February 2024 Commentary

February was a strong month for risk assets, with several major equity indices reaching record highs where continued excitement around artificial intelligence (AI) played a significant role in steering market dynamics. The “Magnificent 7”, a group of technology and AI-related stocks, posted their best performance in nine months and among them, Nvidia stood out, surging by 28.6% following strong underlying earnings growth.

The month was not without it challenges though, particularly in the commercial real estate and regional banking sector which came under scrutiny at the beginning of the month. Concerns surfaced within New York Community Bancorp after they reported losses on the 31 January that were driven by expected loan losses in commercial real estate. Although seemingly isolated at present, it has raised the prospect that the full impact of higher interest rates may be yet to materialise, particularly given the substantial debt that needs refinancing over 2024 and 2025.

Despite these concerns leading to a degree of volatility, investors remained glass-half-full, after a promising jobs report revealed strong payroll growth in the current month, as well as positive upward revisions in the two previous months, allowing them to revel in the prospect of broader economic resilience. Of course, with one eye squarely focused on growth dynamics, the other invariably latched onto the latest developments within the inflationary landscape. It was here where investors broke poise slightly, as a hotter-than-expected reading forced some to rethink their projected path for interest rate cuts. The result having negative implications for the bond market, where climbing yields led to some capital loss.

In terms of market returns, global equities (+4.7%) were positive in February, however there was a large variation across regions. Japan (+5.5%) and the US (+5.3%) were by far the best performing areas as both regions saw their primary stock indices reach all-time record highs. The UK (+0.7%) finished the month in positive territory, but with returns far more muted in comparison. In terms of equity styles, growth stocks (+6.0%) outperformed value (+2.6%), and small-cap stocks (+3.3%) lagged large caps (+4.7%). This was reflected in sector performance, with consumer discretionary (+7.9%) and information technology (+6.2%) the strongest two sectors, while utilities (-0.4%) lagged significantly.

Fixed income markets were also mixed, with higher quality government bonds underperforming the lower quality credit space. The higher-than-expected inflation reading pushed back market expectations for rate cuts and forced bond yields to rise, meaning that the global aggregate bond index fell -0.7% over the month. Strong macro data dominated the narrative on the credit side however, meaning that the risker global high yield (0.5%) was positive over February.

In the real assets space, both global real estate (-0.4%) and global infrastructure (+0.0%) underperformed, reflecting their sensitivity to rising interest rate expectations. Commodities displayed mixed performance over the month, such that whilst the broad index was negative (-1.5%), there was significant divergence within the index. Picking out the highlights, crude oil (+2.9%) rose sharply on the back of developments in the Middle East, whereas agriculture (-4.4%) finished the month in negative territory.