Monthly Markets Review – February 2020
A review of markets in February when stock markets fell
sharply amid worries over the spread of coronavirus.
- Concerns over the spread of coronavirus and its
potential impact on global growth dominated financial markets in February.
Equity markets fell sharply and government bond yields were broadly lower
(meaning prices rose).
- US shares fell with the energy and financials
sectors leading the decline. Earlier in the month, the S&P 500 had set a
new record high on robust jobs data.
- Eurozone equities also experienced a sharp fall
amid concerns that the impact of coronavirus could send the fragile eurozone
economy into recession. Data showed that German GDP saw zero growth in Q4 2019.
- UK and Japanese equities also declined. Japanese
Q4 GDP growth disappointed, while UK data showed an improvement in economic
growth in December.
- Emerging market (EM) equities also lost value
but outperformed developed markets. Chinese shares saw a small gain for the
month as coronavirus infection rates in the mainland appeared to stabilise and
some activity indicators started to improve.
- Government bonds performed well as investors
sought out assets perceived to be lower risk. Government bond yields declined
markedly (meaning prices rose), with US 10- and 30-year Treasury yields hitting
record lows.
Please note any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
US
US equities actually began the month strongly. Indeed, the
S&P 500 Index set a new record high on robust economic data and President
Trump’s acquittal in the final impeachment vote. However, a rising number of
coronavirus cases – including in the US itself – prompted one of the sharpest
US stock market sell-offs in history later in the month.
Employment data in particular was strong. Non-farm payrolls,
which measure job creation outside the farming sector, showed that 225K jobs
were created in January and wages edged up 0.1% (year-on-year) to 3.1%. US
unemployment did tick up from 3.5% to 3.6%, but remained near a 50-year low.
The increase was due in part to a pick-up in the labour participation rate from
63.2% to 63.4%.
Even so, concern over supply chain disruption and economic
growth sent shares lower by month end. Amid a broad market sell-off, all areas
of the market were lower, with energy and financials among the hardest hit.
Utilities – traditionally more defensive – also struggled. Real estate and
healthcare suffered less dramatic declines but still fell.
Eurozone
Eurozone equities experienced a sharp fall in February with
coronavirus worries weighing on shares. The MSCI EMU Index of large eurozone
companies returned -7.9%. There were concerns that the coronavirus and its
impact on travel and business activity could send the fragile eurozone economy
into recession. Data showed the eurozone economy grew by just 0.1% in Q4 2019
with zero growth in Germany.
Sectors that are most reliant on economic growth, such as
materials and industrials, were the weakest. Less economically-sensitive
sectors such as utilities and healthcare proved more resilient. With companies
releasing their annual results, coronavirus worries began to dominate outlook
statements. Brewer AB InBev stated that the outbreak of coronavirus has led to
a significant decline in demand in China in the first two months of 2020.
In response to the coronavirus worries, European Central
Bank President Christine Lagarde said the central bank is monitoring the
situation. She added that the crisis is not so far having a lasting impact on
inflation and so does not require a central bank response as yet. In early
March, the Italian government announced a €3.6 billion stimulus package to
mitigate the impact of the outbreak.
UK
UK equities fell over the period. In line with the wider
trend, economically sensitive areas of the market underperformed, most notably
the commodity sectors of oil & gas and basic materials. However, all areas
– internationally and domestically exposed – sold off sharply.
The latest round of economic data and indicators of future
UK economic activity pointed to ongoing recovery following the decisive general
election result in December 2019. The latest monthly GDP data revealed the
economy grew by 0.3% in December, suggesting a recovery in activity post the
election, up from -0.3% month-on-month in November. The Office for National
Statistics (ONS) also reported that UK retail sale volumes had increased by
0.9% in January, bouncing back from falls in the previous two months.
The preliminary estimate of the IHS Markit/CIPS composite
purchasing managers’ index (PMI) for February was unchanged from January’s
reading of 53.3, holding above the 50 mark. The PMI is a survey of companies in
the manufacturing and services sectors; a reading above 50 indicates expansion.
A number of other forward looking surveys also pointed to further improvement
in business and consumer confidence as well as better sentiment in the UK residential
housing market. It is worth noting that these forward looking indicators
published in February were based on surveys conducted before the global
coronavirus crisis escalated.
Japan
The Japanese market fell 10.2% in February. Almost all of
the decline occurred in the last four days of the month amid an increase in
perceived risk surrounding the spread of coronavirus. During those four days,
the Japanese yen appreciated sharply, fulfilling its traditional role as a safe
haven at times of uncertainty. Immediately prior to this, however, the yen had
actually weakened almost as sharply, with no obvious driver.
The initial Q4 GDP estimate released on 17 February was much
weaker than consensus expectations. Even allowing for the consumption tax
increase and the major typhoon, which hit Japan in October, this was a poor
data point. There has also been some milder disappointment on recent inflation
statistics and there is, so far, little sign of any upwards pressure on overall
wages in the official statistics. . The spring wage negotiations with major
companies are currently being led by relatively low demands from unions.
