A strange quirk of investing is that sometimes good news is seen as bad news and February provided a perfect example of this.
With more positive news related to the pace of vaccinations in the UK, optimism increased that economic growth will be stronger than previously expected. But on the flip side, investors worried that this could lead to rising inflation, which in turn could result in Central banks reducing monetary stimulus and raising interest rates. As a result, there was a sharp sell-off in bond markets towards the end of February. UK Gilts fell by more than 5% in February and global bond markets have had their worst start to the year since 2015 due to the inflationary concerns.
The prospect of inflationary concerns had a knock-on effect across many areas of global stock markets. Leading technology stocks saw some heavy falls as investors worried how these highly rated stocks would fare in environment of inflation and higher interest rates. However, the MSCI World Index increased by 2.4% in February as the positive outlook for growth resulted in a rally for more cyclical areas. From a style perspective, value outperformed growth and UK and European markets were some of the strongest performers.
The UK’s stark underperformance was one of the key market trends of 2020, but by leading in the vaccine roll-out and a Brexit resolution, there has been an increase in optimism for the domestic economy and a recovery in UK assets as well as a stronger sterling. With UEFA Euro 2020 to look forward to in June, maybe it’s not just football that’s coming home.
Source FE Analytics: Performance figures 31/1/21 to 27/2/21. Total returns in local currency
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