February continued along similar lines to January. Investors concentrated on the growth risks in the US and continued to question whether high earnings expectations and elevated valuations – especially the tech megacaps – were justified. Market leadership broadened for a second month, with Europe putting in another stellar performance, while there was continued positive momentum in Chinese tech stocks, helping emerging markets outperform their developed market peers.

The uncertain final destination for US tax and tariff policies – and their inflation and growth implications – continued throughout the month. President Trump confirmed that the tariffs on Canada and Mexico would still go ahead, leading to a fresh sell-off as investors faced up to the prospect of an imminent adjustment and lifted their inflation expectations for the year. Turning to sectors, consumer staples and real estate were the major outperformers, with consumer discretionary and communication services and IT the key laggards.

Source: Bloomberg as at 28 February 2025.

In February, US equities experienced a rollercoaster ride, with the S&P 500 reaching a new high on 19 February before reversing course and ending the month lower as economic concerns mounted, trade tensions resurfaced, and geopolitical uncertainty ratcheted up. President Trump’s announcement of 25% tariffs on imports from Canada, Mexico, China and the European Union reignited fears of a global trade war, unsettling investors. Meanwhile, consumer confidence wobbled, with sentiment indicators dropping to an eight-month low, reflecting growing concern about the US economy’s trajectory. Inflation remains a key focus, with January’s CPI release the strongest monthly print since August 2023.

The technology sector, previously a market darling, faced headwinds, with the Nasdaq by far the weakest performing major US index. Nvidia, despite reporting 78% year-on-year revenue growth, saw its shares decline due to a dip in gross margins and the smallest revenue beat in two years, underscoring investor sensitivity to any signs of potential weakness. The Magnificent 7 put in its weakest performance since December 2022. However, there was continued evidence of a rotation inside the index with sectors such as consumer staples, energy and real estate all delivering healthy positive returns over the month.

The FTSE/JSE ALSI delivered a flat return in February, weighed down by a noticeable increase in fiscal and geopolitical headwinds. In the US, President Trump announced the freezing of all aid to South Africa due to unverified claims of land confiscation, leading to heightened geopolitical tensions and weakened investor sentiment. Adding to the uncertainty was the postponement of Finance Minister Enoch Godongwana’s national budget speech after the coalition government failed to agree on the Finance Minister’s proposed VAT increase (from 15% to 17%). Lastly, after nearly 12 months of uninterrupted power supply, load-shedding returned to its highest level following the failure of multiple Eskom units. The power utility has since reconfirmed its commitment to eliminating disruptions to the power supply, noting that load-shedding should be largely behind us due to structural improvements in its generation fleet.

Turning to economic indicators, the South African Reserve Bank (SARB) cut its key interest rate by 25 basis points to 7.50%, marking the third successive rate cut. The central bank noted that while inflation appeared well-contained, the medium-term outlook was more uncertain. CPI rose to 3.2% in January, still below the SARB’s 4.5% target, while core inflation eased to 3.5%, its lowest level since February 2022. Manufacturing activity continued to weaken, with the PMI dropping to 45.3 in January amid trade disruptions in Mozambique, fuel shortages, and the impending closure of ArcelorMittal.

Source: Bloomberg as at 28 February 2025.

Chinese equities enjoyed a very strong month in February, as investors were encouraged by the positive momentum from the Deepseek launch, offsetting further tariff concerns, with previously announced US tariffs on Chinese imports taking effect on 4 February.

On the data front, China's manufacturing sector showed signs of recovery as the official manufacturing purchasing managers’ index (PMI) rose into expansionary territory to 50.2 from January's 49.1. This improvement was attributed to higher new orders and increased purchase volumes as factories resumed production after the Spring Festival holiday. The US announced a 25% tariff on all steel and aluminium imports into the US, which prompted a series of retaliatory measures from China, targeting US agriculture and food products.

