February 2023 saw a significant turnaround in the performance of investment funds available to UK investors, with Chinese funds leading the charge. Out of approximately 3,200 Morningstar-rated funds, only a quarter experienced negative returns in February, and remarkably, only one fund reported double-digit losses. This resurgence in Chinese funds is particularly noteworthy against the backdrop of their struggles in early 2023 and their 20+ year lows against broader equities.
Surge in Chinese Equities: A Stimulus-Driven Recovery?
February’s market dynamics were influenced heavily by government stimulus packages in China, instilling a renewed optimism for a return to economic strength. Matthews China Small Companies emerged as the best performing fund, with a 14% gain, partially offsetting a 12% loss from January. Despite a challenging three years resulting in an annualised 16% decline, this fund has achieved an average yearly gain of 8% over the past decade. Even as some funds within the China equity category are still reporting year-to-date losses, the overall sector showed remarkable recovery in February.
Global Markets and Precious Metals: A Mixed Bag
While Chinese equities soared, global markets also saw notable highs, with the Nikkei reaching a peak not seen in 34 years and the S&P 500 and Nasdaq hitting multiple all-time highs in 2024. This global market euphoria, however, did not translate to all sectors. Precious metals, particularly gold, experienced stagnation with prices remaining steady yet not providing the anticipated lift to funds focused on gold stocks. The challenges facing the precious metals mining industry, including high capital intensity and volatile commodity prices, have continued to impact profit margins adversely.
Property and Natural Resources: Facing Headwinds
European property and natural resources funds also found themselves at the bottom of performance charts in February. This downturn can be attributed to changing interest rate outlooks, which may not decline as quickly as previously anticipated, impacting sectors sensitive to borrowing costs. Property funds, in particular, have been under scrutiny for several years, with regulatory hesitation exacerbating challenges in the sector. Meanwhile, natural resources funds struggled amidst these broader market dynamics, reflecting the complex interplay of global economic factors influencing fund performance.
As the dust settles on a tumultuous February, the recovery of Chinese equities and the broader implications for global markets and sectors like precious metals and property highlight the ever-evolving nature of investment landscapes. While stimulus measures have provided a much-needed boost to Chinese funds, the sustainability of this recovery amidst ongoing challenges in other sectors remains to be seen. Investors and market watchers alike will be keenly observing how these dynamics unfold, shaping strategies and expectations for the remainder of 2024.
