Written by Anthony Walters, Clever’s Head of ESG, this timely market review offers insights into the most notable and impactful events in global financial markets over the last month.
- Global Manufacturing continues to expand
- Inflation is receding
- A strong month for European equities
February was a mixed month for markets, with the comparison benchmark for most Balanced portfolios down by 0.72%*. News of a resilient economy is certainly positive although markets have been pricing in the prospect of interest rate cuts. Ultimately, good economic news is a headwind to policymakers trying to curb inflation, which continues to run well above long-term averages.
Source: Carson Investment Research, Bloomberg 01.03.2023
The table above indicates that global manufacturing is holding ground above the key 50 level, with the highest reading in 6 months. A PMI (Purchase Managers Index) value above 50 indicates expansion while a value below 50 denotes contraction.
Some investors believe that central banks will move away from their programme of ‘monetary tightening’, yet markets digested the news that inflation could be higher for longer, meaning that interest rates could continue to rise. This, in turn, becomes a self-fulfilling prophecy as rising rates typically lead to economic contraction.
From the Bank of England, Monetary Policy Committee (MPC) member Catherine Mann said more tightening was needed and cautioned that a move on monetary policy towards interest rate cuts was not imminent, signalling that they were likely to rise again when the MPC meets in March**.
Despite inflationary headwinds, the FTSE 100 made a new record high during February, before retreating slightly and still being within 2% of the high***.
Source: ONS – ons.gov.uk, 01.03.2023
UK inflation continues to recede, with the latest annual CPI (Consumer Prices Index) increase coming in at 10.10%. This remains above both the 10-year average of 2.42% and the 2.00% target set by the Bank of England.
Since the Office for National Statistics started measuring CPI back in 1989, the long-term average inflation rate has been a much healthier 2.71%. And in over 33 years, inflation has been below that average for around 69% of the time, meaning that inflation is typically lower over the long-term****.
In addition, the Bank of England themselves expect inflation to fall quickly this year, owing to a decline in wholesale energy prices, a sharp fall in the price of imported goods and as consumer demand reduces*****.
Of the developed equity markets, European nations led the way in February with Austria, Spain and Denmark returning 5.37%, 4.41% and 4.36% respectively. Of the developed majors, the United Kingdom returned a respectable 1.94% whilst the USA returned -0.79%. Developed market laggards this month were Singapore, Australia and Hong Kong, with each returning -3.56%, -4.99% and -5.52% respectively.
Emerging markets told a similar story with European nations leading the way once more. The minors led the pack, with Czech Republic returning 12.30% for the month whilst Greece returned 10.90%. The Emerging market majors had less good fortune with Taiwan the only country to enjoy a positive return of 0.54%. China was the laggard, posting a return of -8.86% for the month. 6
Country level data is supported by fund sector performance, with European Smaller Companies in pole position, returning 3.12% for the month, whilst China/Greater China was in last place, returning -7.37%. Notably, UK Index Linked Gilts was second to last with a return of -5.59% in February. This highlights that bond markets continue to fall at the prospect of rising interest rates. In stark contrast, Sterling High Yield returned -0.47%, suggesting that the market prefers high yield/income and corporate credit as a better relative value investment in the face of ‘sticky’ inflation.
Source: FE FundInfo, 01.03.2023
To recap, the long-term average inflation rate has been much healthier at 2.71% and the Bank of England are working to return to similar low rates. Whilst inflation is higher it has short-term investment implications, however, lower inflation is much better for consumer health and societal good for the long-term. Markets progress despite inflation (not because of it) and this market review serves as an important reminder of the value of diversification. Although economic headwinds abound, ‘there is nothing new under the sun’ as we’ve encountered the same throughout history.
Sources: Anthony Walters – Head of ESG at Clever Adviser Technology Ltd (Clever), 13/03/2023. *‘Mixed Investment 20-60% Shares’ sector performance, February 2023. Carson Investment Research, Bloomberg 01/03/23. **’Turning Points and Monetary Policy Strategy’ speech by Catherine L. Mann – Bank of England, 06/02/2023. ***BBC, 03/02/2023 and Google Finance, 02/03/2023. ONS – ons.gov.uk, 01/03/2023. ****ONS, 09/03/2023. *****Bank of England, 02/03/2023. ******MSCI Indices – Performance for February 2023. FE FundInfo, 01/03/23.
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