Market Analysis Feb 2021

February started with turbulence for US equities amid apprehensions that a rapid economic resurgence might prompt policy tightening, causing ripple effects from the bond market to the equity arena, particularly within the tech sector. However, these concerns waned, leading to a market rebound and concluding the month with gains. Sectors closely tied to the economic cycle, including energy, financials, and industrials, outperformed, whereas traditionally defensive sectors like utilities and consumer staples lagged. It's imperative to note that historical performance isn't indicative of future results, and this information is only intended for illustrative purposes, not constituting investment counsel.

February saw Eurozone stocks climb, primarily driven by robust showings in undervalued sectors such as banks and the energy domain. Meanwhile, defensive segments, including utilities and real estate, grappled with challenges. The Eurozone's annual inflation rate held steady at 0.9% in January, while the region's GDP contracted by 0.6% in Q4 2020. Mario Draghi, the former European Central Bank chairman, received parliamentary approval to lead a new government in Italy.

The UK equity market sustained its sturdy performance in February, recovering from its initial pandemic-induced underperformance. Progress on the vaccine rollout underpinned the market, with domestically oriented and undervalued sectors demonstrating strong performance.

Japanese equities commenced February with an early rally but later experienced a slight retreat. The market witnessed some rotation away from growth stocks and was led by lower-quality factors, with smaller enterprises lagging. The state of Covid-related emergency was set to be lifted in early March, and the vaccine rollout commenced following regulatory nods in mid-February. Strong corporate results prompted upward revisions to projections and heightened expectations for a comprehensive earnings recovery.

Simultaneously, Asia ex Japan equities reported modest gains, propelled by headway in the global vaccine rollout and prospects of US fiscal stimulus. Nonetheless, concerns over burgeoning inflation prompted a sell-off towards the month's end. India claimed the top-performing position, buoyed by sentiment stemming from the Union Budget announcement. Hong Kong and Taiwan also surpassed the index, supported by robust performances in IT stocks. Conversely, China concluded in negative terrain due to weakness in internet stocks, while Pakistan marked the weakest index market.

In terms of fixed income, late February witnessed a substantial sell-off in government bonds, subsequently leading corporate bonds to outshine their government counterparts. Government yields had already been climbing on the anticipation of substantial US fiscal stimulus. However, they surged further towards the month's close due to lackluster demand during a US Treasury bond auction, propelling the US 10-year Treasury yield up by 36 basis points (bps) to 1.43%. Italian government bonds outperformed German bonds following Mario Draghi's appointment as prime minister. Conversely, the UK 10-year yield soared by 49bps to 0.82%, driven by the UK's swift vaccine rollout and easing of lockdown measures.

Corporate bonds, especially high yield bonds, overshadowed government bonds in terms of performance. Investment grade bonds sustained negative total returns due to the global yield sell-off. Conversely, emerging market (EM) bonds observed an overall dip, with EM sovereigns underperforming EM corporate bonds. Nonetheless, EM high yield reported positive returns. EM currencies weakened in the final week of the month, primarily due to the surge in US Treasury yields.

The Refinitiv Global Focus index, measuring balanced convertible bonds, outperformed the MSCI World equity index, registering a 3.1% gain compared to 2.6%. As demand for convertibles surged, valuations escalated, rendering the overall asset class somewhat expensive. However, the technology sector's dip led to a decrease in the previously elevated valuations of US convertibles.