February 2024 Monthly Market Review

February turned out to be yet another strong month for global investors. Some mid-month pessimism about the state of the world economy caused a temporary lull in capital markets, but this was completely overcome as the month came to a close. In the end, global stocks added a very healthy 4.4% in sterling terms. The positive returns were widespread too, with every major region we follow finishing in the black. The fact February’s rally was so broad-based was a good sign, allaying previous concerns that too much capital was focused on the US mega-tech sector. The latter performed well last month – but so did many others – after investors started dreaming about a broad global economic recovery.

The table below shows February’s returns across major regions and asset classes.

The US was once again one of the strongest performers, with the S&P 500 jumping 5.2% in sterling terms. At the start of the month, there was much discussion around the artificial intelligence (AI) investment craze, and whether it is – or will become – a speculative asset bubble. This came to a head following Nvidia’s stellar earnings report, which showed revenue up 265% and profit up over 750% for the year, giving the chipmaker’s share price a massive shot in the arm. Euphoria seemed to peak last week though, and trading since has been much more muted.

By contrast, and as a welcome change, the Russell 2000 index, which includes smaller-cap US companies, has climbed steadily over the last week and a half. Stronger sentiment for smaller businesses signals that markets believe growth is coming. There was also a pick-up in US mergers and acquisitions in the US, a sign of changes in market composition. Fears still persist that a strong US economy would be too inflationary, preventing the Federal Reserve (Fed) from meaningfully cutting interest rates. But recent data suggests that US inflation is stabilising around the 3% level – which is consistent with a slight Fed easing in the summer or autumn.

These moves have helped bring confidence to markets. One clear sign of this is the US dollar, which climbed against a basket of other currencies in the first half of February, thanks to continued outperformance, but pulled back mid-month. A weaker dollar suggests solid global growth expectations. This was also reflected in bond yields, which weakened at the start of the month but subsequently recovered to recent highs.

The clearest sign of the sentiment shift driving capital markets over the past four months is China. After being in the doldrums for over a year, February saw a dramatic turnaround for Chinese equities, which gained an impressive 9.3% in sterling terms, making China the best-performing region for the month. The government’s failure to stimulate a meaningful economic recovery in 2023 had been the dominant story, but that negativity finally seems to have bottomed out, even if the recent gains have not even equalised the losses since the beginning of the year.

The world’s second-largest economy is still struggling in terms of hard data. Official figures say that Chinese gross domestic product (GDP) was 5.2% higher in January than a year before, but consumer demand is weak and disinflation is still present. The cause of the market turnaround is, once again, policy. Through the recent weakness, Beijing has held off using its ‘big bazooka’ of past downturns, but policymakers have now clearly moved to coordinated stimulus. There are signs this approach is bearing fruit too, particularly the cut to China’s housing prime rate as an attempt to bolster its ailing property sector.

China is a very important part to the global economy these days, having contributed more to global growth than any country over the last decade and a half. Investors hope a stronger domestic economy will stop the spread of disinflation and allow global manufacturers to regain their pricing power. Weak demand and goods prices out of China have been a decisive factor behind lower commodity prices. Accordingly, there was an upswing in oil prices this week, and the commodity index we track gained 1.3% in sterling terms through February.

Turning commodity prices might be a hindrance for Europe, which has benefitted greatly from weaker energy prices recently. A warmer-than-expected winter has meant that European natural gas supplies were once again not tested to the limits. European stocks gained a respectable 2.9% through February in sterling terms. So far, 2024 has been a steady incline for Europe, but as we have written before, the continent stands to benefit from stronger global growth. If the European Central Bank (ECB) is able to cut rates soon (and before the Fed) and Chinese demand comes through strong, it will be a potent recipe for growth.

The UK has unfortunately not had the same positivity. The FTSE 100 ended February with a 0.7% gain, ensuring a slight decline in year-to-date returns at -0.6%. Smaller British companies in particular –  being more closely tied to the dynamics of the domestic economy – are having a hard time, with UK small-cap equities down 1.2% last month. The disparity between the UK and other markets – particularly the US – leaves UK equities with relatively attractive valuations, at least.

Growing positivity in the global economy is a welcome sign, as is the fact that returns are no longer solely focused on AI. The worry, as usual, is that this could mean returning inflation pressures and a delay in central bank easing. There is no sign of that yet, but we will keep a close eye.


Important Information

The text is taken from The Tatton Weekly and is provided by Tatton Investment Management. The information in this document does not constitute investment advice or a recommendation for any product and investment decisions should not be made on the basis of it.

Tatton is a trading style of Tatton Investment Management Limited, which is authorised and regulated by the Financial Conduct Authority. Financial Services Register number 733471. Tatton Investment Management Limited is registered in England and Wales No. 08219008. Registered address: Paradigm House, Brooke Court, Wilmslow, Cheshire, SK9 3ND.

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