Market commentary - February 2024

Global share markets generally fared well during the month, with some areas hindered by fading expectations of earlier interest rate cuts and others benefiting from positive growth news.

| 8 min read

Share markets moved higher over the course of February, though there was significant divergence across different sectors and geographies. Some areas were hindered by fading expectations of earlier interest rate cuts, and were pegged back in sympathy with bond markets, while others benefitted from positive growth news.

Once again it was a large tech stock at the vanguard of new US market highs with chipmaker Nvidia, part of the “magnificent seven” US technology cluster, reporting strong fourth-quarter revenues and earnings that smashed investor expectations.

Tech titans increase global market concentration

The further surge in value of the US tech giants above and beyond almost everything else has reignited fears of market ‘concentration’ reminiscent of the turn of the millennium, when a tech bubble subsequently exploded, and the late 1920s when stock market fervour ultimately led to the Wall Street Crash and the Great Depression.

That the largest seven US companies now account for around 20% of the entire global stock market is certainly pause for thought, and history may tell us we should be worried, but today’s conditions have little else in common with these periods. There remains a healthy scepticism in some quarters, and few signs of excessive investor speculation. Moreover, this group of companies are established, very profitable, and potentially contain some of the big winners from artificial intelligence or other avenues of growth. For sure, their shares are expensive in relation to their earnings, and are vulnerable to growth falling short of expectations, but it’s hard to argue investors have lost touch with reality.

The magnificent seven shares are also now showing more dispersion with one another in reaction to earnings and other news, a healthy sign that investors are not treating them as a single block. Tesla, for instance, has been a notable laggard in recent months, and Apple shares have also fallen since the start of the year. This reinforces our view that there will be both future winners and losers among this band of stocks. Each has different growth drivers as well as their own fragilities and uncertainties.

Bigger in Japan

While investor interest has increased been drawn to the US tech giants, another market has quietly shown how being contrarian and showing considerable patience can also lead to strong investment returns. The Japanese Nikkei 225 Index recently passed its December 1989 peak, at last eclipsing a monumental stock market and property bubble and subsequent lost decades as it deflated.

There are several reasons behind the market’s renaissance. Banishing a vicious cycle of deflation has been important to the domestic economy, and many of the nation’s large exporters have benefitted from the weak currency – brought about through continued low interest rates – making products highly competitive on the global stage.

Perhaps even more important has been the actions of companies themselves. Initially slow to transform, many Japanese corporates have embraced governance reforms that have improved efficiency and increasingly prioritised shareholder returns, a factor that has increasingly drawn the attention of global investors.

Ongoing signs of weakness in China’s recovery and a slowdown in the US present potential headwinds to Japan, as do shocks from energy prices, perhaps driven by an escalation in geopolitical events. Yet the shift to moderate inflation and its impact on spending and investment decisions by households and businesses, combined with further steady progress in governance reforms, stand to support the market, especially given the scope for global investors to continue to rebalance their historically light exposure.

Enter the dragon: Chinese shares rebound

There was a welcome bounce for beleaguered Chinese shares as the nation commenced its Year of the Dragon.

Beijing increased support for the troubled property sector, making its biggest-ever cut to a key mortgage reference rate, and the first since June. However, there are expectations more aggressive action to support the economy will be needed.

Separately, there have been measures directed at restricting the selling of shares, clamping down on investors ‘shorting’ the market – aiming to profit from falls. This may offer some support in the short term but risks longer-term damage to investor confidence that market rules are inconsistent and can be changed without warning. Time will tell then whether this month’s short-term upturn can be extended. Geopolitical tensions and growing state intervention in the economy have continued to weigh on foreign investor sentiment, and there are reports many asset managers are favouring emerging market exposure that reduces or even excludes China in portfolios.

One ray of hope comes from the forthcoming National People’s Congress where policymakers will set a new growth target, which will almost certainly be in the region of 5%. The economy just about managed to achieve this rate over the past year, but going forward it appears ambitious given the issues in the property market and resultant hesitance of the Chinese consumer. It implies some new policies and stimulus directed at supporting industrial growth and infrastructure spending will be needed, both to provide fresh economic impetus and to boost ailing investor sentiment.

UK recession confirmed, but outlook a little brighter

Data released during the month showed the UK sank into a technical recession in the second half of 2023, although future revisions to the numbers may change things. As it’s currently estimated, the economy shrank by 0.3% in the three months to December and by a mere 0.1% in the three months prior. Yet the overall trend is more important, and the economy has essentially flatlined for the past two years.

There is hope an improvement in sight. January’s retail spending was strong, and most economists expect consumer confidence and therefore spending to keep rising as wage growth outpaces inflation. Bank of England Governor Andrew Bailey indicated that he thought recession was now behind us and that signs of an upturn were starting to appear.

The Chancellor, Jeremy Hunt, will have wanted a stronger backdrop, though, as he unveils the Budget next week amid higher government borrowing costs and a weary electorate troubled by a higher tax burden and the escalating cost of living. It promises to be more limited than last year’s autumn statement, which included a 2p reduction to National Insurance. Yet Mr Hunt may unveil some measures directed at growth and relieving some of the pressure on workers and investors.

For UK shares, a catalyst for better performance remains elusive. There are high dividends on offer in many parts of the market, and with companies also increasingly buying back their own shares at low valuations, which has the effect of increasing shareholder value, there is some support to prices. Several smaller companies have also recently been approached for by overseas, private equity or trade buyers looking for a bargain, a trend that stands to reward shareholders in these businesses in the short term as bids boost share prices, but potentially removes good quality companies from the market if the takeovers go ahead.

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 2024:

Top performing funds:

Bottom performing funds:

Top performing sectors:

Bottom performing sectors:

The value of investments can fall as well as rise. Investors may get back less than invested. Past performance is not a reliable indicator of future returns. Figures are shown on a % total return basis, bid to bid price with net income reinvested; Source: FE Analytics, data for February 2024: 31/01/2024 to 29/02/2024. Onshore and retail open-ended funds only.

*There are several thousand funds on sale in the UK. The Investment Association divides these into about 45 sectors, broad groupings that help investors and advisers compare funds of similar types before looking in detail at individual funds.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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