What a start to the year it has been! February was yet another eventful month, book-ended by an announcement regarding tariffs on Canada, Mexico and China on the first day of the month and the now infamous Oval Office meeting with President Trump, Vice President Vance, and President Zelenskyy on the last day of the month.

Also, on the last day of the month, the Atlanta Fed’s GDPNow model forecasted a decline of 1.5% in US GDP for Q1. Just over a week earlier, it was signalling growth of 2.3% and just a few weeks before that it was signalling growth of 3.9% for Q1. It’s worth noting that it isn’t the Atlanta Fed’s official forecast and is inherently a more volatile model. It doesn’t necessarily mean that a US recession is imminent but is something to keep an eye on.

Against this backdrop it is perhaps unsurprising that February was a challenging month for risk-assets. In contrast to January, global equities ended February lower than they began it, while global bonds ended the month in positive territory. As can often be the case, things were a bit more nuanced beneath the surface.

In Emerging Markets, Chinese equities delivered strong performance, outperforming most other equity markets globally. This was a continuation of recent momentum and enthusiasm around Chinese beneficiaries of the AI theme that was first seen on the announcement of DeepSeek. Investors were seemingly also positive over the potential for a more amenable regulatory backdrop for some Chinese companies, and China’s economic data looks to be improving after the stimulus late last year

Elsewhere, Emerging Markets were just about in positive territory, helped by a weakening US dollar, although India was a notable underperformer – especially small and mid-caps. The Indian economy is showing signs of a slowdown, and near-term earnings expectations have been relatively muted.

Closer to home in Europe, returns were positive in the UK and Continental Europe, with banks leading the way. Aerospace and defence companies also performed strongly, with defence contractors perceived to be the potential beneficiaries of increased defence spending in Europe. 

The US equity market – which makes up around two-thirds to three-quarters of the global equity market – ended the month down. Growth equities, like those found in the Nasdaq index, fared worse than the broader S&P 500 index. Returns were worse still for Sterling investors in US equities than for US-based investors, as Sterling appreciated relative to the US dollar during the month.

Japanese equities were perhaps the weakest of the major developed markets. Partly this was due to trade concerns but also due to a Yen that strengthened markedly against other major currencies. In fact, it was the strongest currency in the G10 in February. Dollar, Euro and Sterling investors in Japanese equities fared a little better (or less badly) but not enough for returns to be positive.

Bond markets proved to be good diversifiers for multi asset investors in February, with almost all areas ending the month in positive territory. Investment grade credit and Emerging Market debt led the way in terms of returns, followed by government bonds and high yield credit.

A key driver of this was falling yields in the US, with the 10-year Treasury yield falling from around 4.5% to around 4.2%, partly a reaction to weakening US economic survey data. Credit spreads remained tight in investment grade but widened a little in high yield. Falling US yields also helped global Real Estate Investment Trusts (REITS) but failed to help smaller companies.

Interest rate cut expectations for the US are a little more aggressive at the time of writing than they were at the start of February, moving from just under 2 cuts implied for US interest rates in 2025, to just under 3 cuts now implied. Expectations are largely unchanged for Europe and in the UK have moved from around 3 cuts implied to just under 2.5.

The market backdrop is likely to remain noisy and lead to volatility. Our approach is to look beyond the noise, to focus on the fundamental drivers of asset returns. We believe that welldiversified portfolios, with a prudent spread of risk among various exposures, are well placed to navigate a challenging market environment.

And we expect the market environment to be just that. However, it is also our view that market volatility can provide good opportunities for a sensible medium to long-term investment horizon.

Even with a review of the market conditions and political changes, we confirm that this does not require any changes to our current model portfolios.

Kind regards,

iPensions Wealth Team

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