Global Market Review – February 2025

N.B. All performance details are in GBP terms unless otherwise stated.

A risk-off mood prevailed in US markets as investors contemplated multiple bearish narratives. Softening economic data, coupled with hotter inflation indicators have given rise to stagflation concerns. Uncertainty around the Trump administration’s trade, tax, and geopolitical policies have continued to be under the spotlight and have been a key driver of market volatility. There have also been concerns that the AI secular growth theme may be slowing, and elevated selling pressure has been exacerbated by signs of overstretched positioning. Influential big tech names such as Tesla (-27.5%), Alphabet (-17.6%), and Amazon (-11.9%) saw notable declines, leading the MSCI US index to fall by 2.9%.

Europe’s outperformance over the US continued, supported by favourable macro trends and valuation momentum. Despite ongoing ambiguity surrounding possible US tariffs on European goods, optimism on a potential end to the war in Ukraine, the outcome of the German election, and strong Q4 2024 earnings were key drivers. Financials, food & beverage, and telecoms were the leading sectors.

In the UK, the economic and corporate story was mixed. Manufacturing weakness resulted in a two-month low in the composite PMI reading, but Q4 2024 GDP surprised on the upside with a 0.1% expansion due to strength in the services sector. The Bank of England’s outlook also saw adverse developments with an acceleration in wage growth and an upside surprise to inflation. The FTSE 100, led by banks, defence companies, and pharmaceuticals rose during the month, while the more domestically exposed small-cap indices deteriorated.

Japanese equities also eroded all of their January gains during February. Despite Japanese companies generally providing positive earnings reports, with rising dividends and share buybacks, a weakening US dollar and the lack of visibility in US trade policy weighed heavily on market sentiment, particularly hurting large-cap exporters.

Mixed returns were also seen in other Asia Pacific and Emerging Market areas. Chinese markets were buoyed by strong performance in AI/technology stocks and government stimulus measures aimed at further stabilising the economy. Indian equities suffered a fifth successive monthly loss as high valuations, subdued corporate earnings, and slowing economic growth led international investors to continue reducing their exposures. Emerging Europe, particularly Poland, was stronger on optimism of a conceivable resolution in Ukraine. Taiwan declined as key index component TSMC suffered knock-on effects from a global decline in frothy semiconductor names, and other countries including Brazil, South Korea, Thailand, and Indonesia all smarted from below par economic data and the uncertainty surrounding US trade tariffs.

Somewhat pleasingly, considering the positive correlations we saw in 2022, global bond markets exhibited their typical negative correlation to equities, with yields falling as prices rose. UK gilts, measured by the ICE BofA UK GILTs All Stocks Index rose 0.8%, with US and European sovereign debt also providing positive returns.

Despite falling gilt yields, UK property returns were 1.5% lower, as measured by the FTSE EPRA NAREIT UK Index, though under the hood the story was more nuanced. Many individual companies saw high single-digit or low double-digit gains, but the overall index was weighed down by losses in large index constituents such as Segro plc (19.2% of the index) declining 1.84%, Land Securities (8.5% of the index) falling 3.50%, and British Land Co (7.3% of the index) dropping by 4.45%.

A drop of 5.5% in the Brent crude price was attributed to steps towards possible Ukraine peace talks, OPEC+ policy speculation, and US policy influences. There was some resilience in industrial and precious metals, but the oil price alongside weakness in agricultural components pushed the broad commodities index lower over the month.

“US exceptionalism” is a term that has been used a lot over recent years, and with then market capitalisation of US equities dominating global equity indices and US economic policy influencing that of their global peers, it is easy to see why. However, it now appears less certain whether the term can still be used to refer to investment returns, at least in terms of equities over the short-term.

The benefits of diversification were on show in February, with alternatives to the “US exceptionalism” and “US growth” stories proving their worth. While positive steps appear to be being taken with regards to some macro-overhangs, such as the situation in Ukraine, others - especially the impact of US trade tariffs - remain uncertain. With markets also remaining somewhat concentrated despite recent selloffs, we would expect volatility to remain elevated while this economic uncertainty continues. We continue to believe that this volatility will provide an improved set-up for active managers to capitalise on attractive opportunities for the long-term.

Your investment can fall as well as rise in value, and the income derived from it may fluctuate. You might get back less than you invest. Currency exchange rate fluctuations can also have a positive and negative affect on your investments. Please note that EFG Harris Allday does not provide tax advice. Past performance is not a reliable indicator of future performance.