Equity markets in February saw a clear rotation in style and sector bias, with value and real economy sectors outperforming (+4.6% pts). This benefited markets like Australia, which has a high weighting in resources, while the U.S. lagged. Emerging markets also performed well, as the MSCI EM Index rose by 5.0%. The rapid advancement of artificial intelligence (AI) and its potential to disrupt capital-light business models drove a shift towards more capital-intensive sectors. Private markets were similarly impacted, with private credit funds exposed to software companies facing increased scrutiny.

Market attention focused less on AI’s opportunities and more on the potential losers from AI-driven competition, especially the risk of service models being replaced by agentic AI. Software-as-a-service (SaaS) business models experienced a sharp de-rating, given questions about future earnings potential. However, the outlook is more nuanced: investors must distinguish between SaaS companies leveraging AI to enhance operations and those at risk of being overtaken. Companies with valuable proprietary data—such as customer information and spending patterns—will retain a competitive edge, as data is essential for training AI models and driving future growth.

Hyperscalers also faced challenges. Despite stronger earnings in February, their capital expenditure projections outpaced revenue forecasts, raising questions about the monetisation of AI models and the potential for adequate returns on investment. The planned surge in capex, without matching sales growth, has led to increased investor scrutiny.

The winners and losers in the AI landscape remain uncertain. The capex build-out will be a multi-year process, supporting economic activity and gradual productivity gains. Strong demand for computing power and energy is expected to persist, supporting continued investment in semiconductors, memory, and energy infrastructure.

On the policy front, the U.S. Supreme Court ruled tariffs enacted under the International Emergency Economic Powers Act (IEEPA) as illegal, leading to their cancellation and potential refunds. The U.S. administration responded with a temporary 10% tariff, likely to be replaced by other measures, keeping average tariff rates elevated, and trade partners facing renewed uncertainty.

These developments do not change our overall portfolio construction recommendations. Global diversification in equities remains effective, with strong performance in Europe and Northeast Asia. Options strategies for U.S. equities have delivered, and value strategies in APAC and global equities are worth exploring. In fixed income, steady U.S. growth and fiscal stimulus should keep U.S. Federal Reserve (Fed) rates unchanged through the first half of 2026, with active management essential amid varying risks across developed markets.

Australian economy

• The January inflation report was a little firmer than expected, holding at 3.8% year-over-year (y/y) in January, and underlying inflation was 3.4% y/y. The higher inflation readings largely reflect the roll-off of government energy rebates and holiday travel prices, which may reverse in the coming months. Goods prices rose by 1.3% month-over-month (m/m) compared to 1.3% m/m in services. Temporary or not, inflation remains too firm for the Reserve Bank of Australia (RBA) and keeps a May rate hike on the cards.
  (GTM AUS page 5)
• The unemployment rate held steady in January at 4.1% and was slightly above expectations. Hours worked also remain robust. Wage growth was 0.8% quarter-over-quarter (q/q) in 4Q25, taking the annual wage growth to 3.4% y/y. This means that real wages are now negative, given the recent upturn in inflation. Persistently negative wage growth implies a reduction in consumer purchasing power, and the drag on consumption may be offset by the strength in hours worked noted above.
  (GTM AUS page 9)
• The housing market remains resilient, with residential building approvals maintaining a solid pace and new housing loan commitments rising by 9.5% q/q in 4Q25, driven by first-home buyer loans, which surged 15.5% q/q, reflecting the early effects of the expanded 5% first-home buyer deposit scheme.
• House prices in Australia gained another 0.8% m/m in February, and prices are 9.9% higher than a year ago. This is the strongest annual increase since 2022. Prices in Melbourne and Sydney were unchanged over the month, while Perth prices rose by 2.3%, Brisbane by 1.6% and Adelaide by 1.3% over the month.
  (GTM AUS page 10)
• Business conditions and confidence remain positive, and the outlook for private capital expenditure is stable, with firms’ capex intentions for FY27 tracking higher than in the prior year.
• Consumer confidence, however, has softened, and which likely captures the concerns over higher interest rates and inflation driven cost-of-living pressures.
  (GTM AUS page 6)
• Household spending growth moderated (-0.4% m/m in December), and there is evidence of shifting seasonal patterns, as the increase in promotional activity by retailers later in the year is leading to further front-loaded spending in October and November.
  (GTM AUS page 7)

Equities

• The ASX 200 gained 4.1% in February and 6.0% for the year. Financials (9.2%) and materials (9.1%) propelled the market higher, with consumer staples (6.1%) and utilities (4.5%) also performing well. Healthcare (-13.3) and IT (-9.1%) were the worst performers, but consumer discretionary (-5.8%) wasn’t far behind. (All total returns in local currency).
• The international rotation away from the U.S. continued. The landslide victory for the Liberal Democratic Party (LDP) in Japan gives PM Takaichi a strong mandate that the markets like, and Japanese equities rose by 10.5%. Outside of Japan, the rest of the region returned 5.4% while European equities gained 4.3%. The U.S. market fell by 0.8% given the fallout from AI disruptions, and at 0.7% for the first two months of the year, is significantly lagging the rest of the world.
  (GTM AUS page 32)
• Equity valuations were marginally lower, the forward P/E ratio on the U.S. S&P 500 fell to 21.5x while most other markets re-rated: MSCI Europe was 15.9x, MSCI Japan at 17.8x, and the ASX 200 at 18.7x.
  (GTM AUS page 33)

Fixed income

• Core government bond yields fell in January. The Australian 10-year yield was 8 basis points (bps) lower at 4.65%, and the U.S. equivalent was 12 bps lower at 3.96%. Yield curves flattened as the long end came in more than short-dated maturities. The drop in yields meant that Australian government bonds returned 1% over the month, and U.S. Treasuries returned 1.8%.
  (GTM AUS page 52)
• Nearly all segments of the bond market rose over the month in local currency terms as yields fell. Global investment-grade bonds were up 0.8% and high-yield bonds by 0.3%. Emerging market debt has been a strong market this year and rose another 1.4% in February.
  (GTM AUS page 51)

Other assets

• A building military presence in the Middle East created nerves in the oil market, and the price of Brent crude rose late in February to USD 71 per barrel as markets priced in an increased risk premium. The strike on Iran occurred after markets were closed.
• It was another strong month for gold, which rose 4.8% to USD 5,222 as investors moved back in on the back of geopolitical risk and inflation hedging.
  (GTM AUS page 65)
• The U.S. dollar index rose 0.6% to snap a prolonged period of weakness and made gains against the euro, which fell 0.8%, and the British pound, which was 2.0% lower over the month. Robust economic data from the U.S. and a more hawkish Fed have seen rate expectations shift for this year. Meanwhile, the Aussie marched higher, rising 1.7% as the market priced in a May rate hike after the February cash rate rise to 3.85%. The Australian dollar is one of the top-performing currencies this year, gaining 6.9%.
  (GTM AUS page 67)

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