Much like January and England’s current cricket tour of Sri Lanka and India, February was a month of ups and then downs.
On the success of the UK vaccine rollout, over 20 million first doses administered and counting (including two members of the Church House investment team), the FTSE 100 rocketed up 4.5% in the first two weeks of the month before reversing the momentum and closing the month back at starting levels, +0.4% for the month. Likewise, the FTSE All-Share closed up 0.8% and the junior AIM market, leading the charge, +2.3%.
Conditions got tricky for global equity markets mid-month after some substantial moves in the global bond markets. The UK 10-year benchmark yield started the month at 0.32% and more than doubled over February to end the month at 0.81%. The yield curve has steepened quite dramatically, see chart right, with the price of the 30-year Gilt falling around 12% over the month, while base rates remain anchored and the shorter end of the market far less volatile.
Globally, this was most acutely felt in the NASDAQ and US tech prices, for example, Tesla was down just shy of 20% on the month. The rationale being that a jump in long-term rates undermines the valuation case for the techs (especially those that are unprofitable), as their future earnings get discounted at higher rates (e.g. the Long Bond yield has moved from 1.65% at the start of 2021 to over 2.2% now).
However, let us not get in too much of a flap with this as, in the historical context of long-term Gilt yields, we are a long way off the heady days of rates in the high-to-mid teens during the 1970 and ‘80s. What we should see is share prices in businesses that are unjustifiably high pare back as long-term rates discount future earnings, which, in turn, create many opportunities for us to buy great companies at reasonable prices.