February 2024 market commentary

Strong earnings reports and resilient economic data made February a good month for most global equity markets. Emerging and Asian markets especially benefitted from an economic rebound in China due to increased activity and supportive measures from the Chinese government. The S&P 500 ended February up 5.34%, the Euro STOXX 50 gained 5.08%, and the Nikkei 225 grew by 7.99%, despite weaker-than-expected GDP estimates. Less positive news in the UK saw the FTSE 100 grow by only 0.45% and UK stocks remain in negative territory year-to-date.

(All returns are sourced from FactSet and are reported as total return in local currency for the period 01/02/2024 – 29/02/2024).  

February market summary

US economic data indicated continuing resilience with evidence of increased activity throughout February and the addition of over 350,000 jobs. US inflation fell to 2.4%, fuelling increased expectations of rate cuts later in the year. The Federal Reserve, however, remains committed to maintaining borrowing costs until their 2% target is achieved and sustained.

Earnings data in the UK was disappointing, leading analysts to downgrade their profit growth expectations. GDP data from the Office for National Statistics showed a 0.3% contraction in the fourth quarter of 2023 which technically put the country in recession following a similar contraction in Q3. However, the Bank of England quickly scotched rumours of an imminent rate cut, suggesting that the “weak” recession would quickly diminish due to “distinct signs” of an economic upturn.

Declining demand in the eurozone caused a further contraction in manufacturing activity with factories reducing headcounts for a ninth consecutive month. With industrial output contracting for the 20th consecutive month, the European Commission downgraded 2024 growth expectations from 1.2% to 0.8% in the eurozone and from 1.3% to 0.9% in the EU. Despite regional inflation edging closer to its 2% target, the European Central Bank insisted they needed more time to see if lower inflation would stabilise before they could consider cutting interest rates.

Biodiversity net gain (BNG) becomes mandatory for developers and local planning authorities

Confirmed by the Department for Environment, Food and Rural Affairs (Defra) as effective from 12 February, the BNG is a mandatory measure under Schedule 7A of the Town and Country Planning Act 1990 supporting sustainable land and property development and compensating for building-related nature loss in England.

Envisaged as a biodiversity credit scheme, BNG aims to ensure that habitats and ecosystems affected by road and housebuilding projects are left in a measurably better state than they were prior to development. All new developments must now deliver a minimum 10% net gain in biodiversity or habitat – natural spaces lost to roads and houses must be replaced. BNG offers developers the latitude to deliver a combination of on-site and off-site net gains if full delivery isn’t possible within their project boundaries. As a last resort, developers can buy statutory biodiversity credits from the government if neither on-site nor combination gains are possible – they can also use the credits option to make up any minimum net gain shortfalls in site-based activities. Credit revenues will be invested in government-backed habitat creation projects across England.

Calculating BNG and determining which delivery methods developers opt for will depend on the biodiversity value of a pre-development habitat. Value is measured in standardised biodiversity units factoring in expert-led assessments of habitat size, quality, location, and type. These units feed into a statutory biodiversity metric which determines how many units a pre-development habitat contains and what the 10% minimum net gain should be. 

With the government targeting 300,000 new homes a year by the mid-2020s, BNG is being hailed as an ambitious scheme to minimise and mitigate associated habitat loss – Sweden, Singapore, Scotland and Wales are among countries considering similar schemes.

Biodiversity net gain aims to ensure that habitats and ecosystems affected by road and housebuilding projects are left in a measurably better state than they were prior to development.

First global organisations agree to adopt Taskforce on Nature-related Financial Disclosures (TNFD) reporting recommendations

An initial cohort of 320 organisations from 46 countries and territories have committed to publishing TNFD-aligned disclosures as part of their annual corporate reporting. Early adopters include cross-sector companies representing $4 trillion in market capitalisation and over 100 financial institutions with a combined $14 trillion in assets under management. 

Published in September 2023, the TNFD’s 14 corporate nature-related reporting recommendations were designed to support the policy goals of the Kunming-Montreal Global Biodiversity Framework which include restoring 30% of the planet’s land and water systems, halving global food waste, and mobilising at least $200 billion in annual global public and private biodiversity-related funding by 2030. 

The scale of this early adoption is an important development for investors and the wider private sector working to identify and manage nature-related risks, dependencies, and opportunities.

The scale of this early adoption is an important development for investors and the wider private sector working to identify and manage nature-related risks, dependencies, and opportunities.

EU Commission proposes ambitious 90% reduction in GHG emissions by 2040

The European Commission announced a plan to cut GHG emissions by 90% and increase annual regional carbon capture and storage from 50m to 280m tonnes by 2040. The existing European Climate Law target requires a 55% cut in emissions from 1990 levels by 2030, but according to the European Environment Agency, EU member states cut their collective emissions by just 30% between 1990 and 2021. 

Despite accelerating energy transition infrastructure in recent years, exemptions granted to the food and transport sectors on emissions cuts have slowed Europe’s overall progress towards net zero greenhouse gas emissions. European farmers reacted strongly to proposed cuts in agricultural emissions and specific targets were subsequently cut from the Commission’s proposal. Research by BNP Paribas Exane nevertheless suggests that the Commission’s 90% target is possible through the increased electrification of the regional economy, a continuing focus on green hydrogen production for industry, a 100% zero emissions car market from 2035 (and an accelerated scrappage scheme for older vehicles), and a rapid pick up in building renovations and heat pump installations.

In early February, the Commission’s proposal received a boost with the announcement of a provisional political agreement on the EU’s Net Zero Industry Act. The Act aims to create a simplified and enabling regulatory environment for clean technologies, accelerate region-wide carbon capture and storage, facilitate market access for net zero products, and support the development of net zero skills and innovation.

UK net zero economy grows as the wider economy slows

In contrast to the limited growth recorded in the wider domestic economy, the UK’s net zero economy grew by 9% in 2023, according to a report published by the Energy and Climate Intelligence Unit (ECIU) and the Confederation of British Industry. 

Businesses whose activities support decarbonisation and the net zero transition contributed £74 billion in gross value added (GVA) during 2022-23, equivalent to 3.8% of the overall UK economy. These operations supported 765,000 full-time jobs, representing almost 3% of total UK employment. Business hotspots offering higher-than-average salaries were located across the country, with strong net zero activity recorded in some of the UK’s most deprived areas and in marginal constituencies set to be key battlegrounds in the coming general election. 

While it highlighted the unprecedented opportunities presented by the net zero economy, the report nevertheless warned that politicising the concept of net zero risked slowing the pace of growth and investment. According to a recent sustainable economy report by the London School of Economics, the UK needs to increase annual public investment in the green economy by around 1% of GDP to make up for years of underinvestment. 

In contrast to the limited growth recorded in the wider domestic economy,
the UK’s net zero economy grew by 9% in 2023.