It’s been an interesting few months – to say the least. After a strong start to the year, February proved to be a more challenging period with markets facing growing uncertainty under the new Trump administration, particularly the unpredictability of his new tariffs and policy reversals.
Rising trade tensions added to the unease, with Trump affirming 25% tariffs on Mexico and Canada along with an additional 10% import tax on Chinese goods, taking effect in March. In addition, geopolitical uncertainties escalated when negotiations between the US & Ukraine collapsed at the end of the month.
As a result, corporate and consumer confidence declined, raising concerns about future economic growth. These developments weighed on market sentiment dragging down overall performance – especially in US equities throughout February.
Equities: A stronger quarter for Europe – US markets volatile
Focusing on equity markets, it’s fair to say that returns have been mixed since the start of the year.
Firstly, to America. Following a broadly positive month in January, US equities had a particularly challenging February with markets falling by almost 5% and finishing 1% lower when measured over the previous 3 months. The biggest drags on the US stock market were the technology giants of the ‘Magnificent Seven’ group of shares and Nvidia in particular which – whilst still well up over the last year – gave up a fair chunk of its gains.
By contrast, European equities have been a strong performer – delivering over 10% returns over the same quarter. This was despite political upheaval in France and relatively poor economic data out of Germany. This may have been driven in part by the potential for the European Central Bank (ECB) to choose to cut interest rates faster than across the pond, which may well be what the market is focusing on.
Closer to home, there have been solid returns despite political headwinds facing the UK’s new Government.
The Autumn budget in the UK was poorly received, reinforcing the prevailing view of a Government struggling to hit the ground running. Despite this uncertain start, UK equities followed the positive trend of their European counterparts – delivering positive returns of over 10% over the quarter, with the FTSE-100 index of UK shares hitting all-time highs.
It is worth remembering that the UK’s stock market is more broadly viewed as a more defensive index, whereas our American cousins trade in share markets which – to a far greater proportion – are growth-oriented. What we may have witnessed is a ‘more expensive’ US market give up some gains, whilst a ‘better value’ UK market has trundled on.
Outside of Europe, most other regions posted modest gains over the period including, Emerging Markets which has seen particular strength from Chinese technology stocks following the emergence of Chinese artificial intelligence (AI) company DeepSeek.
DeepSeek has raised concerns about the potential dominance and valuations of US tech companies, including Nvidia, as well as the significant capital expenditures these firms have invested in AI development. In contrast, DeepSeek appears capable of delivering similar results with significantly lower computational power and at a fraction of the cost. Meanwhile, emerging markets saw broader gains, benefiting from a weakening U.S. dollar.
Bonds: Interest rates continue to soften, Fixed Interest continues its recovery
Bond markets were generally positive over the period as uncertainty over Trump’s policies, coupled with renewed fears of slowdown led to falling yields in the US. When yields on Bonds fall, prices go up. This fall in yields therefore resulted in gains across most parts of the fixed-income market. Strong corporate fundamentals aided investment-grade bonds (Bonds issued by companies rather than by governments) which were also able to post modest gains over the period.
As we know, central banks across the globe have been gradually cutting rates over the last year to counter slowing growth and inflation. However, over the longer term the outlook for continued cutting – whilst more likely than not – remains uncertain. Market watchers remain cautious about the potential inflationary effects of Trump’s “3 T’s” – tax cuts, trade and tariff policies, which could yet stymie central banks’ ability to continue rate cuts, particularly in the US.
The continued recovery of bonds, despite historically elevated interest rates, suggests that markets still anticipate further rate cuts – though perhaps at a slower pace than expected just a few months ago, as the full impact of the nascent Trump presidency unfolds.
While inflation remains a persistent concern, bonds continue to offer attractive income, particularly as other asset classes face heightened volatility.
Other areas
It’s worth recording that commodities generated strong gains over the 3 months to the end of February (+6%) led by the continued rally in gold. Gold prices hit record highs in February on the back of increased demand from Central Banks, as well as retail investors.
Summary
Looking forward we expect the year to be interesting and challenging as no one knows exactly what to expect from President Trump, and – as has been illustrated in recent weeks – markets do not like uncertainty. However, this will not be the only story dominating markets and as always, select opportunities will present themselves.
The impact of U.S.-China trade tensions, the political landscape in Europe, and the trajectory of central bank policies will continue to shape global markets.
Legal & Medical Portfolio Positioning
After a strong performance over 2024 for most asset classes, we saw increased volatility in late January as markets navigated the implications of the shifting policy landscape, President Trump’s tariffs as well as persistent geopolitical tensions. This increased volatility signalled more headwinds and resulted in our risk barometer falling into the amber zone, which reflects a more cautious outlook. Given this shift – and the more uncertain market backdrop – we felt it prudent to temper equity risk within the portfolios, and in late January we modestly trimmed equity holdings across each portfolio to help reduce volatility while increasing fixed-income holdings (i.e. Bonds).
We have since reviewed the market indicators and portfolio positionings in early March and remain happy that the steps we took to rebalance portfolios in January are sufficient – and appropriate – at this stage.
The modest rotation to fixed-income bonds focused on high-quality businesses that are close to maturity, which offer an attractive level of return and experience a lower level of risk. Our portfolios continue to hold a good mix of different asset classes, taking a diversified approach to investing, to smooth the investment journey for investors.
Whilst risk to the downside always remains, the portfolios are constructed to weather these risks whilst capturing the upside. Our portfolios continue to hold a good mix of different asset classes, taking a diversified approach to investing, to smooth the investment journey for investors.
- Equity holdings in the portfolios are designed to deliver long-term growth.
- Fixed income holdings focus on high-quality businesses that are close to maturity, which offer an attractive level of return and experience a lower level of risk.
- Alternatives such as infrastructure and commodities provide additional diversification benefits through the exposure to steady long-term cash flows which reflect the effects of economic growth and inflation.
As ever we will work to keep you informed and position your investments appropriately for the market conditions.
The concepts and suggestions in this article must not be viewed as advice. As always we recommend you approach a Financial Adviser who will take your circumstances into full consideration before providing advice.