Share markets were mixed in February while bonds mostly fell. Investors, having been overly optimistic on prospects for falling interest rates, have now shifted their thinking more in line with the US Federal Reserve’s stated view that rates will stay higher for longer. That has dampened enthusiasm for assets across the board, though some areas bucked trend. Notably, the FTSE 100 hit a record high of over 8,000 points, lifted by bumper results from oil companies that have benefitted from soaring energy prices.
US economy powers on
Strong data from the US economy – especially in terms of employment and the service sector – would normally be pleasing news for investors, but the dominant factor governing sentiment is when central banks, notably the US Federal Reserve, will implement a ‘pivot’ to lower interest rates – having hiked them aggressively over the past year. This would ease financial conditions and make any much-anticipated downturn shallower. Better economic data is a signal of more stubborn inflation and a more aggressive Fed.
Nonetheless, the pace of any interest rate rises in the US will likely be much smaller and more infrequent that seen in 2022. Higher interest rates are having an impact and inflation should fall away over the course of the year. Although the risk of outsized inflation for a little longer has grown, markets may have moved a little too far in their doubts that central bank monetary policy has it under control.
A mixed picture for shares
Against this backdrop, the top performing funds over the month were an eclectic bunch, ranging from more value-orientated strategies to technology and growth funds. The latter were buoyed by Meta Platforms (formerly Facebook) which reported better than forecast revenue for its fourth quarter earnings report, as well as chipmaker Nvidia which was supported by interest in artificial intelligence services.
Meanwhile, UK funds were supported by improving sentiment. The FTSE breaking new highs may not make much sense on first inspection with the UK economy perilously close to recession and gloomy headlines dominating the news. Yet many of the UK’s heavyweight companies are largely unrelated to the domestic economy. Instead, energy and commodity powerhouses, global banks and pharmaceutical giants ply their trade on the international stage. Overall, around three quarters of FTSE 100 earnings are from overseas.
What’s more, these ‘old economy’ areas are now back in vogue having had a sustained period in the investment wilderness. While the technology sector and growth stocks dominated for a decade prior to end of 2021, the transition to an environment of significantly higher inflation has shifted investor attention to a variety of industries and companies that might stand up to an era of rising prices and resource constraints.
Geographically, the picture was less mixed. It was largely an East-West divide with Japan and Asia losing ground and China in particular weighing as a Covid re-opening bounce in January subsided. In Europe, some decent company results lifted the prevailing mood, mainly from financials with solid earnings reports from banks due to an improvement in interest income. Meanwhile, German engineering and technology group Siemens reported good revenue growth, beating analyst expectations, showing it is not all doom and gloom on the continent.
Although investors should be aware past performance is not a reliable indicator of future results, here are the top and bottom ten Investment Association (IA) funds and sectors* for February 2023 in full:
Top 10 funds:
Bottom 10 funds:
Top 10 sectors:
Bottom 10 sectors:
The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable guide to future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for February 2023: 31/01/2023 to 28/02/2023. Onshore and retail open-ended funds only.
*There are several thousand funds on sale in the UK. The Investment Association divides these into 45 sectors, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.
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