Investment Commentary – February 2025
Summary
February was a month of two halves for global equity markets experiencing significant volatility over the period. The month began on a strong note, however as the month progressed, markets faced a sharp sell-off, erasing earlier gains and turning slightly negative by month-end.
The downturn was driven by a combination of factors, including:
•A growth scare triggered by the U.S. Services PMI data falling into contraction.
•Microsoft canceling some data center leases, raising concerns about AI infrastructure spending and potential oversupply there.
•Escalating trade tensions, with renewed tariff threats impacting sentiment. Possibilities of trade wars.
Some relief came on the final trading day of February following the release of the U.S. Core Personal Consumption Expenditures (Core PCE) Price Index—the Federal Reserve’s preferred inflation indicator. The Core PCE for January 2025 met consensus expectations at 2.6%, down from 2.9% in December 2024. This decline in inflation alleviated concerns around inflation trends, leading to positivity in equity markets.
Fixed Income had a positive month. Both US Treasuries and UK Gilts posted positive returns.
Finally, Gold hit a new all-time during the month ($2,956 an ounce).
Equity Markets
Trade tariffs continued to be a significant theme for global equity markets during February 2025. Earlier in the month, the US President unexpectedly halted his proposed tariffs on Mexico and Canada just hours before they were set to take effect, granting the U.S.’s two largest trading partners a one-month reprieve. However, on the 27th of February, in a post on Truth Social, Trump wrote: “The proposed TARIFFS scheduled to go into effect on MARCH FOURTH will, indeed, go into effect, as scheduled.” In the same post, he announced plans to impose an additional 10% tariff on China on March 4, on top of the 10% tariffs already implemented earlier this month.
US
•U.S. equities posted a negative month. In GBP terms, the S&P 500 declined -2.6%, the Nasdaq 100 fell -4.8%, and the Russell 2000 dropped -6.6%.The decline was driven in part by significant weakness in major tech stocks, with Microsoft, Amazon, Tesla, and Alphabet among the notable detractors to U.S. equity returns.
•We had significant tech earnings over the month, with Alphabet, Amazon and Nvidia having reported. Whilst all three companies beat analyst headline expectations for earnings, the stocks all fell post earnings.
•On February 24th 2025, reports emerged that Microsoft had cancelled leases for several hundred megawatts of data centres capacity in the US. This move raised concerns about a potential oversupply in the company’s AI infrastructure, sparking discussions about the sustainability of the AI-driven stock market surge and the potential for an oversupplied data centre market.
•Beyond technology, there were many positive pockets within US equities, notably defensive sectors – Healthcare and Consumer Staples.
UK
•Large-Cap UK equities continued its outperformance against US equities, with the FTSE 100 Index producing +2% in returns. This contrasts with the FTSE 250 which fell -2.8% in February. Notable significant returns in UK Large Cap from Financials – HSBC, Lloyds, Natwest, Standard Chartered and Industrials – Rolls Royce and BAE Systems.
Fixed-Income
Dollar–Denominated Fixed Income
•The FOMC indicated that it was prepared to keep rates static for a longer period, given persistent inflation and uncertainty over US economic policy.
•The Core PCE Price Index, the Fed’s preferred inflation gauge, increased by 2.6% year-over-year in January 2025, down from 2.9% in December 2024. This decline helped ease fears of inflationary pressures.
•The U.S. Services Purchasing Managers’ Index (PMI) fell below 50 in February, signaling a contraction in the services sector and raising concerns about potential of an economic slowdown in the US.
Sterling-Denominated Fixed Income
Pound Sterling performed well against the US Dollar over the month, rising from around 1.24 to 1.26.
The Bank of England cut its benchmark interest rate by 0.25% to 4.5%, as expected, marking the third consecutive rate cut since the start of its easing cycle in August last year. Two members argued for a larger cut of 0.5%, including Catherine Mann, a well-known ‘hawk’.
The Bank reaffirmed that monetary easing would continue gradually throughout the year, balancing concerns about slowing economic growth and persistent underlying inflation. However, policymakers acknowledged that economic activity had already fallen short of earlier forecasts, prompting them to revise growth forecasts for the year downwards. This adjustment signals a shift in the Bank’s focus from inflation control to support for a fragile economy, raising market expectations of further rate cuts.
February UK inflation came in higher than expected, with headline rising to 3% YoY (2.5% in Jan). Beneath the surface, supercore services measure did retreat to a somewhat lower run-rate of c. 3.5% but offset by a resurgence in goods inflation. So a mixed inflation picture so far.
