After a positive January, February saw a reversal in larger US companies returns on the back of uncertainty over the US government’s policy agenda, which acted as a headwind to both consumer and corporate sentiment. However, other major growth asset markets made headway.
The UK and the European equity markets showed a positive trend, as perhaps cheaper valuations do matter when interest rates look to be cut.
THE ECONOMIC PICTURE
Starting with the economic picture, inflation data in the US and UK surprised to the upside in January, with headline figures of 3%. It was more worrying in the States, where analysts pointed to a core rate of 3.5%, with autos, food, electricity and insurance all important factors even before tariffs have an effect.
Despite the ability for tariffs to increase inflation and the January inflation data, markets remain focused on sentiment and the risks to growth.
February saw both business and consumer sentiment weaken. Services activity and small business investment intentions both dropped, while consumer confidence recorded its largest fall since August 2021.
At present the markets are pricing in only 1-2 rate cuts by the US Federal Reserve in 2025, versus 3-4 cuts in the UK and Europe. It is not surprising that the Federal Reserve is hinting that interest rate declines will be limited, whilst The Bank of England cut rates in February and hinted at more to come in the coming months.
GROWTH ASSETS
Turning to growth assets, European equities outperformed the US in February as investors factored in the likelihood of a ceasefire in Ukraine, along with a strong performance from financials. In comparison, US equities were hindered by continued worries about the valuations of the ‘Magnificent 7’ technology stocks.
Asian equities rose 1.1% over the month, driven by Chinese stocks which rose 11.7% in dollar terms. Enthusiasm about AI company DeepSeek continued to support the broader Chinese tech’ story. Japan was the regional outlier as the yen-sensitive market suffered as the currency appreciated by 2.8% against the dollar.
FACTOR PERFORMANCE
Moving to factor performance, the positive returns in both European and UK markets reflected in the Value factor, which was the best performer over the month.
In contrast both Small-Cap and Growth were the relative underperformers as global small cap stocks delivered negative returns on wider growth concerns.
DEFENSIVE ASSETS
Turning to Defensive assets, all major fixed income sectors delivered positive returns over the month, as falling US yields fed through to other parts of the market.
Strong corporate fundamentals helped investment grade bonds over the month.
SUMMARY
In summary, investors remain focussed on whether high earnings expectations are justified, along with the risks to growth in the US.
The rise in European equities highlighted the importance of regional divergence, while the positive returns in defensive assets show that bonds can once again protect against equity losses.
With US led uncertainties ahead, investors should remain diversified to protect portfolios against any further volatility in the coming months.
Glossary:
Asset Markets – Markets where financial assets such as stocks, bonds, and commodities are bought and sold.
Business Sentiment – The outlook and confidence levels of businesses regarding the economic environment and their future prospects.
Consumer Confidence – A measure of how optimistic or pessimistic consumers are about their financial situation and the overall economy.
Core Inflation Rate – A measure of inflation that excludes volatile items such as food and energy prices to provide a clearer picture of underlying inflation trends.
Defensive Assets – Investments, such as bonds, that are considered lower risk and provide stability during economic downturns.
Economic Picture – A broad overview of economic conditions, including inflation, growth, employment, and monetary policy.
Equities – Shares of companies traded on stock exchanges, representing ownership in those businesses.
Factor Performance – The return characteristics of specific investment styles or factors, such as Value, Growth, or Small-Cap.
Federal Reserve (Fed) – The central bank of the United States, responsible for monetary policy, including setting interest rates.
Fixed Income – Investments that provide regular income payments, such as bonds.
Growth Assets – Investments with the potential for capital appreciation, such as stocks and real estate.
Growth Concerns – Market worries about slowing economic expansion, which can impact corporate earnings and investment performance.
Headline Inflation – The total inflation rate including all goods and services, including food and energy prices.
Inflation – The rate at which the general level of prices for goods and services rises, eroding purchasing power.
Interest Rates – The cost of borrowing money, typically set by central banks to influence economic activity.
Investment Grade Bonds – Bonds issued by corporations or governments that have a high credit rating, indicating lower risk of default.
Monetary Policy – Actions taken by central banks to control inflation, manage employment levels, and support economic growth, often through interest rate adjustments.
Rate Cuts – A reduction in interest rates by central banks to stimulate economic activity.
Regional Divergence – Differences in economic or market performance across various geographic regions.
Sentiment – The overall attitude or mood of investors, businesses, or consumers towards financial markets or the economy.
Small Business Investment Intentions – A measure of how much small businesses plan to invest in expansion, hiring, or capital expenditures.
Small-Cap Stocks – Shares of smaller publicly traded companies, typically with market capitalizations under $2 billion.
Tariffs – Taxes imposed on imported goods, which can affect prices, trade flows, and inflation.
Value Factor – An investment style that focuses on stocks perceived to be undervalued based on financial metrics such as price-to-earnings ratios.
Volatility – The degree of variation in asset prices over time, indicating risk and uncertainty in financial markets.
Yields – The income return on an investment, typically expressed as a percentage, such as the interest earned on a bond.
‘Magnificent 7’ Technology Stocks – A term used to refer to a group of dominant US technology companies with significant market influence.
Yen-Sensitive Market – A stock market or economy that is highly influenced by movements in the Japanese yen.
Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is no guarantee of future performance.
The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Your capital is therefore always at risk. It should be noted that stock market investing is intended for the longer term.
