The big story in February was rising bond yields, as the market priced in higher growth, higher inflation, and eventually higher interest rates. As investors sold bonds, bond prices went down, and bond yields went up. The 10-year US Treasury, which is considered the “risk-free” benchmark rate, hit 1.5%, triple what it yielded last summer.
Higher bond yields make other assets less attractive by comparison, so the impact rippled out into stock markets. It hit “growthy” assets like tech stocks the hardest, because they have the bulk of their profits far in the future.
The pound surged on hopes that the UK’s rapid vaccine rollout will help the economy reopen by the summer. While retail sales fell sharply in the month, as expected given the lockdown, other areas were resilient. Surveys showed manufacturing activity expanding, while service activity held up better than expected. To capitalise on the vaccine boost we switched some of our European weighting to the UK.
UK government bonds, known as gilts, fell on fears of higher inflation. We had already trimmed our gilt funds at the start of February, and continued to do so in early March, reducing our interest rate risk.
America was the biggest driver of inflation fears, as Biden battled to get his $1.9 trillion stimulus proposal through Congress. The package is on top of last year’s stimulus, which helped consumers squirrel away $1 trillion of spare cash. As the world’s largest economy recovers, rocketing US demand could create supply chain backlogs around the globe. Nevertheless, Treasury Secretary Janet Yellen reiterated her support, saying she was more worried about unemployment. In early March we trimmed our exposure to US Treasuries to limit the interest rate risk.
Cyclical stocks, such as oil and banks, did well on hopes of a vaccine-driven reopening, which lifted oil prices and steepened yield curves. The Russell 1000 Value index rose 5.8% while the Russell 1000 Growth index fell -0.1%. In response, we are trimming our holding in the US-dominated technology tracker and deploying the proceeds into cheaper areas of the UK and Europe, where we see better value.
The EU’s vaccine rollout has lagged that of Britain, which could cause the continent’s economy to experience a more prolonged lockdown. Therefore early in February we switched some weight from European stocks to UK ones, which should benefit from the better vaccine programme.
Mario Draghi became prime minister of Italy. His immediate priority will be the vaccine rollout, but longer term he intends to tackle Italy’s lacklustre growth and yawning deficit. As a former ECB chief, he is a market-friendly choice, who is seen as a safe, pro-EU pair of hands. Draghi’s appointment is good news for our European funds; for example, our Man GLG fund has one of its largest positions in Ferrari, the Maranello-based supercar maker.
China’s economy continues to bounce back, but there are concerns that Beijing may take action to dampen Chinese house prices, which have soared over the last year. The renminbi climbed in the month, driven by the gap in economic growth rates between China and the rest of the world. Meanwhile, the fortunes of the Middle East look on firmer ground, thanks to oil prices rising to pre-Covid levels. The rise will also benefit South America and Russia. In our Tactical portfolios, we used the opportunity to increase our allocation to Emerging Markets.
Japan’s Nikkei index topped 30,000 for the first time since 1990, just after the country’s asset bubble popped. While Japan’s economy has emerged relatively well from the pandemic, in early March we used the opportunity to bank gains by trimming our Japan tracker fund in the Tactical portfolios.
Inflation is likely to rise this spring, as the recovery takes hold and the base effect of last year’s low oil prices magnifies the reading. We believe the effect will be transient, however, and unless bank lending picks up then central banks will likely look through the figures. Therefore, we have adjusted portfolios to minimize short-term risks, but maintain our conviction that high-quality stocks will deliver the best returns in the long run.