After a very strong start to the year, resilient economic data in February led to slight declines in both equity and fixed income markets. Interest rate expectations had been signalling a decline towards the end of the year, predicated on rapidly declining inflation and an end to the hostile Federal Reserve interest rate hiking cycle – however markets moved to reprice this following strong economic data. This included labour market data, with payrolls showing a much larger than expected increase in the number of people in employment in the US. Inflation data also remained elevated over the month across developed economies, with the housing and shelter component of inflation in the US remaining stubbornly high. Over the course of the month the Federal Reserve also raised interest rates by 25bps as expected, but also stressed that whilst some progress had been made on the fight against inflation it is likely that there will be further rate rises to come and no interest rate cuts in 2023.
Equity performance was mixed over the month, with the UK and Europe continuing to outperform and generate positive returns versus broader equity markets. A holding in a Clean Water ETF, which invests in companies that are involved in the circular economy of water, materially outperformed over the month.
Fixed income markets were a slight negative, driven by the repricing of the path of interest rates. We remain underweight fixed income risk, particularly with regards to the riskiest parts of the fixed income markets, which we believe are not pricing a possible growth slowdown.
Alternatives were slightly weaker over the month, driven by some of the moves across broader risk assets. We continue to believe that our holdings in both UK Property and listed renewable assets offer us incredibly attractive investments at discounts to NAV.
Within diversifying assets, our holding in Carbon Futures was up nearly 10% in GBP terms. These contracts are bought by emitters of carbon to cap the total emissions the EU allows, which decreases annually.