MONTHLY MARKET REPORT: FEBRUARY 2019

MONTHLY MARKET REPORT:  FEBRUARY 2019

Markets continue their 2019 rally

Prepared by Brandon Yee, CFA, CAIA, and Thomas Connelly, CFA

Developed Markets losing steam

2019 Off to Strong Start

International developed stock markets in the aggregate rose by 2.57%. Pacific ex Japan and the UK outpaced other developed regions, recording gains of 3.77% and 3.39%, respectively. Japan, Canada, and the U.S. lagged in February. After a volatile December 2018 and the subsequent bounce back in 2019, investors are reminded that volatility is normal and trying to time the market is costly.

Volatility increasing in emerging market equities

Emerging Markets Flat in February

Broader emerging markets were flat for the month, posting a gain of 0.51%. China and India recorded gains of 3.45%% and 0.03%, respectively. Brazil and Mexico took a step back in February, dropping -4.49% and -4.19%, respectively. The public is focused on trade wars and geopolitical risks, but investors should be guided by the attractive relative valuations of emerging markets over developed markets.

Global Sector

Information Technology and Industrials Have Strong Month

Information technology and industrials recorded gains of 5.88% and 4.63%, respectively. These two sectors are off to a strong start after a forgetful 2018. After a strong past year, healthcare is lagging other sectors.

Domestic Equity Factors

Value Underperforms Growth

Value underperformed growth in the large-cap and small-cap space. Momentum recorded a gain of 3.78%. Historically, different equity factors have their own periods of outperformance, usually in shorter time periods but sometimes lasting a decade. However, tilting portfolios to capture more of the value and size premium has historically compensated investors in the long run.

Foreign Equity Factors

Value Keeping Pace with Growth in International Markets

In the international developed markets, value underperformed growth in the large-cap space and in the small-cap space. Momentum recorded a gain of 2.73% while small-cap emerging market stocks posted a gain of 0.32%. Over a ten-year period, value kept pace with growth while the size premium was positive in the emerging markets.

Liquidity Providers

Cash is a Viable Short-Term Investment Option

With the U.S. equity market trading at a high valuation and fixed income spreads low, investors can turn to cash and get paid to wait. Investors can earn a similar annual rate on cash versus those of intermediate-term bonds. The CPI increased by 1.52% year over year through January.

Deflationary Hedges

Emerging Market Bonds Off to Strong Start

The returns of deflationary hedges were mixed for the month. High yield bonds and leveraged loans bounced back after a rough 2018 Q4. The Barclays U.S. Agg Bond Index was flat for the month. Emerging market bonds are up 5.07% year to date. Emerging market debt may warrant a higher portfolio allocation if developed market growth continues to slow and their high debt levels become burdensome.

Inflation Sensitive Investments

Energy Starts Year Off Strong

Inflation-sensitive investment returns were mixed for the month. Crude oil and global infrastructure recorded gains of 5.55% and 2.35%, respectively. U.S. REITs and the Alerian MLP posted modest gains. Gold currently has favorable supply/demand dynamics for gold investors and provides a valuable hedge against currency debasement and inflation.

World Currencies

U.S. Dollar Weakens over the Past Quarter

Over the past three months, the U.S. dollar depreciated against most other major currencies except the Australian dollar and Indian rupee. The yen appreciated by 2.35% relative to the U.S. dollar, and the Mexican peso appreciated by 5.72%. After a period of U.S. dollar strength, investors in international securities may get a modest tailwind if the U.S. dollar depreciates any further.

Brandon Yee, CFA, CAIA – Research Analyst

Brandon conducts investment due diligence for Versant Capital Management, and designs and implements tools and processes to support the firm’s research. His background in biology and finance help him to look at challenges from multiple angles, resulting in unique and well-rounded approaches and solutions.

 

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