The Month in a Minute
📰 Overall: February saw mixed performance across markets and assets, as healthy company earnings drove share prices upwards — but higher-for-longer interest rate expectations challenged bond prices.
💪 Benchmark Performance: Wealthify’s higher-risk Plan performance was ahead of industry benchmarks, with regional allocation a key driver for outperformance. However, lower-risk Plans marginally underperformed, as longer-dated government bonds struggled.
📈 Market Movers: Japan Shares (+5.2%); US Shares (+5.2%).
🗒️ Plan Summary: Plans with a higher allocation to shares performed better than those with a higher allocation to bonds.
🌍 Original Plans: Shares (+2.8%) provided healthy returns, as bonds (-1.2%) declined.
🌱 Ethical Plans: Shares (+4.1%) rallied, while bonds (-1.1%) detracted from returns.
🕰️ Going Forward: Despite another decline in February, we continue to favour bonds and remain confident in our cautious positioning. We’re optimistic that the opportunities we’ve selected could have a positive effect on Plans in 2024 (including our US bond allocation) and beyond, while also providing protection if economic conditions deteriorate.
February provided yet another reminder about the importance of diversification, as the performance of shares and bonds went in separate directions again last month.
It was largely a positive month for share markets, as encouraging earnings reports and further indications of a strong US economy resulted in gains across many regions. Notably, US share prices reached record highs again, as the exceptional performance of tech companies continued.
There was also a promising rebound in Chinese shares, following the announcement of several supportive policies by its government. However, UK shares underperformed, as recent earnings and economic data underwhelmed investors.
Bonds also struggled in February, as concerns around stubborn inflation grew. These fears – coupled with resilient economic data from several developed markets – led investors to push back their expectations of interest rate cuts to later in the year. This particularly challenged longer-dated bonds (such as the US 10-year Government Bond), which are more sensitive to these expectation changes.
Overall, last month’s outperformance of shares versus bonds benefited our higher-risk Plans, which generated meaningful returns across both Original and Ethical styles.
Nevertheless, we continue to favour bonds from a risk-reward perspective, as shares remain expensive — and therefore more vulnerable to a potential recession.
Despite these recessionary concerns, recent US data suggests its economy remains healthy for the time being, with both manufacturing and services showing signs of expansion. The labour market also demonstrated positive trends, as the US added a significantly higher number of jobs than expected (+353,000) in January, with unemployment rates dropping.
However, US inflation data was less optimistic, as January’s figure (3.1%) was higher than expected (2.9%). As a result, the expectations for interest rates to remain higher-for-longer increased — particularly after the Governor of the Federal Reserve, Christopher Waller, urged caution around hopes for rate cuts over the coming months.
Interest rates remain elevated in the US (and many other regions), and last month’s economic data showed signs of their impact on consumers, as personal spending and retail sales both declined.
Interest rates were also repriced higher in Europe, as inflation (2.8%) remained in line with the previous month. However, there were some promising developments in the region’s economy, as its manufacturing sector improved — especially in France and Germany.
In contrast, the UK’s outlook is a little more downbeat, as data indicated that its economy entered a recession in the closing quarter of last year, as well as a decline in consumer confidence. There were some signs of improvement, however, after an increase in mortgage approvals.
In addition, January’s inflation data (released last month) was also positive, coming in lower than anticipated at 4%.
Despite this, the Bank of England continues to downplay the prospect of imminent rate cuts.
Data showed that Japan’s economy was in a similar recession in Q4 of 2023, while a larger decline in household spending also painted a negative picture. Even though inflation also exceeded expectations, this is perceived as a positive sign, given Japan’s prolonged struggle with low inflation and deflation.
This could also indicate a potentially improved outlook for the Japanese economy.
Markets
US (+5.2%) and Japan (+5.2%) were the standout performers across share markets in February. US share prices were pushed higher by strong earnings (particularly NVIDIA’s) and positive sentiment towards semiconductors.
Japanese shares, on the other hand, benefited from a further weakening in the yen.
Emerging Market (+4.6%) and Asia Pacific (+4.3%) were strengthened by a recovery in Chinese shares, with investors encouraged by its governments ambitions to increase its share prices.
Europe (+1.8%) also delivered a positive return, following an improvement in economic activity.
UK shares struggled, as concerns around its economy challenged both the FTSE 100 (+0.0%) and FTSE 250 (-1.57%)
Currency
The cooling of both US and European interest rate cut expectations resulted in a strong month for the dollar and euro, which saw sterling weaken against them by -0.5% and -0.4%, respectively. Despite this, sterling appreciated versus the Japanese yen (+1.6%), as interest rates remain negative in Japan.
Investment type performance breakdown
Our large allocations to the US and Japan were able to offset losses from our similar positions in UK Mid Cap. This – combined with positive returns from other regions – saw shares contribute positive returns for Original (+2.8%) and Ethical Plans (+4.1%) in February.
However, the slight deterioration in the interest rate outlook challenged our preference for longer-dated bonds (which are more sensitive to interest rate movements). This was particularly true in the US, as bonds provided negative returns for Original (-1.2%) and Ethical Plans (-1.1%).
Summary with Plan details
The varied returns across assets resulted in mixed performance across our Plans last month. While those with a higher allocation to shares were able to generate healthy returns, Plans which tilt more towards bonds modestly declined.
Our Investment Team continue to actively monitor the financial markets and their impact on Plans — and are always ready to act in your best interests to events as they unfold. We are constantly evaluating new market information and drivers to keep your Investment Plan on track.
It’s important to remember that it’s normal for markets to go up and down, with periods of volatility to be expected when you invest.
As always, we continue to look for opportunities to position your investments, with the goal of protecting your money and achieving your long-term objectives.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Past performance is not a reliable indicator of future results.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
