Commentary for February 2025

Market Overview

Global equity markets saw profit-taking in February, closing 2% lower overall. The divergence between the US and other regions continued to grow. US equities declined by 2%, led by weakness in the mega-cap technology stocks. Growing uncertainty about the impact of the policy agenda of Donald Trump’s administration weighed on sentiment as concerns about growth re-emerged. In contrast, UK and European shares remained on a strong footing, gaining 2.3% and 2.2%, respectively. Elsewhere, China surged 10.3% while India fell by 9.2%, leaving Asia and emerging markets broadly unchanged.

The gold price set another fresh all-time high, reaching $2900 per ounce as geopolitical and economic uncertainties continued to support its appeal as a safe haven asset. Demand remained strong, with the major bullion ETFs recording their biggest inflows in history, comfortably exceeding the previous record set at the onset of the pandemic in early 2020. Other commodities were also strong, with the exception of oil, where the price dipped on the potential for a peace deal in Ukraine.

US equities were buffeted by erratic news flow on tariffs by the Trump administration. Following 25% tariffs on goods imported from Mexico and Canada, an additional 25% tariff was announced on European cars. This triggered market nerves about the potential for trade wars. Nvidia, the dominant maker of chips needed for artificial intelligence, reported positive earnings but the shares were sold off sharply due to concerns over a small fall in gross profit margins. Other ‘Magnificent 7’ stocks such as Alphabet, Microsoft and Tesla also underwhelmed with their results. While growth rates are still strong, they are clearly slowing from their AI mania peak. Conversely, earnings from a broad range of other sectors such as financials, consumer cyclicals and industrials are improving, helping fuel a change of leadership among sectors.

Data releases confirmed that the US economy is slowing with retail sales down by 0.9% month-on-month, the sharpest fall since March 2023. Consumer weakness was confirmed by a disappointing earnings outlook from Walmart. Initial jobless claims increased over the month. There was also concern that, while efficiency gains in the public sector will be positive over the medium term, the mass layoffs currently being executed by Elon Musk’s newly established Department of Government Efficiency (DOGE) could, in the short term, have a negative impact on the economy. Inflation rose by 0.5% month-on-month for January, bringing the annualised rate up to 3% for the first time since June and up from 2.4% in September.

Despite firmer than expected inflation data and the potential for tariffs to reignite rising prices in future, global bond markets closed 0.7% higher, as investors chose to focus on weaker US sentiment data and the risks to growth.

UK equities experienced mixed fortunes in February. The economy unexpectedly grew by 0.1% during the final quarter of last year. However, inflation rose to 3% in January, above the expected rate of 2.8%. The Bank of England cut interest rates as expected, bringing the base rate from 4.75% to 4.5%. However, there were two dissenting votes in favour of a larger 0.5% cut. The market was broadly flat for most of the month but was buoyed in the last few days by Prime Minister Kier Starmer’s announcement of an increase in defence spending to 2.5% of GDP by 2027, and news that trade talks between the UK and the US were making positive progress. As a result, equities finished higher, and sterling recovered from its January low of 1.22 against the dollar to close at 1.26. Banks continued to perform strongly, led by Standard Chartered (+16%), Nat West and Barclays (both +10%). The sector is making new multi-year highs, yet valuations remain on an average multiple of just 7X earnings.

European equities continued their strong start to the year. Despite headwinds from low growth and potential tariffs, companies have seen positive earnings revisions and February saw early signs of a potential resolution to the Ukraine conflict, which would be beneficial for the region. The European Central Bank cut its benchmark interest rate by 25 basis points, citing easing inflation in the euro area. Stocks received an additional boost after chancellor-in-waiting Friedrich Merz announced a dramatic increase in spending on defence and infrastructure, in a major policy shift that upends its ironclad controls on government spending. German bonds sold off by the most since 2022 on the news.

China’s stock market is defying sceptics. Strong momentum was fuelled by a jump in technology stocks, where DeepSeek’s earlier release of a free AI assistant that rivals ChatGPT is leading to a re-evaluation of the sector. Other areas of the market lagged due to escalating trade tensions, with new tariffs imposed by the US and Beijing responding in kind.

