A rotation towards value, then a geopolitical shock at the month's close
Global equities rose 1.2% in February, despite a decline in the US market. Performance diverged notably across styles and sectors: value stocks gained 2.9%, while growth stocks fell 1.7%, reflecting an ongoing shift away from higher-valuation companies towards businesses with steadier earnings, stronger cash flows and more reasonable valuations.
Value gains as capital rotates towards dependable earnings
Escalating tensions between the US and Iran kept the oil price elevated, supporting energy stocks globally. Gold and silver rose a further 3.4% and 4.2% respectively. Global bonds also delivered positive returns. The standout feature of the month, however, was the divergence across styles, with value stocks gaining 2.9% while growth stocks fell 1.7%, reflecting an ongoing shift away from higher-valuation companies towards businesses with steadier earnings, stronger cash flows and more reasonable valuations.
Investors rotate out of technology and into resilient earnings
US equities declined 0.8% during a volatile month, reflecting changing market leadership and increased investor caution. Investors rotated away from large cap technology stocks amid concerns over returns on significant AI-related spending, and where valuations have already priced in years of strong growth. This was illustrated by chipmaker Nvidia reporting strong earnings but seeing its share price fall the following day. Investors are also becoming increasingly selective about which business models are likely to benefit from AI, with greater scrutiny of software and platform companies whose models may be more vulnerable.
As confidence in these areas weakened, capital shifted towards companies offering more dependable near-term results. Utilities, materials and consumer staples were among the stronger performers, supported by stable and resilient earnings. US small-cap stocks gained 3.9%, outperforming large-caps. The sector continues to play catch up and is supported by improving expectations for domestic economic activity, which tends to favour smaller, more domestically focused companies.
A stellar month for the UK, Japan and emerging markets
Markets outside of the US had a stellar month. UK shares performed strongly, rising 7.0%, supported by the global rotation into commodities and more traditional "old economy" sectors perceived as less exposed to disruption from AI, such as materials, utilities and telecommunications. Healthcare also performed well, driven by robust earnings from leading pharmaceutical companies and continued deal activity supporting drug pipelines.
The Bank of England held interest rates at 3.75% but indicated that the next rate cut could come in March. Inflation eased to 3.0% in January, down from 3.4% in December. Policymakers highlighted the likelihood of a further decline from April, driven by the base effects of last year's increase in the national living wage. Official data showed the UK economy grew by 0.1% in the fourth quarter of 2025. Other indicators were more encouraging, with a record budget surplus in January and stronger retail sales, which came in well above expectations, rising 1.8% over the month.
Japanese equities extended their strong start to the year, rising a further 10.5%. A landslide election victory for Sanae Takaichi, Japan's first female Prime Minister, boosted optimism around her pro-growth agenda. Asia and emerging markets also delivered strong returns, rising 7.6% and 5.9% respectively.
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
A correction arrives as Middle East tensions escalate
Following a period of strong gains, global markets were vulnerable to a correction. The catalyst came at month-end, with an escalation in Middle East tensions after Israel and the US carried out joint strikes on Iran in Operation Epic Fury. Retaliation measures by Iran increased uncertainty and pushed markets into risk-off mode. The conflict also disrupted the Strait of Hormuz, a critical shipping route for around 20% of global oil supply.
Post the month end, oil prices have risen sharply in response, while both equity and bond markets have sold off as investors repriced geopolitical risk and the potential for sustained disruption of energy supplies. While a short-lived spike in the price of oil is unlikely to have a lasting impact, a sustained increase in energy costs would lead to higher inflation and weaker growth, potentially delaying expected interest rate cuts.
The key uncertainty is the duration of disruption in the Strait of Hormuz and the speed at which oil production normalises, particularly given damage to regional infrastructure. Political pressure is likely to favour de-escalation. With the US mid-term elections approaching in November, rising energy costs and borrowing rates are likely to cost votes for the Republican Party, increasing the incentive for a resolution. There remains a risk that the conflict broadens and persists for longer than expected. However, experience suggests the worst will be avoided, and that this will present a buying opportunity.
Experience shows that well diversified portfolios, anchored to long term fundamentals, are better placed to navigate volatility.
The current environment is a reminder that a multi-asset approach can help balance portfolios during different market conditions. While short-term events and market reactions can be unpredictable, our focus is on creating resilient investment strategies to navigate a range of different possible outcomes. We have explicitly considered the potential impact of a more inflationary environment in our current portfolio construction. In this context, broader diversification incorporating additional asset classes such as precious metals and commodities remains essential. While bonds offer attractive yields and can help insulate portfolios in the case of slower growth, they will not protect portfolios if inflation remains higher for longer, and returns may also be constrained by concerns around the sustainability of government debt.
A multi-asset approach can help balance portfolios during different market conditions. Our focus is on creating resilient investment strategies to navigate a range of different possible outcomes, having explicitly considered the potential impact of a more inflationary environment in our current portfolio construction.
Diversification beyond bonds
Broader diversification incorporating additional asset classes such as precious metals and commodities remains essential. While bonds offer attractive yields and can help insulate portfolios in the case of slower growth, they will not protect portfolios if inflation remains higher for longer. Returns may also be constrained by concerns around the sustainability of government debt.
An increased weighting in energy
Exposure to the energy sector has been increased in recent months. Prior to recent geopolitical developments, oil was arguably the cheapest and most disfavoured major asset class in global markets. Energy equities account for a mere 3% of the total US market capitalisation, barely above the pandemic-era lows. The prevailing view has been that the oil industry belongs to a bygone era, a relic of the industrial past. The same sentiment was evident toward gold in the late 1990s, shortly before it embarked on one of the strongest bull markets in modern history.
Conviction in gold and silver
Our constructive view on gold and silver remains unchanged. Gold continues to play a critical role as a portfolio diversifier amid geopolitical uncertainty and concerns around government debt and currency stability. At the same time, precious-metal mining equities are benefiting from strong pricing dynamics, supporting robust profitability and sector-leading growth.
Underweight the United States
Within equities, core positions are concentrated in the UK, Japan, Asia and emerging markets. In contrast, our allocation to US equities is significantly lower than a passive index market-capitalisation-weighted approach. This leaves portfolios underweight the mega-cap technology stocks, whose rate of return is likely to lag other parts of the market following a 15-year period of extraordinary returns. We believe that other markets offer a better long-term return and risk profile.
The United Kingdom comes back into vogue
The good news for the UK is that the market has many of the "old economy" companies that are suddenly coming back into vogue. Our UK exposure is biased towards cyclical, domestic and value-orientated sectors, along with small and mid-cap companies.
Emerging markets
Emerging markets are seeing strong inflows from foreign investors, as an improving domestic outlook draws attention to the combination of higher earnings growth and lower valuations in the region. The fundamental backdrop is improving for Chinese equities, powered by the technology sector where earnings growth is above 30%. The Chinese equity market remains just 3% of the total All-World index, which is less than the current value of Apple.
Japan
Japanese equities remain underpinned by attractive valuations, robust earnings and continuing corporate reforms. Following a landslide victory, Prime Minister Takaichi has a strong mandate for a pro-growth policy agenda. This includes fiscal stimulus and strategic investment in areas such as AI, semiconductors, energy and defence.
Capturing the upside, controlling the risk
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. This is the discipline our clients have come to expect, and the one we believe best serves the long-term stewardship of capital.
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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