Perhaps of greatest significance over the month was the symposium chaired by President Xi Jinping, attended by prominent business leaders, including Alibaba co-founder Jack Ma, who has largely kept a low public profile since his critique of the government back in 2020. This was viewed favourably by markets and acted as a clear signal that Beijing was willing to work with the private sector to harness future growth. Discussions focused on promoting healthy, high-quality development and addressing challenges such as monopolies and unfair competition.

This positive development, coupled with the renewed optimism around China’s standing in the global AI race, and in technological innovation more broadly, has raised expectations of a better growth outlook. The market is looking ahead to the annual parliament meeting at the start of March in the hope new stimulus announcements will be made.

Tailwinds from China and a weaker US dollar propelled emerging market equities to outperform their developed market peers, despite volatility late in the month. Chinese markets were choppy earlier in the month on renewed US tariff risk but managed to recover ground. Supportive policy signals following President Xi’s meeting with tech leaders fuelled optimism for Chinese stocks, coupled with the renewed optimism around China’s standing in the global AI race, which saw China outperform most markets. Taiwan’s market pulled back amid increased volatility stemming from tariff threats in the technology sector. Meanwhile, strong earnings and corporate actions (especially in the tech sector) fuelled a mid-month rally in South Korea, but this was bookended by a late-month pullback amid US trade pressure and general weakness in global markets. Elsewhere, it was another weak month for India’s market, as investors rotated capital back into China.

Following a significant sell-off in 2024, Latin American equities continued to recover ground in February, albeit at a slower pace. Most markets in the region posted gains but Brazil was a drag, selling off as rising fiscal deficits and price pressures pushed the central bank to reintroduce rate hikes. Elsewhere, Central and Eastern European (CEE) markets enjoyed a strong month of performance as Poland’s bourse touched all-time highs during the month. Other smaller CEE markets were generally supportive with modest returns. Overall, CEE was a notable performer within the EM universe, buoyed by strength in European stocks more broadly and the potential stabilisation of the Ukraine conflict.

European equities ended the month as the top performing major equity index. Financials maintained their strong run and were the top performing European sector with returns on equity that continue to outstrip their US counterparts. European defence stocks also benefitted from a renewed focus on domestic production. On the political front, the German election took place in the latter part of the month. The result was broadly in line with opinion polls beforehand, and the conservative CDU/CSU bloc opened exploratory talks with the centre-left SPD to form a new government.

UK equities also rose in February, led by large cap banks, defence companies and the big pharma names. Sentiment towards UK small and mid-sized companies was weaker, weighing on the FTSE 250 and FTSE Small Cap indices. This was largely down to ongoing concerns around the domestic economic outlook, which filtered through into the poor performance of a number of consumer-facing sectors. In response to the growing European security threat, Prime Minister Starmer announced an increase in defence spending to 2.5% of GDP by 2027. However, this added to fears that taxes might have to rise again, raising concerns about the UK’s fiscal outlook. Positively, the UK avoided US tariffs, given the lack of trade deficit with the US. On the monetary front, the Bank of England cut rates by 25 basis points.

US Treasury yields fell sharply over February in what was another volatile month. Despite spiking to over 4.6%, the 10-year yield ended February at 4.2%, with the risk-off tone in markets benefitting Treasuries. Conflicting factors influenced yields; while US CPI data was higher than expected and inflation expectations rose, the services purchasing managers index (PMI) data was much weaker than expected and moved into contractionary territory for the first time in over a year. Ongoing trade tariff discussions continued, but were ultimately imposed on China, Mexico and Canada in early March. However, US Federal Reserve Chair Powell has said that the imposition of tariffs will likely lead to higher inflation, weighing on the outlook for rate cuts. As of the end of the month, the market is pricing around 70bps of cuts by December 2025.

Government bond markets were volatile in Europe, but 10-year bond yields across Germany, France, and Spain ended the month slightly lower. At the start of February, yields fell on lower-than-expected inflation data and weaker-than-expected growth indicators such as the PMIs. Yields subsequently rose sharply given the prospect of increased defence spending across Europe, before falling into month end.

