Risk assets delivered strong performance in February.  Sentiment remained positive as clarity regarding future U.S. policy rates and a potential end to the balance sheet roll-off emerged with the apparent Fed shift to a more dovish stance.  Meanwhile, some progress was made in trade negotiations between the U.S. and China during the month.  In light of the positive developments, energy prices rebounded sharply and inflation expectations rose modestly, positively impacting a number of real assets.  Treasury yields drifted higher and the U.S. dollar (USD) rose against almost all currencies.  Nonetheless, the impact of rates and currency did not detract from a renewal in the reflation trade, which boosted risk assets.

Equity markets rose with the U.S. outpacing broad non-U.S. developed and emerging markets (EM) equities.  The 3.2% rise in the S&P 500 helped the benchmark achieve its best two-month start to a calendar year since 1987.  Non-U.S. developed market equities rose 3.5% in local terms and EM equities gained a more modest 1.1%, each trailing U.S. markets.  In contrast, the 13.8% increase in China’s Shanghai Composite Index outpaced all other indices. The Shanghai market rallied nearly 6% the day after President Donald Trump announced he would delay an increase in tariffs on $200 billion of Chinese goods set to take effect March 1st.

China’s domestic equity markets currently account for only a small portion of the MSCI EM Index’s China allocation and less than 1% of the total benchmark.  However, this exposure will increase meaningfully as MSCI announced at month end that it would more than quadruple the China A share allocation—from approximately 0.7% to 3.3%—in three phases over the course of 2019. Total China exposure in the EM Index is expected to increase from just over 30% to roughly 33%. Other major index providers, FTSE and S&P, will be adding China A share exposure to their EM-specific benchmarks in 2019.

Energy-related assets posted strong returns as crude oil prices moved 6.4% higher, bringing YTD gains to more than 26%.  This marks the best start to the year since 1984, but follows 2018 when the commodity declined 21%.  Macro and fundamental factors provided a tailwind. Reported progress toward a resolution in the Chinese and U.S. trade war as well the Federal Reserve’s more dovish monetary stance improved the market’s outlook for Chinese and global demand.  In terms of fundamentals, OPEC and Russian production cuts and U.S. sanctions on Iran and Venezuela helped limit supply and offset continued growth in U.S. production according to the Energy Information Agency (EIA).

Speculative investors and hedge funds have also reportedly continued to build bullish positions after bearish bets pushed spot prices sharply lower in the fourth quarter of 2018.  Higher prices have flowed through to energy equities.  Outside of energy in the resources space, industrial metals and related equities also moved higher as the macro outlook improved and supply and demand tightened.

Research Report Request

To request a full copy of this or any of our research reports, please complete all fields in the form and click submit.

  • This field is for validation purposes and should be left unchanged.
Indices referenced are unmanaged and cannot be invested in directly.  Index returns do not reflect any investment management fees or transaction expenses. Past performance is not an indication of future results.  This report is intended for informational purposes only; it does not constitute an offer, nor does it invite anyone to make an offer to buy or sell securities.  Information herein has been obtained from third-party sources that are believed to be reliable; however, the accuracy of the data is not guaranteed and may not have been independently verified. The content of this report is current as of the date indicated and is subject to change without notice.  It does not take into account the specific investment objectives, financial situations, or needs of individual or institutional investors.   All commentary contained within is the opinion of Prime Buchholz and intended solely for our clients. Unless otherwise noted, FactSet was the source for data used in this report. Some statements in this report that are not historical facts are forward-looking statements based on current expectations of future events and are subject to risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements.