Ben Yearsley, the director of Fairview Investing, has highlighted the murky outlook that bond and equity markets are facing, and he argues that what might appear to be good news for the economy, could, in fact, be bad news for markets.
Equity and bond markets like visibility on growth and inflation, and the news from both the UK and the US appears to be quietly positive. Looking at the UK, Yearsley (pictured) pointed out that January tax receipts were £5bn above predictions, and added that government borrowing is almost £30bn under what the Office for Budget Responsibility (OBR) projected in November.
On top of that, inflation fell for a third month in a row, hitting 10.1%. Yearsley noted that ‘truflation’ was much higher, at 17.4%, but he added even that had come down from over 20% from the back end of 2022 as fuel prices have eased.
Inflation has fallen much more quickly in the US, and the employment data from across the pond is strong. However, Yearsley highlighted a paradox: “We are seemingly back to the good news is bad news outlook again. Better growth and jobs numbers from the US spooks equity markets into thinking that the Fed will hike rates further and for longer leading to losses in higher growth sectors.”
This goes some way to explaining the choppier market outlook in February, and Yearsley cautioned that the UK is not immune to this phenomenon, especially as January’s tax receipts and the government borrowing figures both surprised on the upside.
Government bond markets haven’t known what to make of conflicting data in 2023, with yields seesawing on the uncertainty surrounding rate cuts. Yearsley said: “Latest opinion seems to be that rates will go slightly higher than anticipated, and this is what the Fed has been saying. Yields on the US 10-year rose from 3.5% to 3.9% in February, above the yield at the start of the year. The position is similar on the UK with the 10-year gilt now paying 3.8% compared to 3.3% a month ago, and 3.66% two months back.”
In this uncertain environment, the top three best-performing sectors were all European equities, followed by UK equities.
Yearsley said the cheapness of UK and European equities was finally catching the eye of investors, especially after some bumper results in February from banking, oils, and even aerospace companies.
Yearsley noted that there were two themes at the bottom of the pile: anything linked to China, and UK Gilts.
Fund sectors – February
|Top five||Return %||Bottom five||Return %|
|European Smaller Companies||+2.66||China / Greater China||-6.98|
|Europe ex UK||+2.39||UK Index Linked Gilts||-5.89|
|Europe inc UK||+2.07||Asia Pacific ex Japan||-4.49|
|UK Equity Income||+1.94||Global Emerging Markets||-3.69|
|UK All Companies||+1.69||UK Gilts||-3.49|
Barry Norris’s Argonaut fund house had a stellar month, according to Yearsley. He described it as a month for the old guard, with Ninety One, Artemis, and Jupiter strategies hitting the top 10.
China dominated the lower end of the table, along with gold. Yearsley said that the negativity around gold was down to concerns that the Fed will hike rates more than originally thought, however he warned investors not to forget that gold does well in a falling rate environment. “It may take until late 2023 or even 2024 for sentiment to improve,” he concluded.
Funds – February
|Top 10||Return %||Bottom 10||Return %|
|Argonaut Equity Income||+7.43||Baker Steel Gold & Precious Metals||-14.05|
|Thesis Eldon||+7.32||Allianz China Equity||-12.29|
|Argonaut European Alpha||+7.03||Invesco PRC Equity||-11.93|
|Argonaut Absolute Return||+6.83||Janus Henderson Horizon China Opportunities||-11.76|
|Ninety One UK Special Situations||+6.39||Ninety One Global Gold||-11.53|
|AQR Style Premia||+6.17||GAM Multistock China Evolution Equity||-11.48|
|Artemis SmartGARP European||+5.58||Charteris Gold & Precious Metals||-11.42|
|BNY Small cap Euroland||+4.98||Nomura China||-11.14|
|Liontrust Global Technology||+4.95||HSBC GIF China Equity||-10.94|
|Jupiter UK Special Situations||+4.71||Blackrock Gold & General||-10.92|