Good economic data and strong corporate profits took markets by surprise in February, and pushed back expectations of rate cuts until the summer. This led to an odd market bifurcation, as bonds fell on higher rates, while stocks rose on macro optimism.

UK OUTLOOK

Official figures showed the UK fell into a recession – defined as two quarters of negative growth – as high prices hit consumer spending and business activity. Pay growth was still strong, however, raising concerns about sticky inflation. This dragged down UK stocks, but our micro-cap Gresham House fund managed to eke out a positive return thanks to selecting high-quality stocks.

The Chancellor delivered the spring budget, unveiling a 2p cut to National Insurance and reducing planned increases in public spending. Despite the changes, the tax burden is still forecast to rise to 37.1% of GDP in the coming years, the highest level since the 1940s. National debt will continue to rise, but start falling as a percentage of GDP at the end of the decade.

UNITED STATES

The US economy continued to hum along. The PMI business survey showed sustained expansion, while the most recent monthly job numbers showed 353,000 jobs were created. Corporate earnings were also strong. The “Magnificent Seven” stocks – Microsoft, Apple, Alphabet, Amazon, Nvidia, Meta and Tesla – have driven the strong US performance. Five of the seven reported earnings in February, all meeting or beating expectations. Nearly three-quarters of US stocks also beat earnings expectations. Our US fund holds all of the Magnificent Seven stocks, helping it clock in a 5% gain in February.

EUROPE

European business activity ticked up in the month, raising hopes that the recent spell of weakness is over. The mild temperatures this winter will have helped, pushing down natural gas prices, and taking the sting out of inflation.

EMERGING MARKETS

China was the strongest performer of the month, after a dramatic turnaround in its stock market, which had slid on deflation and property woes for several months. Beijing cut the benchmark mortgage rate and announced stock purchases by state-owned investment firms, sending the market popping. Our Franklin China fund was our top performer of the month, rising 7%.

India’s economy powered ahead, with GDP growth bolstered by productivity improvements in both manufacturing and services. Brazil also returned to growth after stalling late last year. Houthi pirates continued to disrupt cargo ships through the Red Sea, but so far this hasn’t caused widespread supply chain problems. Both our EM bond funds bucked the wider market to post positive returns, helped my lower rate expectations in core EM countries.

JAPAN

In Japan, a weaker-than-expected GDP print put the economy in a technical recession at the end of 2023. Despite this, the weak yen – which boosts the large Japanese exporters – helped propel the Tokyo indices higher. The Nikkei 225 index hit 40,000 for the first time in early March.

SUMMARY

The importance of diversification was made clear in February, as strong gains in America offset weaker performance on this side of the Atlantic. The US is our largest single region, because it is where we can find the largest and most profitable companies. This has proved a good move in recent months, as the “Magnificent Seven” tech stocks have soared. However, it’s important not to blindly follow recent winners – just look at the US underperformance in the early 2000s – which is why we blend styles and regions to optimise risk-adjusted returns.