Overall Market Summary:
Global stock markets gained in February, with emerging markets performing strongly as Chinese shares rebounded. In contrast, fixed income yields generally rose, meaning bond prices fell. Investors adjusted their expectations for when central banks might cut interest rates.
United States:
US shares posted strong gains in February, driven by positive corporate earnings, particularly from some of the "Magnificent Seven" companies. Consumer discretionary and industrials sectors led the gains, while defensive sectors underperformed.
The Federal Reserve (Fed) held a policy-setting meeting at the end of January, keeping interest rates on hold at 5.25-5.5%. Fed Chair Jerome Powell indicated that a March rate cut was unlikely. Data released in February showed ongoing economic resilience, complicating the case for near-term interest rate cuts.
US nonfarm payroll data showed 353,000 jobs were added in January, surpassing market expectations. Annual inflation, measured by the consumer price index (CPI), slowed to 3.1% in January from 3.4% in December. Core CPI, which excludes volatile food and energy prices, remained at 3.9% year-on-year, consistent with December's reading.
Presidential primaries were held in several states, with Donald Trump winning several Republican primaries, including South Carolina and Michigan. "Super Tuesday" on 5 March will see over a dozen states hold their primary contests.
Europe:
Eurozone stocks advanced in February, though they lagged behind US markets. Top-performing sectors included consumer discretionary, industrials, and information technology, while real estate and utilities lagged after rallying in late 2023 on hopes of imminent rate cuts.
Consumer discretionary saw gains from both luxury goods and automotive companies following strong results. Information technology benefited from enthusiasm around AI potential and strong earnings from both local and global tech companies.
Eurozone inflation, measured by the consumer price index, eased to 2.6% in February from 2.8% in January. Signs of improving business activity emerged, with the flash eurozone purchasing managers' index (PMI) rising to 48.9 from 47.9 in January. European Central Bank President Christine Lagarde continued to downplay the chances of imminent interest rate cuts, emphasizing the risks of reversing any cuts.
United Kingdom:
UK equities remained broadly unchanged in February. Top contributors included industrials, financials, and consumer discretionary, while consumer staples, real estate, and basic materials were the largest detractors.
Official data showed the UK economy had entered a technical recession in the second half of 2023, ending the boost from elevated post-pandemic consumer spending as higher inflation and interest rates weighed on activity.
Looking ahead, purchasing managers' indices indicate that economic activity is rising at its fastest rate since mid-2023. Total pay rose 5.8% year-on-year in the three months to December, surpassing market expectations of 5.6%.
UK inflation surprised positively, with headline inflation steady at 4% year-on-year, defying expectations of a slight increase. Core inflation held steady for the second month at 5.1% year-on-year, slightly below the expected 5.2%.
Bank of England (BoE) Governor Andrew Bailey maintained a cautious tone regarding interest rate cuts, citing concerns that inflation could rise again later in 2024 after briefly dipping below the 2% target.
Japan:
Japanese equities continued their rally in February, with the TOPIX index returning +4.9% and the Nikkei 225 exceeding its all-time high from December 1989, finishing at 39,166 yen with a 7.9% return. The rally was driven by large-cap stocks, while small-cap stocks lagged.
Global investors maintained strong interest in Japan, driving a faster-than-expected market rally. The long-term story of Japan, including inflation return and corporate governance reforms, was well received. Investors became more relaxed about potential Bank of Japan (BOJ) policy changes to lift the negative interest rate policy, expected in March or April. Despite subdued macroeconomic figures, the market remained optimistic.
The market rally was supported by strong earnings results from January to February, including certain car manufacturers and large-cap stocks in financials and trading companies. Technology stocks had weaker quarterly earnings, but anticipation of AI demand growth drove semiconductor-related stocks higher.
Asia (excluding Japan):
Asia ex Japan equities gained in February, with share prices rebounding from recent lows and cautious optimism about improving conditions in China. All markets in the MSCI AC Asia ex Japan index ended the month in positive territory, with Mainland China, South Korea, and Taiwan among the strongest markets. Growth in Thailand and Singapore was more modest.
In China, official figures showed that tourism revenues over the Lunar New Year holidays were higher than pre-COVID-19 levels, offering some relief amid weak consumer demand, falling factory output, and a real estate crisis.
South Korea achieved strong growth, with exports rising 4.8% year-on-year in February, driven by strong semiconductor demand. Taiwan's performance was boosted by ongoing investor enthusiasm for AI-related stocks and technology companies.
Emerging Markets:
Emerging market (EM) equities gained in US dollar terms in February, outperforming developed markets. Optimism about potential Fed interest rate cuts later in the year contributed to strong performance, particularly in EM Asia, where China rebounded on better-than-expected activity data and a key mortgage policy rate cut.
Korea and Taiwan performed strongly, with Korea benefiting from tax reform proposals to incentivize improved shareholder returns, boosting value stocks. Taiwan saw continued investor enthusiasm for AI, lifting the tech sector.
Peru performed well, supported by local currency strength, while Saudi Arabia benefited from energy price strength and better-than-expected corporate earnings. Poland and Chile also generated notable returns.
Greece and Turkey underperformed, with local currency weakness impacting returns. Turkey's underperformance persisted despite GDP growth improvement in Q4 2023. India lagged as the financial sector struggled with higher interest rates. Colombia and Thailand also underperformed, with Thailand's economy in deflationary territory. Brazil lagged as well.
Other markets, including the Czech Republic, South Africa, and Egypt, posted negative returns. In South Africa, rand weakness and political uncertainty weighed on returns. Egypt experienced the biggest losses in US dollar terms.
Global Bonds:
Government bond yields rose in February, leading to falling prices. Market expectations for near-term rate cuts receded as labor markets remained strong and inflation data surprised to the upside.
Credit markets outperformed, supported by a positive economic outlook and the rate environment. European investment grade (IG) outperformed its US counterpart, with the financial sector excelling in both regions. High yield (HY) bonds were the standout performers, generating positive returns.
Uncertainty about the US inflation outlook tempered enthusiasm for immediate rate cuts. January's CPI rose more than expected, driven by the shelter component. Core CPI saw its largest increase since April 2023. Robust labor market data and wage pressure concerns were catalysts for yield increases.
In the eurozone, inflation news was encouraging, with easing price pressures in Germany, France, and Spain. The regional growth outlook improved, with services PMI moving into expansionary territory. The European Central Bank emphasized the risks of premature rate cuts.
The Bank of England maintained interest rates with a three-way split in the committee's decision, indicating rates have likely peaked but more evidence of inflation returning to target is needed before cuts. UK GDP data showed the economy entered a technical recession in Q4 2023, but subsequent PMIs indicated increased activity.
Major global government bond yields rose, with the US 10-year yield up 29 basis points to 4.24%, the German 10-year yield up 24 basis points to 2.40%, and the UK 10-year yield up 32 basis points to 4.12%. Canada performed better, with the benchmark 10-year yield rising just 5 basis points.
In the foreign exchange market, lower-yielding currencies like the Japanese yen and Swiss franc underperformed, while the dollar modestly strengthened.
Convertible bonds did not keep pace with equity gains, with the FTSE Global Focus convertible bond index gaining 0.7%. The primary market for convertibles remained active, with $9.8 billion in new issues, but valuations stayed subdued.