February 2023 monthly investment review

Eurozone and Emerging Market stocks have outperformed as optimism has rebounded after a poor December 2022.

The reopening of China, following the abandonment of the zero-COVID policy, along with better-than-expected economic data has fuelled the rally. A milder than forecasted European Winter has also reduced energy demands which manifests into lower inflation.

More growth orientated sectors have benefited on a relative basis. Eurozone bonds also saw positive gains as inflation fears eased once again. Whilst the outlook for risk assets has brightened somewhat, leading indicators continue to suggest that there will be a significant slowing of economic activity. Whether a recession can be avoided entirely remains to be seen.

Major central banks will persist with monetary tightening throughout the first half of this year, but markets have been comforted that the end may well be in sight. The Bank of Japan remains under pressure to abandon its ‘yield curve control’ policy as it grapples with inflation at a multi-decade high.

Activity 

A preference for equities over other asset classes was maintained in January. Sentiment towards inflation and economic growth prospects was negative as we entered 2023 and has remained broadly intact, which proves to be a positive contrarian indicator. Equities remain attractive on a relative valuation basis.

On a geographical basis we hold a current preference for Eurozone, Asia Pacific ex Japan, and the UK. Within equity sectors, we prefer technology, consumer discretionary, and industrial stocks and are more cautious on areas such as telecommunications and utilities.

Within fixed income, we have a small preference for corporate bonds over eurozone sovereign offerings. However, we maintain a flexible approach to our allocations as markets continue to digest the moves higher in yields over the last 12 months.

We are broadly neutral across our allocations to alternatives. We maintain our EUR/USD hedge which has aided performance so far this year.

Equities

The opening month of 2023 saw a stellar performance for equities. World equities returned 5.22% in euro terms in January, their best performance since October of 2022.

The consumer discretionary sector led this rebound returning 12.97%. This has been a change from the prevailing trend of energy sector outperformance seen throughout much of 2022.

World energy stocks returned 1.64% in January, largely due to the underperformance of oil and commodity prices. On a US sector basis, performance largely mirrored that of world equity markets. The lowering of interest rate expectations on the back of softer inflation data saw growth sectors such as communication services, technology and consumer discretionary perform. In contrast sectors traditionally associated with value stocks saw performance wane, with consumer staples, health care and utilities returning –2.29%, -3.26% and –3.39% respectively perform better in euro terms.

Bonds

The benchmark US 10 Year yield finished the month at 3.51%, down 0.36% from December. The lowering of bond yields saw positive gains in fixed income markets throughout January with the Eurozone 5+ Year bond returning 3.05% in January. Supported by market expectations of lower future interest rates, bonds have come to represent a return opportunity for many investors. Investor consensus in the US is that inflation has most likely peaked, leading to a softer rate hiking path from the Federal Reserve.

The European benchmark German 10 Year yield finished January at 2.28%, down 0.28% from last month. Eurozone credit benefitted from milder than expected weather throughout the winter months of 2022 and 2023, with investment grade and high yield credit both yielding positive returns in January.

Commodities & currencies

A broad basket of commodities showed negative performance in January, with the Bloomberg Commodity index returning –2.20% in euro terms. Commodity prices lowered as both inflation and global energy demand appeared to slow with higher interest rates.

Copper prices, which are often used as a barometer for global economic health due to being used in a wide range of industries, rallied in January. Copper returned 9.19% in euro terms last month. Much of this performance has been a result of China relaxing its Covid-19 restrictions. The performance also represents investors softer recession outlook for 2023.

US Dollar strength faded in January of 2023 as the Federal Reserve appeared to soften in its previous hawkish stance on inflation. At the months end, 1 euro purchased 1.086 dollars.