A Positive Month Masking Deepening Market Dispersion. Monthly Market Outlook – February Review

February proved to be a month of contrasting forces, with markets navigating a combination of geopolitical developments, sector rotations and encouraging economic data. While headline performance across major asset classes was broadly positive, underlying conditions remained volatile, with dispersion rising across regions, sectors, and investment styles.

🌍 Macro & Market Overview

Markets contended with several significant crosscurrents. The US Supreme Court ruled against using the International Economic Emergency Powers Act to justify the reciprocal tariffs planned for April 2025, reducing a key source of policy uncertainty. Toward month‑end, geopolitical tensions escalated as the US and Iran entered armed conflict. As hostilities commenced after markets had closed for February, the market impact will materialise in March.

Despite heightened geopolitical risks, the economic backdrop improved. Global business surveys continued to signal broadening expansion, while inflation moderated across the US, UK, and Japan. This combination of healthier growth and easing inflation placed downward pressure on bond yields and supported a wider range of risk assets.

📈 Equities – Leadership Continues to Broaden

Equity markets experienced further rotation away from US mega‑cap technology companies. Despite another strong US earnings season, investor concerns over the return on rising AI‑related capital expenditure weighed on hyperscalers. Their scale exerted a meaningful drag on global growth‑style equities, which returned –1.6%.

This shift in leadership benefited a range of value‑oriented and cyclical sectors:

• Asian manufacturers gained from rising expectations for AI infrastructure investment.

• Latin American raw material exporters outperformed.

• Emerging markets delivered 5.5%, significantly outperforming developed markets.

Falling bond yields and broadening growth momentum supported small‑cap equities and real estate, both of which outperformed large‑cap indices. Japanese small caps were the global standout, while European real estate outperformed relative to global peers.

Regional Equity Highlights

United States

The S&P 500 was the weakest major market in February, returning –0.9%. AI fears were two‑fold: questions over capex efficiency and concerns about broader sector disruption. Software companies were particularly affected, as investors reassessed the resilience of the software‑as‑a‑service model. Financials were also pressured amid concerns about private credit managers’ software exposure. By contrast, materials, utilities and energy benefitted from a rotation into asset‑heavy sectors poised to gain from AI infrastructure build‑out.

Japan

Markets reacted positively to Prime Minister Sanae Takaichi’s snap election victory, which delivered the first two‑thirds supermajority since the Second World War. Investors increased expectations for additional fiscal stimulus, propelling the Nikkei 225 to a 10.4% return, the strongest of any major regional market.

United Kingdom

UK equities generated a strong 6.7% return, supported by large‑cap constituents with favourable sector exposure to energy and value‑oriented industries benefiting from the global rotation. The domestically focused FTSE 250 rose 2.3%.

💵 Fixed Income – Lower Yields Support High‑Quality Bonds

As geopolitical and AI‑related risks rose, investor demand for high‑quality fixed income increased:

• Global developed market government bonds: +1.2%

• Emerging market local‑currency debt: +1.4%

Investment‑grade credit posted 0.8% returns. Concerns persisted around private credit’s software exposure, though spillovers into public credit were contained. Spreads widened moderately (investment grade by 10 bps; high yield by 21 bps).

🛢️ Commodities – Precious Metals Rebound Strongly

Commodities returned 1.1% over the month.

• Precious metals rebounded with a sharp 12.4% rise following January’s correction.

• Energy commodities weakened on higher US inventory levels, although oil prices spiked at the start of March after markets reopened following the US–Iran escalation.

✔️ Conclusion – Positive Outcomes Amid Deepening Divergence

February was broadly constructive for investors, with most asset classes generating positive returns. Growth is widening across regions and sectors, supporting a more diversified return environment. However, beneath the positive surface, dispersion is clearly increasing between styles, regions, sectors, and even within technology itself.

As geopolitical developments already drive sharp market moves in early March, we expect a continued environment characterized by both broader growth and heightened volatility.