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Despite being a short month, there was no shortage of news flow to keep investors on their toes in February. Inflation is back on the agenda as UK CPI inflation hit 3% in the January reading, exceeding expectations and reaching a 10-month high.

However, this didn’t stop the Bank of England from cutting another 0.25% off the base rate (down to 4.5%) in their February meeting; a slowing economy proving more of a concern than pricing pressures as they halved the UK GDP forecast for 2025. At least the UK economy grew in the fourth quarter of 2024 unfortunately it was by a miserly 0.1% and overall, 2024 saw growth of just 0.9%.

The Bank of England rate cut followed hot on the heels of the ECB in January and whilst there might be a pause now for a few months at home, Europe could see continual trimming with less inflation concerns. Across the pond, the official US reading puts inflation also at 3% making it tricky for the Federal reserve to further reduce rates in accordance with Trump’s wishes.

It is hard to believe it has been less than seven weeks since Trump’s inauguration and whilst in February he reinforced his intentions to impose tariffs, this was not a great surprise to markets (given he has been banging on about it for so long) and investors have so far largely shrugged off concerns.

Short-term noise from Donald Trump continues to be a key driver for investor sentiment, but recent weeks have reinforced the futility of trying to position a portfolio based on politics. The initial enthusiasm over Trump’s election win seems to have waned, with investors doubting that US consumer led growth can continue at the current pace.  Consumer confidence fell to an eight-month low over concerns of the adverse effects of tariffs, whilst in a sign of possible trouble ahead US consumers now owe a record $1.2 trillion on their credit cards up 7% on a year earlier.

There is undoubtedly an increased level of scepticism that Trump’s policies will translate into growth for stockmarket investors and concerns are also increasing over the amount the tech leaders are spending on developing Artificial Intelligence. It is estimated that between them Meta, Amazon, Alphabet and Microsoft will spend $340 billion on AI in 2025. The figure has increased by $40 billion in the last month. Will this boom lead to an almighty bust?

Investors writing off the US do so at their peril, but have we seen peak US exceptionalism? Interestingly Warren Buffett’s Berkshire Hathaway announced a record cash weighting of $334 billion - surely a sign of Mr. Buffett being worried about US equity valuations.

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Market Watch

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It proved to be another mixed month for markets with the MSCI World Index falling back by 0.96%. The US stockmarket drifted back, with the S&P 500 1.3% lower as concerns over an economic slowdown and the amount being spent on AI by the large tech companies weighed on sentiment. The Tech heavy NASDAQ index had its worst month since April 2024, falling by 5.4%.

In contrast, despite the economic woes, the UK and European markets continued their recent revival. The FTSE eked out a 2% gain in February, the rate cut obviously helped with banks largely leading the charge on the back of good results and even more buybacks. Whilst the MSCI Europe ex UK index was up 3.3% and is up over 10% year to date. Such was the gloom and doom at the start of the year that any slight improvements and the accommodative monetary policy are being welcomed.

However, it was China that led the way. Was it Trump tariffs not being as bad feared, was it more stimulus measures, or more likely it was the Deepseek impact and the realisation that Chinese stocks are cheap and that their tech companies are pretty good. The Hang Seng led the way up 13.4% in February.

On to bonds and markets still can’t seem to decide where rates are going. There does appear to be a disconnect between bonds, expectations and what central banks are doing. Inflation is probably the statistic causing the most angst. February has been an odd month as despite inflationary concerns over Trumponomics 2.0, US treasury yields fell back markedly with the US ten-year treasury starting February yielding 4.54% and finished the month paying 4.21%. Whereas the UK ten-year gilt started February with a yield of 4.54% and finished the month only marginally lower paying 4.48%. In contrast Germany’s ten-year bond pays 2.41% and with further ECB rate cuts expected that yield appears to be heading one way only.

Moving to commodities now and gold was in touching distance of $3,000 an ounce last month hitting $2954 mid-month. The price fell back to finish February at $2848 an ounce marginally above January’s close. Oil has been quiet during the last month – maybe the gradual falling back in price is natural as major oil and governments row back on clean and green energy and focus more on new supply? The price of a barrel of Brent fell almost $4 to finish at $73.18.

On the currency front, the dollar was weak last month falling almost 3% versus the Yen and just over 1% against the pound. Bitcoin fell 22% in February as investor sentiment turned more cautious.

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Fund Watch

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Going over to the fund world now and China invested funds were by far and away the best performing last month. The China/Greater China IA sector gained 7.3%. There was nothing else to really write home about with none of the other leading sectors generating more than 1% over the month. For the record two European equity sectors and two bond sectors were amongst the top five. It was a bit more interesting at the foot of the table with India’s recent bear market continuing with the average fund falling another 8.8% in February bringing 2025 falls to 13.6% now. It wasn’t much better for the US last month either with the weak dollar not helping returns. The main US fund sector fell 4.5% but US small cap stocks bore the brunt as risk aversion increased regarding the strength of the US economy. with the average fund falling over 8%.

Turning to individual funds now and unsurprisingly China funds dominated the top of the tables. Nine of the top ten best performing funds came from the China sector in February with the only outlier being the JPM Emerging Europe Equity fund. Will that take a tumble this week though after the very public spat between presidents Trump and Zelensky? Eastern European shares have basked in the recent glow of a potential end to Russian warfare in Ukraine. The RBC China Equity fund topped the table with a return of 14.8%.

At the other end, it was more of a mixed bag however US growth and small cap funds were the most dominant theme Artemis US Smaller Companies propped the tables falling 14.6% – this fund has been a barometer of the Trump trade in recent months. Clean energy stocks are still taking a bashing with Pictet Clean Energy Transition having torrid tie falling 12% - the ascendancy of Donald Trump has led to more emphasis on carbon and less on carbon capture. To be fair this is an acceleration of the same trend of the last 18 months or so.

The investment trust world was like the fund universe with China topping the investment trust tables. The average China investment trust gained 13% last month. Obviously there are trust sectors that don’t have a direct equivalent in the open-ended world with Infrastructure gaining over 3% to make the top five as well as Property UK logistics. As mentioned last month, with a large amount of M&A in the trust world it will be no surprise seeing a different takeover target topping the tables each month. It was the turn of BBGI Global Infrastructure in February receiving a bid approach and topping the tables with a gain of 17.49%.

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Manager watch

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The Bank of America fund manager survey released last month showed that fund manager cash levels at their lowest level since 2010 (illustrating the bullish sentiment that has driven markets chasing AI and also highlighting a lack of money on the sidelines). The same survey highlighted that 89% of fund managers asked described US stocks as overvalued.

Meetings we held over the month saw UK equity investors in more upbeat mood. Henry Dixon at MANG GLG is seeing signs that the UK is finally a momentum market with sentiment turning positive, whilst Premier Miton highlighted that in January UK equity funds saw their first inflows in 42 months – is the tide finally turning?

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Important Information

This document is produced by Fairview Investing Ltd, an independent research consultancy. The content is for information purposes only and does not constitute financial advice. The commentary or research provided do not constitute a personal recommendation to deal. Any statements, opinions, forecasts, and figures are made by Fairview Investing (unless otherwise stated). They are considered to be reliable at the time of writing but may be subject to change.

Fairview Investing accepts no legal responsibility or liability for the content of this material. The contents of the document are not to be re-produced or circulated without the express permission of Fairview Investing Ltd. Fairview are independent investment consultants sitting on the Investment Committee of EXE Capital Management.

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