Fintuity Market Review – February 2025
Global bonds once again demonstrated their value as diversifiers, providing resilience against equity losses for multi-asset investors.
After a strong start to the year, February saw renewed concerns over global growth, particularly in the US. Uncertainty surrounding government policy and its potential economic impact weighed on both corporate and consumer sentiment, contributing to a decline in developed market equities, which posted a total return of -0.7% for the month.
A key takeaway for investors was the continued strength of global bonds. Despite concerns that tariffs could drive inflation higher and inflation data exceeding expectations, bond markets focused on weaker US sentiment and economic risks. Business and consumer sentiment both softened, with service sector activity and small business investment plans declining. Consumer confidence saw its steepest drop since August 2021. While a budget framework was agreed upon, allowing for an extension of previous tax cuts, it failed to signal additional fiscal stimulus. Against this backdrop, Treasury yields fell, and the Bloomberg Global Aggregate Index returned 1.4% over the month.
Emerging markets outperformed developed markets, returning 0.5%, supported by continued gains in Chinese technology stocks. A weakening US dollar also provided a tailwind, with the broad dollar index declining 0.7%. Real estate investment trusts (REITs) were another beneficiary of falling yields, with US and European dollar-denominated real estate delivering solid performance, helping the global REIT benchmark rise 2.6%, making it the top-performing major asset class.
However, global small-cap stocks struggled despite typically benefiting from falling yields. Concerns over economic growth led to a -3.3% return. Worries about the sustainability of mega-cap technology earnings also weighed on global growth stocks, which declined 2.8%. In commodities, cold weather and temporary supply shortages pushed US natural gas prices higher, offsetting a drop in gold prices and helping broad commodities gain 0.8% over the month.
Equities
European equities outperformed US markets, with the MSCI Europe ex-UK Index rising 3.4%, making it the top-performing major equity index. Investors factored in an increased likelihood of a ceasefire in Ukraine, providing support to regional markets. European financial stocks continued their strong run, delivering returns that outpaced their US counterparts, while European defence stocks benefited from renewed domestic production efforts, gaining 9.3%.
Asian equities also advanced, rising 1.1%, with Chinese markets surging 11.7% in dollar terms. Optimism surrounding technological advancements and regulatory improvements supported investor sentiment. However, gains were largely concentrated in offshore markets, while concerns over domestic real estate weighed on GDP-sensitive sectors. Japan was an exception in the region, with the TOPIX declining by 3.8% as the yen appreciated 2.8% against the US dollar, negatively impacting its export-heavy economy.
US equities were weighed down by concerns over mega-cap technology stocks. Communication services and consumer discretionary sectors saw the biggest losses, falling 4.2% and 9.0%, respectively. However, there was evidence of a rotation within the market, with sectors such as consumer staples, energy, and real estate posting positive returns.
Fixed Income
All major fixed income sectors posted positive returns in February, driven by falling US Treasury yields. Treasuries were the top-performing sector, returning 2.2%, while the weaker dollar supported emerging market debt, which gained 1.6%.
Corporate fundamentals remained strong, helping to keep investment-grade credit spreads stable. Global investment-grade credit rose 1.6% over the month. However, US high-yield bonds underperformed slightly, returning 0.6%, as spreads widened modestly.
Government bond sentiment shifted most dramatically in the US, where Treasuries outperformed European counterparts. In Europe, optimism about a potential ceasefire in Ukraine lifted growth expectations. This, combined with concerns over increased government borrowing to support defence investment, resulted in smaller declines in European sovereign yields compared to the US. European government bonds returned 0.7% over the month, with Italian bonds outperforming German Bunds as spreads remained stable.
Conclusion
February reinforced the importance of diversification. Concerns over US economic growth weighed on investor sentiment, while European equities demonstrated strong performance. Fixed income markets provided valuable protection against equity losses, proving the continued importance of bonds in a diversified portfolio.
For those looking to navigate the complexities of investment markets, seeking guidance from a financial adviser near me can be invaluable. Whether you are searching for an independent adviser to provide unbiased insights, a certified adviser for pension planning, or an expert to assess investment fees, finding the best financial advisor for your needs is crucial. With markets expected to remain volatile, professional financial advice can help investors implement effective protection strategies while identifying opportunities to grow wealth.
