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Monthly markets review - February 2021

March 5th, 2021 Back To News & Insights

Highlights

  • Vaccine rollout spurs US equity markets higher but inflation jitters trigger caution.
  • Mario Draghi forms Italian government
  • The UK equity market ended February in positive territory despite concerns about the prospect of higher interest rates and rising inflation.
  • China’s equity market was dampened by large internet stocks giving back some of their recent gains
  • Strong month for commodities as metals and oil prices advance

Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.

US

Increased optimism that the successful rollout of Covid-19 vaccines would speed up the US economic recovery pushed Wall Street to fresh record highs before inflation jitters prompted a partial pullback towards the end of the month.

Despite the late selling pressure all the major indexes closed higher as President Biden’s fresh stimulus package took another step forward. The US$1.9 trillion Covid-19 relief package, a measure that would provide millions of Americans US$1,400 payments and extend unemployment aid through the summer, successfully passed through the Democratically controlled House but still needs to get approval from an evenly divided Senate.

Concerns that this sizeable fiscal stimulus plan could lead to a rise in inflationary pressures took the edge of technology stocks on worries that a rise in long-term interest rates would weaken support for companies with high valuations.

Nerves over the inflation outlook unsettled US bond markets - whose returns are eroded by inflation - as ten-year Treasuries came under selling pressure, pushing yields (which move inversely to price) sharply higher.

Europe

European stocks rebounded in February as the 4Q20 earnings season kicked off in a strong fashion. A record number of companies have beaten on EPS (earnings per share) expectations thus far, with weighted earnings coming in 20% ahead of consensus, and continued evidence of profit margin expansion.

Form a sector perspective, financials and commodities sectors have seen the best EPS revisions, whilst ‘defensives’ have been the worst. Unsurprisingly then, energy and financials were the best performing sectors in the broad market. Information technology, industrials and consumer discretionary also rallied significantly. Meanwhile, utilities, real estate and consumer staples sold off sharply.

Another notable feature of the market over the month was signs of inflation making a comeback. Inflation forecasts have risen significantly following a surge in government spending combined with vast liquidity unleased by central banks. The 10-year German bund rose from -0.52% to -0.26% over the month, hitting levels last seen during the height of the pandemic.

Economic data across the region showed positive signs as the Eurozone composite PMIs rose to 48.8 (47.8 in January). There remains a stark difference in the recovery of manufacturing vs services sectors as the former rose sharply to 57.9 (54.8 in January) whilst recovery in services remains muted rising only marginally to 45.7 (45.4 in January), and remaining below all-important 50-level.

UK

The UK equity market ended February in positive territory as the swift rollout of the Covid-19 vaccine bolstered hopes of an economic rebound once lockdown restrictions end. This was supported by Prime Minister Boris Johnson announcing plans to gradually lift lockdown restrictions and reopen the economy over the next four months.

However, concerns towards the end February about the prospect of higher interest rates and rising inflation, as the broader sell-off in bonds extended to equity markets, saw the UK equity market experience its worst day for four months on the last day of the month.

Investors had grown concerned about global economies ‘overheating’ (when the rate of growth is unsustainable), given the substantial stimulus measures implemented by governments and central banks in the UK and around the world over the past 12 months. If inflation were to pick up too much, central banks could raise interest rates and potentially scale back the current stimulus measures. However, more stimulus is expected in March when the UK Government lays out its budget plans.

The market rose steadily in the first half of the month, shrugging off economic data which showed that the UK economy shrank by 9.9% in 2020, the direct result of the measures put in place to contain the spread of Covid-19. This was the largest contraction on record and took the UK economy back to the size it was in 2013.

Asia

Asian equity market performance was mixed over the month. Investor sentiment was boosted by a number of factors: a meaningful decrease in new Covid-19 cases; a faster than expected roll-out of Covid-19 vaccines; the prospects of US fiscal stimulus; and improved global growth prospects, with the large-scale reopening of economies now expected over the second half the year.

Towards the end of the month, however, expectations for faster growth and higher inflation prompted a sell-off across equity markets. Against this backdrop, the Indian equity market significantly outperformed peers as investors welcomed the growth-focused 2021 budget, which included a notable increase in capital expenditure and supply side reforms.

Elsewhere, the Taiwanese market was driven higher partly thanks to better than expected export growth, with broad-based gains in exports seen across both tech and non-tech sectors. Conversely, in China, the equity market underperformed the region as some large internet stocks gave back some of their recent gains while, at the same time, the material sector rallied on the back of a rebound in commodity prices. On the economic front, the domestic recovery continued, with encouraging levels of activity during the Lunar New Year holiday especially on the consumption side. At the same time, the People’s Bank of China confirmed its intention to maintain a prudent but flexible policy stance.

Japan’s equity market ended the month higher in local currency terms for the fourth consecutive month. Sentiment was helped by improved global growth prospects and robust quarterly corporate results, which included healthy full-year guidance. In particular, manufacturing industries achieved notable expansion, mainly led by exports.

Emerging Markets

Emerging equity markets made an encouraging start with vaccine optimism raising confidence over global growth prospects. However, most of these gains were erased as growing concerns over inflation began to unnerve financial markets. By the close, the asset class eked out a modest gain, driven by EMEA (Europe, Middle East and Africa) and Asia delivering positive returns. By comparison, Latin America ended in negative territory, dragged lower by political woes in Brazil.

While the US dollar was broadly unchanged – it lost a little ground versus the Russian rouble but gained against the Argentine peso – it was a strong month for commodity prices, particularly for crude oil and metals such as copper and aluminium. As a result, both the materials and energy sectors benefited. Cyclical stocks (this refers to companies that are better positioned to benefit from economies that are recovering) also performed reasonably well. Not all sectors finished higher, however, with healthcare and consumer staples being the weakest performers.

India and Taiwan led the gains in Asia although overall returns for the region were held back by the underperformance of China. In India the announcement of a decisively long-term growth focussed budget was favourably received. Rising exports orders, particularly for microchips, supported the advance in Taiwan’s equity market.

Higher energy prices had a positive impact on oil-exporting countries in the emerging markets region with equity markets in Saudi Arabia and Russia among the regional winners. Positive returns in South Africa were driven by basic materials and some good news on the local economy – the government expects the budget deficit (the difference between public expenditure and receipts) to narrow this year following faster tax revenue growth. Foreign outflows had a negative impact on the performance of Turkey’s equity market as non-residents reduced their holdings of local stocks.

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