led by utilities, and Greece benefited from rising interest rates in the banking sector. Weaker commodity prices also impacted emerging market equities, with concerns arising about weakened Chinese demand, dwindling cargo shipments, and increased inventory levels.

Bond markets faced challenges during the month, primarily driven by concerns about persistent inflation. Market expectations now lean towards central banks raising interest rates, following strong US job figures, higher-than-expected retail sales, and robust US consumer price index (CPI) numbers in January. In the euro area, inflation reached a new record high of 5.3% in January, increasing expectations of aggressive rate hikes by the European Central Bank. In contrast, the UK saw better inflation news, with the CPI experiencing a third consecutive monthly decline while remaining in double digits at 10.1%. Credit markets also encountered difficulties, with investment-grade (IG) bonds, which are more sensitive to interest rates, underperforming high yield (HY) bonds. Corporate issuance of euro/sterling high-grade corporate bonds returned to normal levels in February, following a near-record-breaking month in January, according to Barclays data.

European shares concluded February on a positive note as updated guidance from companies revealed a more optimistic outlook. Communication services performed exceptionally well, followed by financials, with rate-sensitive banks showing strength. Real estate experienced the most significant detraction, closely followed by healthcare.

The European Central Bank raised interest rates by 0.5% to 2.5%, reaching their highest level since 2008. The ECB indicated its intention to continue tightening monetary policy, planning another 0.5% rate increase in March.

French consumer prices rose to 7.2% in February from 7.0%, while Spanish consumer price growth increased to 6.1% from 5.5% during the same period. These developments raised concerns about the ECB needing to extend its aggressive policy of raising interest rates for an extended period.

Revised figures revealed that Germany's economy contracted more than anticipated in the fourth quarter. High inflation resulted in decreased consumer spending and investment. The revised figures are expected to lead to a downward revision of Eurozone GDP, which currently stands at 0.1% growth.

The flash purchasing managers' composite index (PMI) for the eurozone increased to 52.3 in February, up from 50.3. This index measures activity across services and manufacturing companies in the eurozone and indicates expansion when above 50. The February reading surpassed consensus estimates, marking the second consecutive month above the 50 mark.

The European Union and the UK reached a new agreement on Northern Ireland trading rules. European Commission President Ursula Von der Leyen praised the constructive attitude displayed by both parties and emphasized the strong partnership between them, both presently and in the future. The agreement awaits voting in the UK Parliament.

In February, the UK equity market saw gains driven by higher earnings and signs of slowing inflation. The Bank of England (BoE) raised interest rates by 0.5% to a 15-year high of 4.0%, indicating that further rate hikes would only be necessary if inflation remained persistently high. UK inflation decreased to a five-month low of 10.1% in January, primarily due to falling petrol prices and reduced travel costs. The UK GDP remained unchanged between the third and fourth quarters of 2022, avoiding a recession after a contraction in the previous quarter. The UK public sector unexpectedly posted a budget surplus in January, providing flexibility for the upcoming budget. Retail sales in the UK grew by 0.5% in January after a decline in the previous month, surprising analysts. The UK and the EU reached a deal on post-Brexit trading rules in Northern Ireland, pending parliamentary voting.

In the US, equities declined in February, with the NASDAQ composite performing relatively better than the S&P 500 and Dow Jones indices. The Federal Reserve announced a 25-basis point increase in the federal funds rate, reflecting a strong labor market and resilient economy. However, unexpected labor market acceleration led to concerns about potential rate cuts later in the year. Inflation remained a concern, with the headline consumer price index (CPI) growing at an annual rate of 6.4%. The technology sector was the top performer, driven by positive earnings from companies like Nvidia and Apple. Health care and communication services were the weakest sectors.

Asia Pacific equities faced declines, particularly in China due to rising tensions with the US and delayed policy stimulus. Taiwan and Indonesia performed relatively better. Emerging market equities as a whole underperformed developed markets, with Asia being the worst-performing region. The Czech Republic and Greece showed positive performance, while Colombia, China, and Thailand experienced declines. Weaker commodity prices, particularly in industrial metals, raised concerns about Chinese demand and cargo shipments.

Bond markets experienced negative returns in February as concerns over persistent inflation grew. Both Europe and the US saw government bond yields rise, with the 10-year German bund reaching a post-2011 high. The US labor market data and robust retail sales prompted expectations of additional interest rate hikes by central banks. The European Central Bank (ECB) raised rates by 50 basis points and indicated another hike in March. Inflation in the eurozone reached a new record high of 5.3%, leading to expectations of more aggressive rate hikes by the ECB. The UK saw a decline in CPI for the third consecutive month but remained at 10.1%. Credit markets faced challenges, with investment-grade bonds underperforming high yield bonds. Corporate issuance of euro/sterling high-grade corporate bonds returned to normal levels in February after a record-breaking month in January, according to Barclays data.