Our investment experts delve into February 2025's key trends: the threat of higher tariffs on Canada, Mexico, and China by Trump, escalating inflation concerns, and the surge in European stock markets.
Top three investment trends
1. Tariffs: What goes around, comes around
February began with threats of imminent tariffs by President Trump on Canada, Mexico and China, which were expected to be implemented from February 4 (25 per cent tariff on the former two and 10 per cent on China). All three countries have deeply integrated trade channels with the US, accounting for around 40 per cent of all US imports. Canada and Mexico successfully agreed a last-minute extension with the US on the proposed tariffs, following constructive border-security conversations.
The tariffs on China were implemented swiftly, however, and the country took retaliatory action, which led to Chinese equities selling off. This contrasted with the relief rally in Mexican and Canadian currency markets, which saw the Canadian dollar bounce back from a nine-year low. However, this relief was short-lived, as President Trump’s tariff threats on the two countries resurfaced towards the end of the month. An additional 10 per cent tariff threat was also directed at China (all of which are now live and developing).
2. Inflation jitters resurface
The threat of higher tariffs interacted with growing fears of inflation in February, with several data points initially raising concern. In particular, headline US inflation was ahead of expectations at 0.5 per cent, marking its strongest monthly reading since August 2023. However, the underlying detail showed this increase was concentrated within certain categories, which are affected by more temporary, seasonal factors, such as car and truck rentals.
Likewise in the UK, headline inflation data beat forecasts, but there were signs of easing within services inflation that came in below the Bank of England (BoE) expectations. In the euro zone, despite inflation data also exceeding market expectations, headline figures trended lower in February with a 2.4 per cent increase, compared to 2.5 per cent last month. Despite the inflation surprises, investors’ risk-off sentiment dominated fixed income markets, with most global bonds ending in positive territory for the month.
3. European stocks surge ahead
Politics dominated headlines out of Europe in February, as the US announced the beginning of negotiations with Russia over ending the war in Ukraine. The potential for progress towards a resolution boosted market sentiment, triggering a fall in oil prices and a rally in European equities, most notably the defence sector. The STOXX Europe 600 was up over 3.4 per cent for the month, outpacing the S&P 500 for the third consecutive month, with defence stocks such as Germany’s Rheinmetall surging 33.2 per cent on the month.
The result of the German election provided further support for European equities
The result of the German election, which saw the CDU/CSU secure the largest vote-share as expected, provided further support for European equities, particularly domestically focused mid-cap stocks. The leader of CDU/CSU, Friedrich Merz, has subsequently expressed interest in increasing defence spending, as did British Prime Minister Keir Starmer, who pledged to increase the defence budget from 2.3 to 2.5 per cent of GDP, which was an additional tailwind for the broader defence sector.
How did we position MAF Core and MAF Plus portfolios?1
Growth assets
February was an eventful month for risk assets. The month started with a broad relief rally across equity markets, following the reversal of US tariffs on goods from Canada and Mexico. Improved sentiment saw both the STOXX 600 and S&P 500 hit new all-time highs by mid-February. However, when tariffs came back into focus towards the end of the month, caution returned to markets. Given this backdrop, most equity markets ended in negative territory, including the Magnificent 7 posting their worst monthly returns since 2022.
European and UK equities benefitted from their exposure to defence companies, delivering positive returns
European and UK equities were the exception, delivering positive returns. Both markets benefitted from their exposure to defence companies, as confidence in the US’ continued guarantee of European security came into question following President Trump’s direct negotiation with Russia over Ukraine.
In terms of active positioning, this meant that our positions in North American and European equities detracted. Although, this was partially offset by our overweight exposure to the US financial sector and underweight in Emerging Market (EM) equities. In MAF Plus, our overweight North American versus our underweight in European equities reflects our view of relative macro weakness within the euro zone compared to the US, as well as the view that investor hopes for a Russia-Ukraine ceasefire in the near-term may be overstated.
We also increased our overweight position in US equities at the start of the month, as market sentiment improved following the announcement that US tariffs would be paused on Canada and Mexico
Defensive assets
Despite market concerns about perceived strength in inflation data, and future inflationary pressures from tariffs, fixed income markets fared better than equity markets in February. Initially, inflation surprises across developed economies drove bond prices lower and yields higher, with 10-year US bond yields posting their largest daily spike since 2015 at over 4.6 per cent.
10-year US government bond prices rallied with yields experiencing their largest monthly fall since July 2024
Within Europe, concerns about increased defence spending also put downward pressure on bond prices. However, risk-off sentiment in response to the reemergence of President Trump’s tariff threats, and fears about weakness in US growth, led investors to seek safety in global bond markets towards the end of the month. In particular, 10-year US government bond prices rallied with yields experiencing their largest monthly fall since July 2024.
Given this, our overweight positions in 10-year German Bunds and UK gilts were additive, although our underweight to French 10-year government bonds was a detractor. In MAF Plus, we opened a relative value trade within European government bonds, preferring to be overweight German Bunds versus French bonds. This reflects our expectation of increased fiscal risks, specifically in France, which are likely to drive French bond yields relatively higher and hence, bond prices lower.
Lastly, following Japanese bond yields reaching new historical highs (driving prices lower), we also decided to close our underweight Japanese government bonds position. Meanwhile, we increased our FX exposure. Given attractive entry levels, we took the opportunity to increase our overweight position in USD vs an underweight in GBP.
Alternative assets
AIMS benefitted from its tactical fixed income positions
Alternative assets performed well in February, both our overweight synthetic gold position and AIMS delivered positive performance, cushioning some of the equity weakness.
In MAF Plus, we closed our position in gold to take profit, as the commodity has rallied given its ‘safe haven’ status in an uncertain market. AIMS benefitted from its tactical fixed income positions.
Market outlook and positioning: What do we believe happens next?
From an active asset allocation perspective, we maintain a preference for an overweight position within the US market, since corporate profitability has remained resilient. In contrast, we are underweight European and EM equities relative to US equities.
Our FX position expresses our growth concerns within the UK relative to the US’ strong macro backdrop
Regarding global fixed income, the potentially inflationary effects of President Trump’s proposed policies present a risk to central bank easing biases, most notably in the US. Although, we believe the euro zone and the UK are more insulated from this effect, where the continued focus on growth risks could place a ceiling on bond yields. Our FX position expresses our growth concerns within the UK relative to the US’ strong macro backdrop.
In terms of equity regions, we maintained an overweight in US equities in February, which was diversified through our sector position in US financials. Going forward, US companies may benefit from a combination of corporate tax cuts, deregulation policies and fiscal stimulus in the US. Earnings have also continued to be robust, helping to stabilise valuations. The US financials sector is well-placed in an environment of potential higher rates, which is supportive of banks’ profitability.
We expect continued macro underperformance in EM relative to the resilient growth in the US
We also have relative value trades, with underweight positions in EM equities and European equities against an overweight in US equities. We expect continued macro underperformance in EM relative to the resilient growth in the US and are continually monitoring developments in Europe.
Regarding our fixed-income allocation, we believe our overweight German Bunds and gilt position could benefit from continued central bank easing, particularly in the case of the UK, where we see potential for greater rate cuts than market expectations. For France, we see specific fiscal risks where expected increases in spending, compared to the rest of Europe, are likely to put downwards pressure on bond prices.
