Market Update with Aled Phillips

Market Returns:

February highlighted the importance of diversification for portfolios.  In sterling terms, global Equities fell 1.6% whilst global Fixed Income rose 1.2%.  Risk off investment returns fed through to commodity markets with gold gaining 2.1% against a broader commodity index that fell 1.5% led in part by oil.  Over the course of the month the US dollar declined 1.4%.

Regionally in Equities, in sterling terms, the US, Japan and Pacific ex Japan all fell over 2% whilst UK equities gained over 1% but were beaten by European equities which rose 2%.  The out-performer on the month was China which gained over 10%.

Across all Equity regions Value outperformed Growth whilst in US, UK, Europe and Emerging Markets large cap stocks outperformed but this was not translated through to Japan, Asia Pacific ex Japan and Emerging Markets where mid-caps outperformed.

This breath of performance can also be seen in equity sectors.  In the UK and Europe, Cyclical and Defensive sectors saw strong performances in Financials and Healthcare.  In the US, Cyclical and Defensives were also the strongest performer areas but with Real Estate and Consumer Staples. 

In Fixed Income, all sub asset classes produced positive performance led by Investment Grade bonds.

Drivers:

After a strong 2024 and start of 2025 investor sentiment in the out-performers of last year started to falter in February. Fears over inflation risk have been overshadowed by growth concerns in the US.

 For diversified portfolios, the outlook is not all bad with global Fixed Income markets playing their traditional role of offering uncorrelated returns to equity markets.

 But the growing uncertainty on the next move by the new US administration has impacted both corporate and consumer sentiment with US consumer confidence reporting its biggest decline since August 2021. Investors swing away from inflation concerns to focus on growth risks has brought into question the high earnings expectations particularly for US equity markets.

 On the flip side, the continued positive momentum seen in Chinese tech stocks, coupled with the added tailwind from the weaker US dollar has supported Emerging Markets.  In particularly excitement over DeepSeek, coupled with the high-profile meetings Xi held during the month with senior business leaders in this sector has led to optimism for an improved regulatory environment.

 Japan struggled during the month as the Yen weakness which has supported gains over the last year reversed in February.  The Yen versus the US dollar appreciated 1.5% in February.

 European and UK equities outperformed on increasing optimism of a ceasefire in Ukraine.  European Financials and Defence stocks were the best performers.  Given the renewed focus on domestic production the European Defensive sector saw returns of over 9%.

 The strong performance for regional equities alongside Fixed Income showed the importance of diversification in portfolios.