In the short term, the improving trend in earnings
revisions, which had been playing out as expected in January, reversed abruptly
in February. In economic terms, the disruption from coronavirus is likely to be
transitory. As we approach the end of the fiscal year for most Japanese
companies, however, there are multiple reasons for companies to be extremely
cautious in their forecasts for 2020.
Asia (ex Japan)
Asia ex Japan equities were down in February as the spread
of the coronavirus outside China increased concerns over the impact on regional
and global growth. US dollar strength also acted as a headwind to returns.
Within the MSCI Asia ex Japan index, Thailand and Indonesia
were the weakest markets. In Indonesia in particular, currency weakness
amplified negative returns. During the month the central bank cut its headline
interest rate by 25 basis points (bps) to 4.75% in an effort to mitigate the
potential impacts from the coronavirus. The South Korean market also saw a
sharp decline as the number of COVID-19 cases accelerated rapidly in the second
half of the month; Korea now has the largest number of cases outside China.
India and Malaysia also lost value and underperformed. In Malaysia, the
unexpected resignation of Prime Minister Mahathir Mohamad also contributed to
uncertainty.
By contrast, China recorded a positive return. Taiwan and
Hong Kong finished in negative territory but outperformed the Asia ex Japan
index.
Emerging markets
Emerging market equities fell in February as coronavirus
concerns put shares under pressure. US dollar strength was also a headwind to
returns. The MSCI Emerging Markets (EM) Index decreased in value but
outperformed the MSCI World.
Within the MSCI EM Index, Turkey was among the weakest
markets as tensions with neighbouring Syria increased. An airstrike in Syria
killed more than 33 Turkish troops in February. Russia lagged behind the index
as crude oil prices fell sharply, weighing on the rouble. South Africa and
Brazil, where currency weakness also amplified negative returns, both
underperformed. India, where the Union Budget disappointed, and Malaysia also
lost value and underperformed. In Malaysia, the unexpected resignation of Prime
Minister Mahathir Mohamad added to uncertainty.
By contrast, China recorded a modest gain as coronavirus
infection rates in the mainland appeared to stabilise and some activity
indicators started to improve. Taiwan, where the spread of the new coronavirus
has so far been more limited, and Egypt were the only other countries to
outperform.
Global bonds
The spread of the coronavirus resulted in large declines in
riskier assets such as shares in February, as fears of a global recession
mounted, while government bonds performed well. The final week of the month
proved particularly painful for riskier assets; for some it was the worst week
since 2008. Government bond yields declined markedly (meaning prices rose),
with US 10- and 30-year Treasury yields hitting record lows.
The vast majority of coronavirus cases have occurred in
China, where significant areas remain effectively in lockdown. While the number
of new cases in China showed signs of peaking, the virus began to spread across
borders. There were outbreaks in South Korea, Italy and Iran, and confirmed
cases in every western European country as well as in the US, raising concerns
of a possible global pandemic.
The US 10-year bond yield dropped to 1.15%, down from 1.51%,
while the 30-year yield dropped from just over 2% to 1.67%. The 10-year German
government bond yield fell to -0.61%, from -0.44%, and the UK’s 10-year bond
yield fell to 0.44% from 0.52%. Meanwhile, the Italian 10-year yield increased
from 0.92% to 1.13% and Spain’s rose from 0.23% to 0.28%, selling off in the
final week of the month.
Investment grade corporate bonds were to some extent
cushioned by falling global yields, but substantially underperformed government
bonds. High yield corporate bonds were weak, with US energy hit particularly
hard, given the sharp fall in oil prices. Investment grade bonds are the
highest quality bonds, as determined by a credit ratings agency, while high
yield bonds are more speculative, with a credit rating below investment grade.
Emerging market bonds declined, with currencies falling
sharply against the US dollar, although hard currency investment grade
government and corporate bonds produced positive total returns. Higher yielding
government bonds fell markedly, while the Russian rouble, Brazilian real and
Indonesian rupiah were among the weaker EM currencies.
With shares under pressure, convertible bonds provided
investors with effective protection from losses in February. Convertible bonds,
as measured by the Thomson Reuters Global Focus index, finished the month with
a loss of -1.4% in US dollar terms. In line with the market sell-off,
convertible bond valuations cheapened, most significantly in US names.
Commodities
Commodities were firmly lower as concerns over global
economic growth continued to mount. The energy component was the main
contributor to negative returns. Brent crude oil posted a double digit decline
as the demand outlook further deteriorated. In agricultural commodities, cotton
recorded the largest decline. Precious metals also lost value, with gold and
silver both moving lower. Industrial metals posted a more modest decline. Zinc
and nickel were notably weak but copper recorded a small gain, following a
sharp sell-off in January.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested.
