February returns were dominated by events in Ukraine. Equity markets were down with only a few exceptions in emerging markets. Value again led growth, consumer defensive stocks beat consumer cyclical stocks, and small-cap beat large cap stocks. A consistent theme in February was the ‘risk-off’ market regime and portfolio liquidations. Even fixed income assets suffered. though infrastructure project bonds again outperformed equities. Finally, commodities continued to inflate as the commodity super-cycle hit new highs.
The following analysis provides a visual record of returns across and within the major asset classes. The report is intended to help investors with portfolio comparisons and performance benchmarking.
The S&P 500 index was down -3.6% in January after accounting for dividends. In contrast, strength was seen in small cap energy (+2.5%), materials (+1.8%), and healthcare (+1.3%). On a year-to-date (YTD) basis, only large-cap energy (+20.4%) and small cap energy (+11.8%) have positive returns. Technology (-12.9%) and consumer discretionary (-16.2%) stocks have the worse returns since the year started.
Elsewhere, red ink is apparent across all the developed market indices with the exception of Australia (+4.7%) and New Zealand (+2.6%). In general, return momentum has swung back to favor ownership of US stocks stocks. Loss leaders – Sweden, Austria, and Finland are most vulnerable to events in Ukraine. All all had return losses in excess of 8%.
Next, we see that select emerging market equities offered solid returns and diversification for the second month straight. The S&P Emerging Market Index (-3.6%) lagged US equities, thanks to heavy losses in Russia (-36.5%) and Poland (-11.3%). However, persistent return growth is evident in commodity-based economies. For example, year-date gains for Brazil (+20.8%), Qatar (+11.4%), and Saudi Arabia (+10.2%) are all solid. Commodity consuming economies in Asia, notably Taiwan (-4.6%), China (-5.6%), and Korea (-6.7%) lagged their peers in returns.
Returns across all bond durations suffered price declines in February. Relative return momentum favored Treasury Inflation Protected Securities (TIPS), which geberated a gain of 59 basis points (bps). The US aggregate Bond index was down 167 bps and long bonds were down 342 bps. Emerging market bonds (-485 bps) were hit the hardest because of events in Ukraine.
In February, US and global infrastructure project bonds turned in positive returns of 65 and 34 bps, respectively. Long-term corporate bonds (-483 bps) suffered from both yield curve and earnings outlook declines. Meanwhile, the High-Yield Bond index (-132 bps) had muted losses in line with short duration corporate bonds (-115 bps).
Next, the fingerprint of the Ukraine crisis was again on display, influencing a number of commodities higher, notably Brent (+7.3%), aluminium (+10.6%), wheat (+12.8%) and lean hogs (+17.6%). In contrast, natural gas at Henry Hub (-5.9%) was not impacted even though LNG exports have been robust. Lumber (+40.4%) again topped the monthly list on high increases in housing permits and forward purchases for spring construction.
The Russian ruble was down 8.5% in February, bringing the year-to-date decline to 12.2%. For the second month, the Brazilian real (+4.67%) led monthly gains and yeat-to-date gains (+8.75%).