Reflections of the CIO… February 2025

February was another busy month, marked by a flurry of activity and sharply contrasting market performances between different geographies. There was a definite change in mood (a ‘vibe shift’ according to the FT’s Unhedged column[1]) as US equities stalled, falling sharply into month end and ending up erasing all their cumulative gains of the year so far.[2] By contrast, European and UK equities had a good month, despite the issue of tariffs continuing to hang over both.[3]

This contrasting performance between regions had its roots in a subtle shift in investor perceptions surrounding economic outlooks, especially when compared to initial expectations. Europe, overall, is picking up, helped by interest rate cuts and the prospects for peace in Ukraine.[4] The picture in the UK is more complicated but given depressed expectations for both regions it doesn’t take much to incrementally change the mood. During February, the catalyst for change was a stream of weaker than expected US economic data, covering everything from the housing market to consumer confidence and corporate expectations reports. Although each individual report had its own particular twists, the overall picture was one of a cooling in the US economy, which investors worried would gain traction in the months ahead.

While underlying economic trends driven by multiple factors shaped the shift in mood, it was also becoming increasingly clear that, at the margins, some of the new administration’s policy actions were starting to influence the confidence of the crucial US consumer. Job losses under Elon Musk’s DOGE initiative have been making headlines in the US and are beginning to bleed into consumer confidence surveys.[5]When coupled with the macroeconomic impact of potential and actual tariff announcements, the overall level of economic ‘policy uncertainty’ globally has now shifted even higher than it was during Covid or the Great Financial Crisis of 2008.[6]

This ‘vibe shift’ impacted market performance, with gold continuing its strong recent performance and safe haven assets such as government bond markets rallying – with US bonds even going as far as pricing in future interest rate cuts only a few weeks after deciding that the economy was too strong to need them. As mentioned above, US equities were weak, with not even strong revenue numbers from Nvidia able to turn the tide.[7] Regionally, optimism around significantly higher government spending in Germany following the elections, along with broader expectations of increased defence spending across Europe, helped lift the region’s equity markets—bolstered, no doubt, by attractively low starting valuations. The Japanese/Asian region also had a weak tone, influenced by the steady ratchetting up of tariff pressure on China, as the only nation to face newly imposed tariffs by February.[8] Japan was sluggish, lacking any new real catalysts and leaving local risk appetite to wane in line with the US market.

Although economic uncertainty is now disconcertingly high influenced heavily by US policy and political instability in Europe, it is also clear from the different price movements of markets that there is still plenty of opportunities to balance out the obvious headline risks which we can all read about in our newspapers.[9] There are multiple events still to play out in this first quarter of the year, particularly surrounding the Chinese economy, which may soon be in receipt of a large stimulus boost from the government.[10] Given the UK government plans to chop our Foreign Aid budget to fund increased defence spending,[11] it will be interesting to see how the Chancellor might respond to a fast approaching Office for Budget Responsibility (OBR) assessment of our domestic outlook. Taking ‘tough decisions’ on spending would provide a boost to the gilt market and, potentially the stock market too (especially as we have seen in Europe how quickly low expectation assets can recover with a little help from government spending priorities).

A noisy market environment globally is nothing particularly new when we look back over the last few tumultuous years and one which should be navigable if we keep our focus on the ‘basics’ of portfolio management: spreading risks, buying as cheaply as possible and not being afraid to take profits as winning positions become a little too popular. Your investment team is very focussed on applying these basic principles to portfolios consistently, especially in the current environment where it can sometimes be difficult to see the wood for the trees. We look forward to updating you on the evolution of our thinking next month, as the first quarter of a tumultuous year draws to a close.

With thanks for your continued support,

The Saltus Asset Management Team, February 2025