The ‘Brexit’ debate stepped up a gear in February as Prime Minister David Cameron announced that a referendum would be held in June to determine whether Britain should remain in the European Union. Cameron spent several days in talks with other European leaders and agreed several amendments to the UK’s membership, such as limits on benefits for EU migrants if migration levels become exceptionally high. The changes will only take effect if Britain votes to remain in the EU.
The threat of a ‘Brexit’ caused the value of the pound to drop significantly. Over the course of a week the pound fell nearly 4% against the US dollar, and it reached a seven year low of $1.3844 on the last day of the month. However the UK large-cap equity market remained relatively steady, with the FTSE 100 index hovering around the 6,000 mark while the EU discussions took place.
The US presidential primaries got under way in February. Hillary Clinton and Bernie Sanders are the two key Democratic candidates, and as of ‘Super Tuesday’ on 1st March, with sixteen of the fifty US states having voted, Clinton leads the way with nearly three times as many delegates as Sanders. In the Republican race, Trump leads the way with more delegates than his four nearest rivals combined.
Japanese stocks have had a particularly bad start to the year. In mid-February the Topix index fell by nearly 13% in one week and reached a sixteen month low. The bear sentiment regarding the Japanese equity market has recently been fuelled by the strength of the yen, which is expected to have a negative impact on imports.
After a wobbly start to 2016, UK markets recovered a little in February. The FTSE 100 index rose +0.82%, while the FTSE 250 (ex IT) index and the FTSE Small Cap (ex IT) index gained +0.98% and +0.58% respectively. Other developed markets continued to struggle, as US equities, measured by the S&P 500 index, slipped -0.13% and European stocks, measured by the Euro Stoxx 50 index, shed -3.20%. In Japan, the Topix index slid -9.34% over the course of the month.
Emerging markets experienced mixed fortunes. The MSCI EM (Emerging Markets) index remained flat with a minimal +0.08% gain. Chinese equities, represented by the MSCI China index, fell -2.60%, but Latin American equities, measured by the MSCI EM Latin America GR index, climbed +2.94%. Indian equities, measured by the IISL CNX Nifty PR index, lost -7.62%.
Bond returns were also mixed during the month. In the UK market, the FTSE Gilts All Stocks index returned +1.39% while long dated (over 15 years to maturity) bonds grew +1.67%. In the corporate market, European corporate bonds, measured by the Markit iBoxx Euro Corporates index, rose +0.47% but sterling denominated corporate bonds, measured by the Markit iBoxx Sterling Corporates index, declined -0.81%. High yield returns were mostly negative, as the Bank of America Merrill Lynch Euro High Yield index and the Bank of America Merrill Lynch Sterling High Yield index posted losses of -0.84% and -1.25% respectively. Emerging Market sovereign debt, measured by the JP Morgan EMBI Global index, returned +2.02%.
Commodity returns in February were varied. The S&P GSCI index, which consists of a basket of commodities including oil, metals and agricultural items, was down -2.01%. However Brent blend oil, measured by the Oil Price Brent Crude PR index, grew +3.54%. The precious metals saw hefty increases as the S&P GSCI Gold index jumped +10.60% and the S&P GSCI Silver index gained +4.61%. In the agricultural markets, corn and wheat fell -5.24% and -6.55% respectively.
In the currency markets, the pound continued its downward trend. The US dollar, the euro and the Japanese yen all appreciated against the pound by +1.79%, 2.21% and 9.17% respectively.