Monthly Commentary – March 2025

After a strong start to 2025, February saw some of the shine come off the ‘US exceptionalism’ story. This is the belief that the exceptional characteristics of the US economy and stock market mean they can continue outperforming. Growing uncertainty about the impact of the policy agenda of Donald Trump’s administration weighed on both corporate and consumer sentiment, and concerns about growth started to re-emerge. Weak US performance acted as a drag on wider developed market equities, which were down over the month. Meanwhile, continued positive momentum in Chinese tech stocks and a weaker US dollar helped emerging markets outperform their developed market peers, with the MSCI Emerging Markets index up 0.7% over the month. Global bonds provided a silver lining for multi-asset investors, as they once again proved themselves as a diversifier against equity losses.

Despite the potential for tariffs to reignite inflation, and firmer-than-expected inflation data, global bond markets focused on weaker US sentiment data and the risks to growth. We continue to believe that a benign global growth environment will be supportive across asset classes. The ‘broadening out’ theme continues to play out. This is the expectation that after a strong run by the largest companies in the US, other stock markets will gain ground. As a team, we are closely monitoring markets for opportunities created by volatility resulting from the accelerated pace of geopolitical events.

United Kingdom

UK equities (company shares) experienced mixed fortunes in February. The FTSE 100 was broadly flat for most of the month but was buoyed in the last few days by Prime Minister Keir Starmer’s announcement of an increase in defence spending to 2.5% of gross domestic product (GDP) by 2027 and news that trade talks between the UK and the US were going better than expected. As a result, the FTSE 100 finished the month up 1.99%. However, inflation figures came in at 3%, which was above the expected rate of 2.8%, and this weighed on the FTSE 250 and FTSE SmallCap indices, which ended the month down -2.9% and -3.1% respectively.

“The FTSE 100 was broadly flat for most of the month but was buoyed in the last few days by Prime Minister Keir Starmer’s announcement of an increase in defence spending to 2.5% of gross domestic product (GDP) by 2027”

United States

February saw a degree of volatility in US markets. The Trump administration announced tariffs on goods imported from Mexico and Canada, then, towards the end of the month, the US president confirmed a 25% tariff on European cars as well. This triggered market nerves about potential trade wars. In terms of company results, chip-designing giant Nvidia reported robust earnings, but the stock market reacted negatively due to concerns about gross margins. This demonstrated investors’ high expectations of the company. Volatility in the US market was further fuelled by mixed economic data, with retail sales down by -0.9% month on month. This was worse than the forecast fall (-0.1%) and the sharpest drop since March 2023. In addition, initial jobless claims increased over the month, with a particularly sharp rise in the third week of February.

Europe

European equities continued their strong start to the year. Despite headwinds in the form of low growth and potential tariffs, companies have seen positive earnings revisions, and February saw early signs of a potential resolution to the Russia/Ukraine conflict, which would be beneficial for the region. On the political front, the month saw an election in Germany, which was won by the centre-right Christian Democrats. The next step will be for the party’s leader, Friedrich Merz, to form a coalition. Mainstream parties have a ‘firewall’ that stops them working with the far right, which prevents a coalition with the Alternative for Germany party, which secured second place in the election. So, it is likely the Christian Democrats will work with the centre-left Social Democrats, assuming an agreement can be reached.

Japan

Shifting monetary policy expectations and renewed trade concerns weighed on investor sentiment towards Japanese equities. The Bank of Japan (BoJ) remained a key focus, with speculation about potential interest rate hikes to tackle inflation driving 10-year government bond yields* close to 15-year highs before easing slightly on softer prices data. The yen strengthened throughout the month, amid expectations of further rate hikes. Data showed a sharp rise in nominal (no adjustment for inflation) wages in December, with real (adjusted for inflation) wages posting positive growth for the second consecutive month, driven largely by increased winter bonuses. Additionally, household spending rebounded by more than expected, which is likely reinforce the BoJ’s position that sustained real wage growth is necessary for private consumption to maintain an upward trend.

Asia and Emerging Markets

Chinese tech stocks continued their strong momentum, helping emerging markets outperform developed markets over the month. Chinese equities surged, driven by enthusiasm for artificial intelligence (AI) products like DeepSeek, and more positive regulatory signals after high-profile meetings between government and business. However, domestic GDP-sensitive stocks lagged due to real estate concerns and escalating trade tensions, with new tariffs imposed by the US and Beijing responding in kind. China faces economic headwinds, including currency depreciation, deflationary pressures and slowing growth in industrial output. However, the nation’s tech sector remains a bright spot, benefiting from cheap valuations and AI-driven optimism. While risks persist, investors see the potential for Beijing to introduce long-term growth measures that will stabilise the economy.

Fixed Income

Since Trump was elected, markets have marched up a number of hills, and during February they did a pretty good job of marching back down many of them. In the bond arena that meant a significant drop in US government bond yields, which translated into higher prices (since yields and bond prices move in opposite directions). This was due to soothing rhetoric from Treasury Secretary Scott Bessent, delays to tariffs and softer US data combining to create a more bond-friendly environment. The same could not be said in Europe. As the Trump administration threatens to radically alter the role the US plays in NATO, governments across Europe are being forced to contemplate paying for their own defence – and it will not come cheap. Bond investors sense a loosening of fiscal policy, even in Germany, and they do not like it. UK and European government bond yields therefore largely ignored the US rally, resulting in significant US outperformance.

Source: Morningstar Direct