Market Analysis Feb 2019

In February, US equities demonstrated a positive trajectory despite no significant shifts in earnings and economic dynamics. Notably, Q4 GDP growth data, released later in the month than usual, surpassed expectations at 2.6% quarter-on-quarter but remained slower compared to Q3's 3.4% growth. Projections anticipate a further deceleration in Q1. Employment figures remained strong, and the majority of US company earnings met expectations, with 70% exceeding them. However, expectations for future earnings are predicted to decline.

February marked the end of the US government shutdown, bolstering investor confidence. Additionally, optimism surrounding the resolution of the US-China trade conflict contributed to the positive sentiment. The US postponed the imposition of escalated tariffs on $200 billion worth of Chinese goods, which were originally set to take effect on March 1st. The potential for trade conflict resolution led to an upswing in US equity markets.

While all sectors of the S&P 500 experienced growth, some sectors outperformed others. The IT and industrial sectors displayed particularly robust performance, while consumer discretionary and communication services sectors achieved more modest gains. Notably, historical performance is not indicative of future outcomes and should not be interpreted as advice to buy or sell any securities, sectors, regions, or countries.

In February, Eurozone equities exhibited growth, with the MSCI EMU index returning 3.9%. Investor sentiment toward riskier assets like equities was bolstered by ongoing US-China trade negotiations and the potential restart of the European Central Bank's targeted long-term refinancing operations. Banks and economically-sensitive sectors, such as industrials and materials, were among the top-performing sectors, while real estate and utilities sectors showed weaker performance.

Released data confirmed that the Eurozone economy expanded by a mere 0.2% in the final quarter of 2018, with Germany experiencing no growth and Italy slipping into recession. Spain recorded a growth rate of 0.7%, and France achieved 0.3%. Although the flash composite purchasing managers' index (PMI) for February increased from 51.0 in January to 51.4, the manufacturing component contracted with a reading of 49.2. Consumer confidence surveys were more optimistic, with the European Commission's flash consumer confidence survey for February indicating an increase. On the political front, Spain's prime minister called for a snap election scheduled for April 28th after the parliament failed to approve the 2019 budget.

In spite of positive performance during the period, UK equities lagged behind their global counterparts due to the strengthening pound, attributed to growing hopes of a managed Brexit process. Domestically focused sectors extended their recovery, supported by better-than-expected data.

While the UK labor market remained robust and nominal wage growth stayed strong, the broader economic slowdown in Q4 2018 raised concerns. Despite a drop in UK inflation to a two-year low in January and a strong rebound in retail sales from a poor December, Brexit uncertainty weighed on business investment, leading to a sharp economic deceleration in Q4 2018. Real GDP growth decreased from 0.6% in Q3 to 0.2% in Q4, falling below the projected 0.3%. The 2018 GDP growth of 1.4% marked its weakest rate since 2013.

Responding to these concerns, the Bank of England adjusted its growth forecasts in the latest Inflation Report. It revised down its annual average GDP growth projections for 2019 from 1.7% to 1.2% and for 2020 from 1.7% to 1.5%, raising apprehensions about the first half of 2019's outlook.

In February, the Japanese stock market maintained its recovery momentum as worries over a global slowdown eased. The market gradually climbed throughout the second half of the month, ending with a 2.6% gain. Following a pronounced strengthening at the close of 2018, the yen started weakening again.

The corporate results season concluded by mid-February, with predominantly negative interpretations, though the balance of earnings surprises leaned only slightly towards the downside. Nonetheless, negative reactions in share prices were muted, suggesting that much of the setback had already been priced into stocks. While some companies witnessed fundamental decline, the domestic outlook remained relatively steady, with external factors, particularly the slowdown in China, accounting for most negative surprises, especially in the automotive and tech sectors.

During the month, preliminary estimates for Q4 2018 GDP growth were released, indicating a slightly slower recovery from Q3's weakness due to natural disasters. However, other short-term economic data generally disappointed, with statistics on industrial production and housing falling short of expectations. Inflation levels remained stable, and the outlook for the year remained relatively positive.

In Asia ex Japan, equities extended their gains in February, showcasing mixed performance across the region. Positive advancements in US-China trade negotiations buoyed markets in Hong Kong, Taiwan, and China. MSCI's decision to enhance the weighting of China-listed shares in its benchmark indices further boosted Chinese stocks. Nevertheless, China's official PMI declined to a three-year low in February, marking the third consecutive month of contraction.

Indian stocks trailed amid escalated tensions with Pakistan following a deadly attack in the disputed Kashmir region. In response to slowing economic growth and reduced inflation, the Reserve Bank of India lowered its benchmark interest rate by 25 basis points to 6.25%. South Korean equities declined as the US-North Korea summit concluded without an agreement on denuclearization.

Recent outperformers in ASEAN markets experienced declines, with Indonesia facing the most significant setback due to steep drops in the consumer discretionary and materials sectors. However, Indonesia's economy expanded by 5.18% year-on-year in Q4 2018 due to robust consumption, investment, and government spending. The Philippines and Thailand also experienced declines.

During February, government bond yields experienced an upturn, leading to a decline in prices as market conditions favored riskier assets. This positive shift was influenced by the more dovish rhetoric from Federal Reserve Chair Jerome Powell and an optimistic outlook for US-China trade negotiations. Minutes from the European Central Bank's policy meeting indicated preparations for a new cost-effective loan program for banks, similar to the targeted long-term refinancing operations introduced in 2016.

UK gilt yields observed a notable increase later in the month due to mounting expectations of avoiding a "no-deal" Brexit and extending the deadline

UK gilt yields observed a notable increase later in the month due to mounting expectations of avoiding a "no-deal" Brexit and extending the deadline. Meanwhile, on the European mainland, Bund yields saw a minor uptick. Despite heightened political risk in Spain following the announcement of a snap general election, Spanish 10-year yields decreased by two basis points. However, Italian 10-year yields rose by 16 basis points.

Corporate bonds delivered positive total returns and surpassed government bonds, with high yield corporate bonds particularly excelling. Within the investment-grade category, Europe stood out, and sectors sensitive to economic conditions, such as automotive and capital goods, generated favorable returns.

US-dollar denominated emerging market (EM) government bonds rose, while local currency bonds experienced declines due to pressure on certain EM currencies stemming from idiosyncratic factors. Conversely, EM corporate bonds demonstrated strong performance.

Global equity markets sustained their upward trajectory in February, with the MSCI World index gaining 3.0% in US dollars. Convertible bonds also enjoyed a robust month, rising almost in tandem with equities. The Thomson Reuters Global Focus index increased by 2.4% during this period. The US region's valuation became pricier due to the equity rally, while Japan and Asia ex Japan maintained a discount relative to fair value.