February Market Digest 2023

• The optimistic start to the year had its first test in February, as inflation data showed it might be stickier than was anticipated just a month prior. Perversely, strong economic data in the US concerned investors, as the prospect of additional rate hikes from the Federal Reserve and a “higher-for-longer” rate environment outweighed the economic benefit.
• Our model portfolios are typically invested in a combination of equities and bonds. Over the month global equities fell slightly, however UK and European equities held up better as the economic picture improved somewhat (from a low base). Chinese geopolitical tensions meant Emerging Markets were one of the worst performers over the month as Chinese equities gave up some of the strong returns experienced since the removal of Covid restrictions. Equity markets overall remain up year-to-date.
• Bonds in general fell in value, as a worse outlook on future inflation lifted expectations of further interest rate hikes, pushing up bond yields. With only mild losses, high yield bonds performed strongest, owing to lower interest rate sensitivity, and remain in positive territory for the year.
• The rate hike from the BoE pushed up cash returns, but the Bank also signalled that they were approaching the end of this rate hiking cycle.
• At a portfolio level over February, UK equity and cash positions protected, as did the lower level of interest rate sensitivity in bond allocations. These positions also added value over the quarter so far, as did other “risk” assets such as global equities and high yield bonds, on the back of the improved economic outlook.

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