In a silver lining for multi-asset investors, global bonds once again proved to be diversifiers against equity losses.
After a strong start to 2025, February saw some of the shine come off the US exceptionalism story. Growing uncertainty about the impact of the US administration’s policy agenda weighed on both corporate and consumer sentiment, and concerns about growth started to re-emerge. Weak US performance dragged on developed market equities, which delivered a -0.7% total return over the month.
A silver lining for multi-asset investors was global bonds, which once again proved to be diversifiers 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. February saw both business and consumer sentiment weaken. Services activity and small business investment intentions both fell, while consumer confidence registered its largest decline since August 2021. The House of Representatives did agree a budget blueprint but while this provided enough fiscal room to extend the 2017 Tax Cuts and Jobs Act, it didn’t clearly point to additional new fiscal stimulus. Against this backdrop, Treasury yields fell over the month and the Bloomberg Global Aggregate index returned 1.4% over February.
Continued positive momentum in Chinese tech stocks helped emerging markets outperform their developed market peers, returning 0.5% over the month. Emerging markets received a further tailwind from a weakening US dollar. The broad dollar DXY Index fell by 0.7% over the month and boosted the returns of dollar denominated global indices. Real estate investment trusts were another beneficiary of falling yields. Solid performance from US and dollar denominated European real estate helped the global benchmark rise 2.6% to end the month as the top performing major asset class.
Despite normally being supported by falling yields, global small cap stocks underperformed, delivering negative returns of 3.3% as growth concerns outweighed falling discount rates. Worries about the sustainability of US mega cap tech earnings also outweighed falling yields, causing global growth stocks to fall 2.8%. Meanwhile, cold weather combined with temporary supply shortages boosted US natural gas prices. This helped offset the fall in gold prices and meant that broad commodities delivered returns of 0.8% over the month.
Equities
European equities outperformed the US in February to end the month as the top performing major equity index. The MSCI Europe ex-UK Index rose 3.4% as investors increasingly factored in the likelihood of a ceasefire in Ukraine. European financials maintained their strong run and were the top performing European sector with returns on equity that continue to outstrip their US counterparts. European defence stocks also benefitted from a renewed focus on domestic production, delivering returns of 9.3%.
Asian shares rose 1.1% over the month, driven by Chinese equities which rose 11.7% in dollar terms. Excitement about the implications of DeepSeek continued to support the broader Chinese tech complex and high profile meetings between Xi Jinping and senior business leaders also hinted at an improved regulatory environment. However, these returns were concentrated in the export focused offshore market. Concerns about the real estate market meant that GDP sensitive domestic equities lagged. Japan was the outlier in the region and the TOPIX delivered returns of -3.8% over the month. The yen-sensitive market suffered as the currency appreciated by 2.8% against the dollar.
US equities were hampered by continued worries about mega cap tech. Communication services and consumer discretionary were the worst performing sectors, with returns of -4.2% and -9.0% respectively. However, there was continued evidence of a rotation inside the index with sectors such as consumer staples, energy and real estate all delivering healthy positive returns over the month.
Fixed income
All major fixed income sectors delivered positive returns over the month, as falling US yields fed through to other parts of the market. US Treasuries were the top performing sector with returns of 2.2%, while the weaker dollar also supported emerging market debt which returned 1.6%.
Strong corporate fundamentals helped investment grade spreads remain contained and global investment grade credit markets also rose 1.6% over February. A combination of a slight widening in spreads and a shorter duration meant that US high yield underperformed with returns of 0.6% over the month.
The change in sentiment for government bonds was most acute in the US and Treasuries outperformed their European counterparts. In Europe, growth hopes were boosted by increasing confidence in a ceasefire between Russia and Ukraine. This, combined with concerns about increased government borrowing to support investment in defence, meant that European sovereign yields fell less than in the US and European government bonds returned 0.7% over the month. European spreads remained flat over the month and higher yielding Italian bonds outperformed German Bunds.
Conclusion
February continued where January left off. Investors sharpened their focus on the growth risks in the US and continued to question whether high earnings expectations and rich valuations are justified. The strong performance from European equities highlighted the importance of regional diversification, while the positive returns in fixed income show that bonds can once again diversify against equity losses. With the eventual path of US tax and tariff policies – and their inflation and growth implications – still uncertain, investors should remain diversified to protect portfolios against any further volatility ahead.