Despite intra-month volatility, UK 10-year Gilt yields ended February slightly lower. The Bank of England (BoE) cut interest rates by 25bps to 4.5% while also cutting its growth forecast in half to 0.75% in 2025. The bank also suggested it expects headline inflation to rise to 3.7% later this year driven by energy, food and regulated prices, although they do not expect this inflationary pressure to be persistent. Towards the end of February, headline inflation figures for January rose to a 10-month high of 3%, while the closely watched services inflation print came in below expectations. However, gilt yields still fell across the curve, driven by the risk-off tone in markets and the somewhat dovish BoE.

Bond yields in Japan continued on their upward trajectory of the last six months, fuelled by a growing consensus that the Bank of Japan (BoJ) may raise interest rates sooner than previously expected as inflation expectations continue to rise, and wages remain on an upward trend. However, yields dipped slightly towards the end of February as Japan-style core CPI inflation for Tokyo was lower than expected, albeit still above the BoJ’s 2% target.

Source: Bloomberg, as at 28 February 2025.

Within global credit markets, the sharp fall in US Treasury yields benefited fixed income assets the most, particularly US investment-grade bonds. US high-yield bonds fared less well as the combination of weaker US economic data and a risk-off tone in markets caused credit spreads to widen. In Europe, returns in both of these markets were more subdued, reflecting less-pronounced moves in their government bond markets.

However, credit spreads tightened in Europe, supported by continued demand for credit, helping the high-yield market. Returns were positive but more muted in markets with floating coupons, such as loans and structured credit (CLOs). There was a significant tightening of credit spreads in the European loans market, boosting performance; in contrast, spreads widened in the US loan market. This was a similar theme in CLO markets.

Against a volatile global backdrop, the emerging market (EM) fixed income asset class delivered positive returns in February. The local currency debt market (JP Morgan GBI-EM) gained 0.7%, driven by bonds – EM currencies were broadly flat on the month. Latin American markets were among the top performers, with Mexico’s bonds benefiting from further dovish comments from the country’s central bank. In contrast, Turkey’s local bonds underperformed as a higher-than-expected inflation print added uncertainty around the central bank’s rate cutting cycle.

Hard currency sovereign markets performed well, with the JP Morgan EMBI posting a 1.6% gain. This was led by investment-grade bonds (2.3%), which benefited from the fall in US Treasury yields. The high-yield part of the market gained 0.9%, boosted by a rally in some of the more distressed markets, such as Lebanon, which is moving closer to an IMF deal. Underperforming markets included Ecuador, which sold off meaningfully after the opposition candidate performed much better than expected in the first round of the presidential elections.

The EM corporate debt market had a positive month, with the JP Morgan CEMBI climbing 1.5%. Both the investment-grade and high-yield parts of the market delivered positive returns (1.7% and 1.4%, respectively), with the rally in US Treasury yields a significant driving factor – offsetting a slight widening of credit spreads. All sectors posted positive returns, led by real estate and metals & mining. From a country perspective, Ukraine’s bond market was the top performer as market participants priced an increased likelihood of a ceasefire.

Source: Bloomberg as at 28 February 2025.

Concern over the potential impact of US tariffs weighed on oil in February, with the price of a barrel of Brent crude losing almost 5% to end the month at approximately US$73. Oil has been weaker since the Trump administration took office on the risk that a trade war could slow global growth and suppress demand. In contrast, US natural gas prices gained in February, partly because the cold weather stoked buying.

The price of copper rose by more than 3% after the US initiated a review that may result in tariffs on the industrial metal on national security grounds. Trade-war worries – and geopolitical tensions more broadly – also supported gold, with the precious metal gaining 2% to end the month at about US$2,858 per Troy ounce. But iron ore declined in February, impacted by trade tensions and a pick-up in supply.

Source: Bloomberg as at 28 February 2025.