February was a turning point for the disinflation trend that had been shoring up the markets over previous months. Economic data brought more pleasant surprises on both sides of the Atlantic, but the (dis)inflation trend disappointed investors. While share indices continued to benefit from growth being stronger than anticipated, bonds performed much less glowingly, with traders forced to lower their expectations of central bank rate cuts in 2024. In the United States, leading and lagging indicators seem to be converging towards a single sustained growth scenario. Both the manufacturing and service components of PMIs improved, and consumer confidence picked up further in February, showing businesses’ and households’ shared enthusiasm about the economic outlook. This US economic exceptionalism results from the knock-on effects of a growing labour market, on which job reports were surprisingly positive once again. However, this frenetic growth seems to impinge on the immaculate disinflation scenario that had been underpinning traders’ risk appetite. The US Federal Reserve chair therefore took a less dovish than expected tone, driving up yields. The 10-year Treasury yield gained 34 bps over the month, reversing last December’s bond rally. Albeit to a lesser extent, the Eurozone also showed signs of progress with leading indicators still rebounding as the services sector expands. Inflation slowed by less than expected due to the robust services component of core inflation. This combination of firmer growth and more dogged inflation led to the 10-year Bund yield gaining 25 bps, while credit assets made further progress as high yield spreads narrowed by 23 bps. Chinese equity markets showed signs of recovery thanks to the restrictions placed on short selling and the Caixin PMI’s resilience. Japan’s complacent monetary policy seems even more likely to end with the publication of higher-than-expected core inflation, above the 2% mark for the 11th month in a row. The reporting season was in full swing, with AI companies again beating all records. For example, NVIDIA, the global leader for graphics cards, increased its net income ninefold in the fourth quarter, and a number of AI firms announced similar accelerations. Overall, corporate earnings were higher than investors were expecting, fuelling the strong equity rally. However, if we exclude the Magnificent Seven – the main US tech leaders – then EPS growth for the S&P 500 was slightly negative.

The Fund delivered a positive return, faring much better than its reference indicator in February. The sharp rise in developed equity markets, both American and European, greatly benefitted our strategy. Our equity component added to the Fund’s performance, mainly through Carmignac Portfolio Investissement and Carmignac Portfolio Grandchildren. On the fixed income side, Carmignac Portfolio Credit and Carmignac Portfolio Flexible Bond were also profitable in February. Our long position on the S&P 500 helped ensure the Fund ended the month in the black.

The horizon seems to have cleared for the markets as the various data appear to show that the prospect of a recession in the United States is receding. The “no landing” scenario for the US economy provides a catalyst for risky assets, even in Europe where the economy keeps bordering on stagnation. Although price multiples have risen on equity markets, there are no signs of exuberance just yet. We therefore think it wise to remain highly exposed to this asset class, which is benefitting from both economic resilience and moderate inflation, which is helping businesses’ margins. On the bond front, credit remains the cornerstone of our portfolio, being a direct recipient of flows from the money market, and delivering an attractive return. However, in the short term we think that tactical hedging could be interesting to improve the portfolio’s risk elasticity, given that we are in a poor geopolitical situation and the prospect of US regional bank incidents seems to be mounting. Our sovereign bond exposure has been taken in expectation of a steeper yield curve, as the level of short-term yields in both the Eurozone and United States now seems right after the upward movement at the beginning of the year, whereas long rates are being held back by growth figures and debt trajectories in developed economies. The inflation trend should be viewed as a decisive factor in the construction of our portfolio, as recent statistics have once again shown the resilience of core consumer price indices in both the United States and Europe. Complacency over disinflation could prove naive ahead of the US Federal Reserve’s monthly meeting on 20 March, suggesting that we should keep modified duration at a moderate level, and some exposure to inflation-linked instruments.