The Investment Committee in charge of our Core portfolios met today to review recent market events.
February was good month for equities. Most major developed stock markets rose, although the UK being a notable exception. Emerging markets were more mixed, but Korea was a particularly strong performer, as was China, showing signs of life after a very poor period, although it would be too soon to say that it has turned the corner.
By contrast, Fixed Interest continued to struggle. For several months, bond investors have been convinced that more interest rates cuts were coming than were being indicated by central bank messaging. However, having been showing signs of doubt about their position since the start of the year, in February bond markets re-positioned and moved to be aligned with central bank rhetoric, proving that the mantra ‘Don’t fight the Fed’ is alive and well. The result was weak performance, especially in sovereigns and longer duration assets, but across the Fixed Interest market in general.
Our conversations around the macro environment were similar to those of previous months, as the path of inflation and interest rates continues to dominate investors’ thinking. Whilst every new data point is important at this stage, and moves markets in the short-term, nothing during February suggested any major change in the path of either. Therefore, we saw no reason to make any significant changes to our high-level asset allocation.
That notwithstanding, performance has varied across countries and sectors. Therefore, we decided to make some marginal changes, taking profits from those that have performed better, such as Financials and Germany, or reducing exposure where our conviction has reduced, such as Brazil. However, for the first time in many months, the conversation about China was more positive. Of course, one decent month does not mean that the concerns about the structural challenges it faces have gone away. However, with the market trading at historically cheap levels, any improvement in sentiment offers the possibility of significant outperformance. Therefore, whilst we will continue to monitor things very carefully, we have decided again to maintain our position, at least for now.
