Reflections of the CIO…

February proved to be a constructive month for most asset classes but, as with much of the past year, the headline outcome masked a number of important cross‑currents beneath the surface. Global markets delivered positive returns overall, yet the magnitude of those returns varied materially. Leadership moved away from the familiar dominance of large US technology stocks, volatility increased, and investors became noticeably more selective in how and where they were prepared to deploy capital.

At a high level, the most striking feature of the month was the outperformance of non-US equity markets relative to the United States, a trend that had been building in recent months but without a clear breakout until now.[1] Global equities in aggregate rose, but US shares were the laggard. This divergence was mirrored across styles: value stocks rose strongly while growth stocks fell, suggesting that investors are increasingly uncomfortable paying high prices for long dated growth when rapid technological advances are raising uncertainty about who the eventual winners will be in the coming years, let alone decades.[2] This rotation did not reflect a collapse in confidence, but rather a growing preference for earnings visibility, tangible assets, and more immediate cash generation.

The source of this change in tone lay largely in the ongoing reassessment of artificial intelligence (AI). AI remains a powerful long term structural theme, but February marked another step in the market’s transition from broad enthusiasm to more discriminating judgement. During the US earnings season, many of the largest technology companies once again reported robust revenues and profits. However, these results were accompanied by announcements of further significant capital expenditure on AI infrastructure.[3] For a sector already spending vast sums on this buildout, and where valuations had risen sharply in anticipation of future benefits, this prompted increasingly uncomfortable questions around returns on invested capital and the timing of any meaningful payoff.

Outside the US, the picture was initially more encouraging. Risk assets in Europe delivered positive returns, supported by signs that economic momentum was gradually improving. Business surveys pointed to a modest acceleration in activity, with manufacturing indicators reaching multi-month highs.[4] Inflation continued to ease, falling below central bank targets, allowing the European Central Bank to keep policy on hold while maintaining a reassuringly calm tone.[5] However, events that unfolded in the Middle East late in the month disrupted this narrative. As a major energy importer, Europe saw a lower material repricing as markets reassessed energy security and inflation risks.

The UK equity market also delivered a strong performance, aided by its sector composition and the global rotation away from high growth technology stocks. Large cap UK companies outperformed, benefiting from investors prioritising sustainable earnings and disciplined capital allocation. Monetary policy developments provided additional support to UK assets. The Bank of England kept interest rates unchanged but struck a noticeably dovish tone, with several policymakers voting in favour of a rate cut. Inflation slowed meaningfully and economic growth remained weak, reinforcing expectations that policy easing is approaching. Gilt yields fell sharply, making UK government bonds the best performing sovereign market during the month.[6]

Japan stood out as the strongest equity market globally.[7] Japanese shares rose sharply, driven by a combination of domestic political stability and a broadening of investor interest beyond traditional export champions.[8] A decisive election victory for the ruling party boosted confidence in policy continuity and pro-growth initiatives. At the same time, inflation data surprised on the downside, easing pressure on monetary policy. While some technology related sectors lagged on AI disruption fears, companies linked to AI infrastructure, domestic demand, and reflation themes performed particularly well. However, as with Europe, Japan experienced a marked increase in volatility at the end of the month and into March, as market attention shifted rapidly towards questions of energy independence.

Perhaps the most telling takeaway from February was not the level of returns, but their distribution. Investors are no longer willing to buy themes indiscriminately. The AI narrative, which has driven markets for much of the past year, is evolving into something more selective and analytical. At the same time, broadening global growth, easing inflation, and supportive central banks provide a constructive macro foundation. Reconciling these forces suggests an environment that will be less forgiving. Volatility and dispersion are likely to persist, particularly as geopolitical risks intrude more frequently. In this context, maintaining diversified portfolios and avoiding excessive concentration in any single theme or region remains crucial. As with much of the past year, our outlook remains cautiously optimistic — glass half full rather than half empty — but with a clear recognition that the path ahead is unlikely to be smooth.

Looking ahead into March, the escalation of tensions between the US and Iran at the very end of the month introduces a fresh geopolitical risk premium, particularly for energy markets, and could test investor confidence if hostilities broaden or persist. Markets are likely to be transfixed by the implications of different oil and gas price scenarios across multiple time horizons. At the same time, fixed income markets will be grappling with the prospect of renewed inflation pressures emerging just as interest rate cuts had previously been priced in. The conflict poses a particular dilemma for many central banks, arriving at a moment when cooling inflation and softer labour data were pointing towards the need for monetary stimulus. Against this backdrop, we expect the market’s increasingly discriminating approach to AI to persist, rewarding companies able to demonstrate tangible returns while continuing to challenge those where spending runs ahead of visibility. Volatility is therefore likely to remain elevated, and diversification will once again be essential in navigating what promises to be a skittish market environment, offering both an abundance of opportunities and a meaningful set of risks.