Talking points

1. Trade tensions shake up global markets: February highlighted ongoing uncertainty in global markets, driven by new US tariffs on major trading partners like Mexico, Canada, and China. The ripple effects led to market volatility, with small-cap stocks particularly impacted.
2. US stocks struggle: US stocks had a ough month, with the S&P 500 down 1.4% and the Nasdaq losing 2.8%. Consumer discretionary and communication services were the biggest losers, while energy and real estate saw gains.
3. ASX 200 stumbles while the RBA cuts rates: The Australian share market dropped 3.8%, with technology, healthcare, and property stocks hit hardest. The RBA lowered interest rates to 4.10%, showing confidence in slowing inflation but warning against expectations of more cuts.
4. Economic crossroads across the globe: US job growth cooled while inflation ticked up, leading analysts to rethink interest rate expectations. Meanwhile, China faced ongoing producer price declines, and central banks in India and the UK cut rates to navigate global uncertainty.
5. Investors turn to safer ground: Defensive assets, including bonds and infrastructure, outperformed as investors sought stability. The Australian composite bond index rose 0.9%, while global bonds gained 1.2%, reflecting a shift toward lower-risk investments.

Market Commentary

February brought a new reality check for investors who may have viewed the Trump tariff announcements as an aberration or a bargaining chip. Economic, political and geopolitical events regularly dominated the headlines. The US economy showed signs of a sudden slowdown, and political figures squabbled over the speed and extent of policy implementation. At the same time, global allies of the US scrambled to implement new defence spending measures to fill the void being created by the new administration.

So great was the uncertainty around all things US that the Australian dollar rose against the greenback, and the regime-favoured crypto sector suffered a significant retracement.

Financial markets were interrogating the prospects of higher prices from new tariffs against the US’s largest trading partners. Commencing early March, tariffs are being imposed on Mexico, Canada and China. Meanwhile, reciprocal tariffs and non-tariff barriers will come into force in early April, which are expected to have a heavy impact on Europe.

The fallout of these restrictive trade policies hurt global small cap returns in February, as growth concerns outweighed the valuation benefits of lower yields.

The MSCI ACWI ex-Australia index delivered a total return of -0.2% to unhedged domestic investors in February, as sentiment soured later in the month and US megacaps lost share price momentum.

In the US, communication services and consumer discretionary were the worst performing sectors, while consumer staples, energy and real estate delivered positive returns over the month. In US dollar terms and excluding dividends, the benchmark US S&P 500 index fell 1.4% in February, and the tech-heavy Nasdaq lost 2.8%. Meanwhile, the price-weighted Dow Jones Industrial Average declined 2.8% for the month.

Closer to home, the ASX 200 slumped in February to the tune of 3.8%, including dividends, with small cap peers and the listed property sector also finishing deep in the red. The best ASX returns in February were seen among the more defensive utilities and telcos sectors. However, steep losses were seen in technology, health care and listed property. The February interim reporting season was underwhelming but contained few surprises and generally met the low expectations of domestic investors. The gold mining sector again posted a positive return, helped by heightened geopolitical uncertainty.

Elsewhere, the TOPIX was 3.8% lower in local currency terms as the export-oriented Japanese economy was expected to be disproportionately hurt by the new trade barriers.

In Europe, defence stocks led the charge, with the MSCI Europe ex-UK index 3.4% higher in local currency terms. European shares are nearly 11% higher in the current quarter as investors seek value outside of the Magnificent Seven.

Returns were broadly positive across defensive assets. Fixed interest led the way as strong inflows and capital gains implied lower bond yields across many fixed rate debt securities. In Australia, the composite bond index was 0.9% higher, while the global aggregate bond index jumped by 1.2%. Of great local significance, the Reserve Bank of Australia (RBA) cut the official cash rate by 0.25% to 4.10% as expected but suggested that futures traders were too bullish in their positioning for further rate cuts. We note that as at 28 February 2025, bank bills have outperformed domestic fixed interest across time frames ranging from six months, extending out to ten years.

Economic Commentary

Australia

In Australia, the labour market remained strong as jobs growth again smashed expectations. However, a further rise in workforce participation resulted in a slight increase in the unemployment rate to 4.1%. The RBA cut the cash rate to 4.10% in its February meeting, but Governor Michele Bullock pushed back on market pricing for more rate cuts this year and reiterated that future decisions are data dependent. Bullock said the RBA board cut the cash rate because it had gained confidence that underlying inflation was heading in the right direction, having fallen to 3.2% in the December quarter. However, she framed it as a discrete decision to undo the “cautionary” rate rise delivered in November 2023 rather than the start of a new easing cycle.

Global

On the economic front, US job growth moderated in January. Annual revisions from the government revealed a more moderate labour market last year than previously thought, with the unemployment rate printing at 4%. Separate data showed that US inflation picked up broadly at the start of the year, further diminishing chances the Federal Reserve will cut interest rates anytime soon. The increase in consumer inflation was led by grocery prices, underpinned by a 15% surge in egg prices in the wake of a deadly bird flu outbreak. The stronger-than-expected core inflation report prompted analysts to revise their interest rate expectations for 2025.

Elsewhere, China’s annual producer prices fell by 2.3% in January, surpassing market estimates of a 2.1% decline. It was the 28th straight month of producer deflation amid continued efforts from Beijing to spur demand at the start of the year. Meanwhile, the Reserve Bank of India (RBI) unanimously lowered its policy by 0.25% to 6.25% during its February meeting, marking the first reduction since May 2020 and aligning with market consensus. The RBI is aiming to counter slowing economic growth amid rising global trade uncertainty. Finally, the Bank of England (BOE) cut its benchmark rate by 0.25% to 4.5% in February, marking the third rate cut since the start of its easing cycle in August 2024.

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