A growing divergence between the US and the rest
Growing uncertainty about the impact of the new US administration's policy agenda 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 reached $2,900 per ounce as geopolitical and economic uncertainties continued to support its appeal as a safe-haven asset, 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.
Tariff nerves and a change of leadership among sectors
US equities were buffeted by erratic news flow on tariffs. Following 25% tariffs on goods imported from Mexico and Canada, an additional 25% tariff was announced on European cars, triggering 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 on 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 0.9% month-on-month, the sharpest fall since March 2023, and consumer weakness confirmed by a disappointing earnings outlook from Walmart. Initial jobless claims increased over the month, and there was concern that the mass layoffs being executed by the newly established Department of Government Efficiency could, in the short term, weigh 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, up from 2.4% in September. Despite firmer inflation data, global bond markets closed 0.7% higher, as investors chose to focus on weaker US sentiment data and the risks to growth.
Banks lead at home while Europe rearms
UK equities experienced mixed fortunes in February. The economy unexpectedly grew by 0.1% during the final quarter of last year, although 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%, with 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 the Prime Minister'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. 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%), NatWest and Barclays (both +10%). The sector is making new multi-year highs, yet valuations remain on an average multiple of just seven times 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 brought 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, a major policy shift that upends Germany's 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 amid escalating trade tensions, with new tariffs imposed by the US and Beijing responding in kind.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
The most interesting landscape in quite some time
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 has 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 administration's "ready, aim, fire" approach to foreign trade policy and tariffs is adding to the uncertain environment. In the President'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 among the first key economic policies, with the fiscal boost coming later. The headwinds from these policies are likely to be felt before any tailwinds from 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, and the 'Magnificent 7' are no longer the sole driver of US earnings, with 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.
A few months ago, a handful of US technology names looked like the only game in town. No longer.
2025 is off to a good start for those with a balanced portfolio of global markets and sectors and additional exposure to gold and gold mining stocks. Attractive opportunities at a reasonable price can be found in most regions outside of the US.
The United Kingdom
UK equities represent a strong value-orientated opportunity, with many high-quality companies trading at valuations significantly below global peers, and a compelling income stream. Sector exposures in the UK are very different to other global markets, bringing important additional benefits in terms of diversification: minimal exposure to technology, but greater exposure to cash-generative financials, energy and basic materials, along with high-quality consumer staples.
Emerging markets and China
The US monetary policy outlook is likely to be supportive for emerging markets, where equities look set to benefit from stronger domestic growth. We are increasingly optimistic on China, where equities have benefited from a surge in enthusiasm for AI products and policy measures implemented last year 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.
Latin America
Equities in Latin America are looking extremely cheap. Javier Milei's success in Argentina has changed the political equation in the region. Over the coming 18 months, Chile, Peru, Colombia 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.
Bonds over cash
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, which remains our central view, with the exception of index-linked bonds.
Conviction in gold
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.
Capturing the upside, controlling the risk
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.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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