CI Associates
momentum

Global Matters | Monthly

Market review & outlook February 2024

Equity markets continued to surprise on the upside with a gain in February of 4.2% in developed markets (MSCI World index) and 4.8% in emerging markets (MSCI Emerging Markets index). MSCI World has returned 11% so far this year, 23% since the current surge in markets started in late October 2023, and 44% since the low point of this cycle in mid-October 2022. The US has led the way, with returns very similar to the World index, unsurprisingly given that the US market capitalisation now represents over 70% of the world developed markets total.
While the Magnificent 7 grabs all the headlines and outpaced the S&P 500 in February with a return of 8.2% versus 5.3% for the broader market, some of its 7 constituents are not direct beneficiaries of the AI boom which has driven most of the spectacular returns in markets over the past year. Tesla and Apple are struggling with the tough China market and in Tesla’s case from the growing competitive threat of cheap Chinese Electric Vehicles flooding the global market. Their share prices have fallen this year, while two of the megacap tech stocks have driven returns, with big beats on earnings announced in February: Nvidia is up by 60% YTD to end February and Meta by 38%, adding a combined $1tn or about 2.5% to the capitalisation of the whole market.
Although the US dominates global markets, and its major indices reached all-time highs at the end of February, it is by no means the only market performing well. Japan has outpaced it this year with a return of 13.1% YTD, including 4.9% in February (in yen terms), and the Nikkei index finally broke through its previous high of December 1989, a 34-year long salutary reminder of the dangers of riding a speculative, liquidity driven market bubble leading to outrageous valuations. The broader Topix index in Japan remains 7% below its 1989 high, but with valuations still relatively attractive and Japan’s corporate sector focussed increasingly on shareholder returns while reaping the benefits of sustained yen weakness (at its lowest level against the dollar since 1990), we expect further outperformance.
Other markets also reached new highs, including Germany, perhaps surprisingly given that the German economy faces considerable challenges and has endured seven consecutive quarters of near-zero growth. The only notable underperformer was the UK, broadly flat in the month, YTD and over 12 months, in the face of a struggling economy and persistently high inflation. With improving prospects ahead, some of the valuations now available offer particularly attractive opportunities.
Emerging markets have suffered a three-year period of sustained underperformance against developed markets, primarily due to China’s woes, but the 8% recovery in China’s market in February, helped by additional stimulus measures by the authorities and State sponsored buying of equities, along with tentative signs of stabilisation and recovery in the economy, point to the potential for improved performance, if not an inflection point, supported by attractive valuations now on offer.
In contrast to equities, bond markets weakened as central banks pushed back on early rate cuts as core measures of inflation remain too high and economic activity is proving resilient. Market expectations of the Federal Funds rate at the end of 2024 moved from 3.75% at end December 2023 to 4.5% at the end of February, the additional 75bps bringing market implied rates in line with the Fed’s latest median forecasts, with most of that move taking place in February. Bond yields reacted accordingly, 2-year Treasury yields rising by over 40bps in the month and 10 year yields by 34bps. Similar moves were seen in Europe and the UK. Over the month the JP Morgan Global Government Bond Index (GBI) returned -1.5%.
US yields rise YTD