Growing political and economic turbulence led investors to question their outlook and positioning in February. The global equity seascape witnessed significant divergence, with Australian and US markets underperforming their European and Asian counterparts. The S&P 500 declined by 1.3%, while the ASX200 experienced a more substantial drop of 3.8%. In contrast, European equities demonstrated resilience, rising by 3.4%, while the Hang Seng index in Hong Kong surged an impressive 13.4%.
Chinese equities have shown remarkable strength over the past six months, outpacing the S&P 500 with returns of 17.9% compared to 6.1%. This performance underscores the potential for value in the Chinese market, with many top-tier companies trading at historically low valuations.
In addition to the divergent performance across global equity markets, interest rate-sensitive global sectors such as REITs (+2.5%) and infrastructure (+2.8%) demonstrated notable strength during February.
Bond markets provided a defensive counterbalance, with US 10-year government bonds outperforming the S&P 500 by 3.75% and Australian 10-year government bonds surpassing the ASX200 by 5.1% in February.
Economic indicators and monetary policy
The Reserve Bank of Australia's decision to cut interest rates by 0.25% offers relief to mortgage holders but may signal a typical central bank response to slowing economic activity.
In the United States, real-time estimates for Q1 GDP have deteriorated significantly, plummeting from 2.9% at the beginning of February to -2.8% in early March. This sharp decline suggests a potential contraction in the US economy, raising concerns about the broader economic outlook.
Investment outlook
While individual market movements may not be cause for alarm, the combination of these factors paints a potentially worrisome picture. Expectations may be overly optimistic, particularly regarding US mega-cap technology stocks, which could face challenges in generating medium-term returns.
Our investment models performed well in February, all achieving first-quartile peer group returns. Active strategies added value beyond our enhanced index models, benefitting from manager alpha, our listed holdings in emerging markets and global infrastructure holdings, as well as our overweight fixed interest allocation in the Dynamic models.
It's crucial to remember that investing is a long-term endeavour. The best results are achieved through patience and discipline, especially when the risks of chasing returns become elevated. As we navigate these uncertain times, maintaining a balanced and well-diversified portfolio remains paramount.