Monthly Comment - February 2023
In February 2023, global equities experienced a decline following a strong January, influenced by interest rate hikes by major central banks such as the Fed, ECB, and Bank of England. The US Federal Reserve's hawkish stance on inflation contributed to the drop in US equities, despite strong economic data, with concerns about potential further rate increases. Eurozone shares saw gains, particularly in communication services, financials, and industrials, but negative returns were observed in real estate, IT, and healthcare sectors. Japan's market saw a slight rise, while China's economic rebound gained momentum, boosting various sectors and commodity prices. Global government yields increased, affecting risk assets negatively, and investor speculation drove stock market rally amid warnings about economic fundamentals and liquidity concerns. Clairinvest Cosmopolitan recorded a 1.98% decline in February.
FEBRUARY 2023Global equities took a tumbled in February after a roaring start to the year in January. The economic data, on the other hand, has been remarkably resilient, indicating that we may not see a pause in the interest rate hikes that some had hoped for. It's worth noting that the Fed, the European Central Bank, and the Bank of England all raised rates last month, which likely contributed to the drop in equities.US equities took a bit of a hit as the Federal Reserve leaned more hawkish on curbing inflation through policy intervention. The policy rate may peak at a higher point, which is something to keep an eye on as we got confirmation from the Fed minutes that there's a consensus that rates may need to rise further than initially assumed to get inflation under control. On the bright side, economic data remains strong with Q4 GDP revised to 2.7% annualized. Almost all sectors of the S&P 500 were weaker, with energy being one of the weakest. Investors are keeping an eye on potential cost pressures. Technology was relatively more resilient, with chipmaker Nvidia performing particularly well after posting strong results and announcing greater involvement in artificial intelligence.Eurozone shares found their footing and posted gains throughout February, with several sectors performing particularly well, including communication services, financials, industrials, and consumer staples. However, real estate, IT, and healthcare sectors weren't so fortunate and posted negative returns. Looking ahead, the eurozone economy is showing some encouraging signs, as forward- looking data indicates that business activity is on the rise. The flash Markit composite purchasing managers' index for February climbed to 52.3, up from January's 50.3, marking the strongest expansion of business activity since last May. Meanwhile, the ECB has increased interest rates by a further 50 basis points, bringing the main refinancing rate to 3.0%. Many in the market had believed that signs of easing inflation in January suggested that the pace of hikes could soon moderate. However, preliminary data for February indicated that inflation ticked up again in both France and Spain, casting doubt on hopes of an end to rate rises.Japan's market slightly rose in February, with a total return of 0.9% in local terms. The yen weakened after Kazuo Ueda, nominee for BOJ, suggested he preferred the status quo on monetary policy. Inbound tourism saw a sharp recovery, with foreign visitor numbers back to 60% of pre-Covid levels, boosting sales for retailers, hotels and services.China's economic rebound is gaining momentum, as indicated by all the February activity indicators released. The growth is being driven by all sectors of the economy, with industry seeing a rebound in both the official and Caixin surveys. The official survey reached a new high since 2012, indicating a boost to domestic assets, equity markets, and the yuan. The rebound in Chinese appetite is also reflected in the prices of commodities such as oil and copper, which should continue to limit the speed at which global inflation falls back due to input costs. The official "services" PMI also showed a clear acceleration, indicating the vitality of household demand, which is being supported by accumulated savings. China's growth acceleration is expected to be a major driver for the global cycle in the coming months. The communication from Beijing at the annual Party Congress will be scrutinized to further fuel the rebound in confidence and short-term prospects in the country.Global government yields rose in February, causing risk assets to underperform. US credit spreads widened as markets anticipated higher rates, while European credit fared better.Investors are driving the stock market rally this year based on speculation rather than economic fundamentals. They are hoping that the Federal Reserve will provide cheap liquidity, ignoring repeated warnings to the contrary. Speculation and bubbles require significant liquidity. Economic fundamentals do not suggest the Fed will change course anytime soon. In fact, recent arguments suggest the opposite may occur. As a result, we are maintaining defensive positions within portfolios instead of investing in assets that may ultimately fail.In this context, Clairinvest Cosmopolitan is down 1.98% for the month of February.
