The February Fumble
In February, investors reassessed growth risks in the US, questioning whether elevated earnings expectations and valuations were sustainable. Policy uncertainty weighed on corporate and consumer sentiment, reigniting concerns over economic momentum.
Growth concerns and policy uncertainty in the US: US equities faced headwinds, particularly in mega-cap tech, with communication services and consumer discretionary sectors underperforming. However, rotation within the market saw consumer staples, energy, and real estate posting gains. With policy uncertainty and high valuations, US equities may remain volatile. Defensive sectors may outperform as investors seek stability.
Europe leading the charge: European equities outshined the US, making them the best-performing major index. Financials led the rally, benefiting from strong returns on equity compared to their US counterparts. Defense stocks also gained as European governments signaled increased military spending. Europe’s strong performance highlights the value of regional diversification. Financials and defense stocks remain attractive.
Large caps vs small caps in the UK: Large-cap banks, defense firms, and pharmaceutical giants lifted the FTSE 100, while small and mid-sized companies lagged due to domestic economic concerns. UK equities may see mixed performance. Large-cap stocks could benefit, but small and mid-caps may face pressure.
Tech optimism meets real estate struggles in China: Chinese equities surged, fueled by optimism around Deepseek and an improving regulatory outlook, though real estate sector struggles weighed on GDP-sensitive stocks. Tech may continue to thrive, but challenges in real estate and domestic growth could limit gains. A selective approach is advised.
The yen-sensitive market suffered: Japan’s market weakened as the yen appreciated against the US dollar. The Nikkei 225 dropped 6.1%, led by weakness in large-cap tech and exporters. Japan’s market faces continued pressure from currency fluctuations, but opportunities may arise in non-export sectors.
Indian markets slide amid external pressures: India’s markets continued their slide, erasing $900bn in investor value over six months as foreign outflows, high valuations, and weaker earnings took a toll. The Nifty 50 endured its longest losing streak in 29 years, exacerbated by concerns over US tariffs. India’s short-term outlook remains challenging due to high valuations and external pressures.
Nvidia's AI Slump, But AI Demand Holds Strong.
The AI rally this year lost some of its steam after the rise of Deepseek, with Nvidia losing $593bn in market value, the largest one-day loss for any US company. However, Nvidia's strong growth forecast for the first quarter signaled that booming demand for its AI chips was intact, and the company said orders for its new Blackwell semiconductors were "amazing."
Yields in Flux
In February, US bond markets saw volatility as strong CPI data led the Fed to project just one rate cut, initially pushing yields higher. However, concerns over Trump’s tariffs, inflation, and economic weakness drove a shift to safer assets, lowering yields.
Central banks took action, with the Bank of England implementing its third rate cut in six months, lowering rates amid weak growth. The Reserve Bank of India followed with its first cut in five years. The ECB is expected to ease further in March, while the Fed, adjusting to inflationary pressures from tariffs, revised its outlook to two rate cuts in 2025.
Yields remain volatile amid inflation risks and policy uncertainty. High-quality bonds are favored, while sentiment hinges on central bank decisions and economic data.
Bullish on Bullion
After making multiple record highs throughout 2024, gold appears poised to enjoy its best annual performance in 45 years. Gold broke through the $2,900/oz for the 1st time in February and rose 8.9% by the end of the month, while silver was up 7.9%. The Gold/Silver ratio stood at 91.86.
While central-bank gold purchases are difficult to predict due to policy-driven factors, the core motivations such as diversifying reserves amid rising sovereign debt and geopolitical tensions are likely to persist. We remain bullish on precious metals, anticipating that this growth shall persist too.
Oil tumbled
Brent prices fell to lows of $72.75 per barrel in February, reaching the lowest level since December 2024. The ongoing progress toward a resolution in the Russian-Ukraine conflict continues to pressure crude oil markets but the possibility of easing sanctions against Russia may increase global oil supply, putting additional pressure on prices.
Crypto Crash
The cryptocurrency market experienced a significant downturn, with Bitcoin and Ethereum losing over 20% of their value. The lack of concrete regulatory advancements spoiled the optimism regarding a pro-crypto agenda, contributing to market sell-offs. Market sentiment remained weak, with liquidations exceeding $800m on the last day of February. However, prices regained a positive momentum in March with the announcement of a US crypto reserve by Trump.
Diversification Wins
European equities highlighted the value of regional diversification, while positive bond returns reinforced fixed income’s role in hedging equity volatility. With US tax and trade policies still uncertain, maintaining a well-diversified portfolio remains key.