United Kingdom
UK equities rose steadily through February, with the FTSE All Share rising 1.2 per cent, although there were losses on the final day due to negative data and Wall Street’s reaction to Google’s warning on future growth. Takeover rumours continued, with Cadbury Schweppes, BAA and Lloyds TSB among the more notable companies to join the rumour roster.
Positive earnings and news flow along the broker upgrades in the banks sector helped gains. By contrast, oil stocks declined, despite immense earnings from Royal Dutch Shell. BP’s earnings, while rising 26 per cent to $4.4 billion in the fourth quarter of 2005, nevertheless disappointed and the stock ended the month down 6.8 per cent.
Economic news was mostly negative. While the Bank of England maintains a fairly optimistic growth expectation for 2006, factors such as slowing consumption and weak business investment continue to undermine growth prospects. Disappointing retail sales figures and a decline in the Nationwide Building Society’s house price index did not help. Interest rates were kept on hold at 4.5 per cent, despite inflation falling below the Bank of England’s two per cent target, a factor that makes a rate cut more likely.
Continental Europe
European equities rose during the month (FTSE World ex-UK +2.6 per cent; MSCI EUR +1.9 per cent, MSCI EMU +2.8 per cent) as mergers and acquisitions (M&A) activity continued. Financial and utilities were the best-performing sectors helped by takeover activity. The utilities sector was particularly active. Meanwhile, M&A activity in banks continued with France’s BNP’s purchase of Italy’s sixth largest bank (Banca Nazionale del Lavoro), continuing the trend for cross-border mergers. Telecoms also extended their strong start to the year as bid speculation pushed up companies like Portugal Telecom. As part of a global trend, energy stocks declined sharply.
United States
US equities made minor gains in February (the Russell 1000 Index rose 0.2 per cent). The Federal Reserve’s comments that policy, in the near term, would be dictated by economic data and increased market sensitivity to data that was weaker in February than January. Mid-month, this led to a sell-off as strong retail sales, oil prices and better-than-expected economic data fuelled concerns that interest rates may be tightened more aggressively. However, on the final day of the month, it was weak economic data – coupled with Google’s growth warning – that sent US equities down. In a month when companies with more stable earnings were favoured, utilities, producer durables and financial service stocks were the best-performing sectors. Oil and energy related stocks were by far the weakest, despite mammoth earnings from companies such as Exxon.Value, which has a large energy-related component, nevertheless outperformed growth. Small caps underperformed as investors sought defensive stocks.
Japan
Japanese equities (Topix -2.9 per cent in total return terms) underperformed their global peers during February, as domestically oriented stocks underperformed. In a difficult environment for equities, only six of the 33 Topix sectors posted positive returns, while retail, real estate and services were among the worst performing. Uncertainty about the Bank of Japan’s (BoJ) interest rate policy was another distraction for investors as they took a break from months of gains. Economic data was positive, GDP growing 1.4 per cent in the fourth quarter from the previous quarter. With domestic spending playing a greater part in the economy’s strength and consumer confidence at a 15-year high, attention is now turning to how the BoJ might tighten interest rates and borrowing conditions.
Pacific Basin
Asian equities declined slightly during February (MSCI AC AsPac xJap -0.4 per cent), as strong gains in India (+2.5 per cent) and China (+3.1 per cent) were offset by losses in Korea (-2.8 per cent) and Thailand (-3.3 per cent). India’s national stock exchange hit a record high during the month on sustained foreign buying of stocks. In Thailand, markets were unsettled by political instability as Prime Minister Thaksin Shinawatra faced calls for his resignation and greater government transparency.
Emerging Markets (all returns are in US dollars unless otherwise stated)
Emerging Markets paused for breath in February, following a strong start to the year in January, with the MSCI EM Index falling 0.1 per cent in US dollar terms.
Performance among the major markets was mixed, with negative returns in the largest markets of Korea (-2.8 per cent) and Taiwan (-0.5 per cent) being offset by more encouraging performances from Russia (+7.1 per cent), Turkey (+6.3 per cent), China (+3.1per cent) and Brazil (+2.0 per cent). In terms of sector performance, utilities were the best, followed by industrials and consumer staples as defensive sectors generally fared well. The weakest sectors were technology and materials. Latin America (+0.9 per cent) was the only region that outperformed during the month, while both Asia (-0.2 per cent) and EMEA (-0.7 per cent) had lacklustre performance.
Global Bonds
Yields in the US rose at the short end as investors revised their previous expectations that the Federal Reserve would halt its interest rate tightening cycle. Meanwhile, the reintroduction of the 30-year US government treasury – last issued in 2001 – reinforced the low yields at the long end of the curve amid heavy demand.
UK yields rose slightly across the curve, investors at the long end regained their poise on Treasury reassurances that long-dated issuance would be increased to help address rising demand for liability matched by pension funds. High yield was slightly ahead, as spreads narrowed, benefiting from high demand and a strong economic outlook.
Emerging market debt reached a new high towards the end of February, the spread above US Treasuries hitting a fresh low of 1.92 per cent (as measured by the JP Morgan EMBI+ Index). Buybacks of sovereign debt by Latin American countries also helped support gains.
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By Bill Blevins