Looking Forward

The global investment environment is changing rapidly. Just a few months ago, the perception was that investing in a handful of US mega-cap technology names was the only game in town. Fast forward to today and one can make a cogent case for equities in the UK, Europe and emerging markets along with infrastructure, precious metal and commodity plays. The investment landscape is looking more interesting than it’s been in quite some time.

Bullish exuberance has faded in the US as markets have struggled to digest concerns over artificial intelligence along with slower economic growth and sticky inflation. Moreover, the Trump administration’s “ready, aim, fire” approach to foreign trade policy and tariffs is adding to the uncertain environment.

In Trump’s previous term, a boost from fiscal stimulus came first, with tariffs later. The order of policy implementation is different this time around. Tariffs are likely to be one of the first key economic policies, with the fiscal boost coming later. Moreover, the mass layoffs currently being executed by DOGE could have broader implications in terms of their impact on consumer spending and economic growth. The headwinds from these policies are likely to be felt before any tailwinds from the benefits of deregulation, increased government efficiency and tax cuts emerge.

In the meantime, the ‘broadening out’ theme is likely to continue to play out. US technology stocks are showing increasing signs of fatigue. The ‘Magnificent 7’ are no longer the sole driver of US earnings, as there has been a clear acceleration of growth in other sectors and regions over the past few quarters. Given that markets outside of the US have only delivered a fraction of the returns in the post-2008 surge, the valuation gap is extremely high and, as a result, they have been able to make gains while US markets have pulled back.

Our Strategy

The good news is that 2025 is off to a good start for those of us with a balanced portfolio of global markets and sectors and additional exposure to gold and gold mining stocks. Diversifying to take advantage of markets whose valuations have been left behind in recent years has been beneficial and remains an effective way of managing portfolios from both a risk and return perspective. Attractive opportunities at a reasonable price can be found in most regions outside of the US.

UK equities represent a strong value-orientated opportunity, with many high-quality companies trading at valuations significantly below global peers. They also offer a compelling income stream. Sector exposures in the UK are very different to other global markets, bringing important additional benefits in terms of diversification. The UK has minimal exposure to technology, but greater exposure to cash generative financials, energy and basic materials, along with high quality consumer staples.

The US monetary policy outlook is likely to be supportive for emerging markets, where equities look set to benefit from stronger domestic growth. Action by the Federal Reserve also provides greater flexibility for this region to initiate its own policy easing cycle without the fear of negative repercussions for its currencies. We are increasingly optimistic on China, where equities have benefited from a surge in enthusiasm for AI products. Policy measures implemented last year to boost growth are finally starting to translate into an improvement in the property market and consumer demand. A stronger China would further increase the attraction of emerging markets in general and help unlock some of the value that’s been accumulating over the past decade or so.

Equities in Latin America are also looking extremely cheap. Javier Milei’s success in Argentina has changed the political equation in the region. Over the coming 18 months, Chile, Peru, Columbia and Brazil will head to the polls – and the chances are rising of a big shift to the right. If so, investors are likely to return to the region and the year-to-date rally could really have legs.

While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. From an income perspective, yields are now attractive in both absolute and real terms (relative to the level of inflation). Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer (except for index-linked bonds), which remains our central view.

Alternative assets such as infrastructure, renewables, gold and commodity stocks offer a valuable additional source of diversification and allow us to hedge against inflation and other potential risks and capitalise on wider opportunities outside of traditional bonds and equities. Stimulus by China could exert further upward pressure on commodity prices. We continue to view gold as essential portfolio insurance. The combination of higher geopolitical risk, lower interest rates and strong central bank demand has created a highly favourable environment for the yellow metal, which has risen steadily throughout recent turbulence, earning its reputation as a safe haven in stormy times. Our exposure to both physical bullion and gold mining shares across standard portfolios has been a major contributor to outperformance against their benchmarks.

Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk to dampen volatility and smooth the path of returns.