Inside the markets | Multi-Asset review

Hello, my name's David Aujla. I'm the lead portfolio manager for Invesco's Model Portfolio Service and also for our Summit multi-asset fund ranges, and this is the February 2025 market review.

What a month to review is the first thing I would say. If we just think about what happened on the
first of the month, tariffs announced for Canada, Mexico and China, tariffs that are due to come into play in the coming days unless an agreement of some kind manages to avert them.

And then on the last day of the month, the sort of bookend of the month, we had that incredible and tumultuous exchange between President Trump, Vice President Vance and President Zelinsky of Ukraine in the Oval Office.

The kind of diplomatic engagement we're not used to seeing, certainly not played out in front of the
world's press, and, I guess a continuation or even acceleration of what's thus far been a very
different and much more unpredictable approach to communication from the new Trump administration.

Also, at the end of the month, we had news that the Atlanta Fed's GDP now model, the forecasting model for US GDP, had forecast a decline of 1.5% for US GDP in Q1 of 2025.

Just a week earlier, over the same period, it was seeing little in growth of 2.3%, and not long before that it was seeing growth of about 3.9%. So moving from plus 3.9 to -1.5% in a handful of weeks is quite the move.

What I would say though is that it's not an official forecast. It's a model that reflects economic survey data, and therefore is a high-frequency model and doesn't necessarily mean that a US recession is imminent, although it's certainly something for us to be keeping an eye on.

With just those bookended events in markets, and never mind what happened in the middle of the month, it's no surprise that it was a mixed month for market returns. In contrast to January, global equities ended February in negative territory for the month, while global bonds acted as a diversifier for multi-asset investors and ended in positive territory. Beneath the surface, of course, things were a bit more nuanced.

In the emerging world, Chinese equities led the way and actually looked pretty good on a global basis, outperforming most other equity markets. This was primarily due to a continuation of enthusiasm around some Chinese stocks now being beneficiaries of the AI theme that was once deemed to be largely contained to those US mega-cap stocks. Of course, Deepeek changed all of that, but also a combination of improving economic data expectations, the prospect for government stimulus, and the potential for an easier regulatory backdrop for some of those companies in China that I just mentioned.

Elsewhere in emerging markets, things were just about in positive territory, helped by a weakening US dollar, which is generally speaking good for emerging markets. Although I would say that India was a notable underperformer, particularly small and mid-sized Indian companies, which were down double digits, over 10%, during the month.

Close to home, things were a bit more positive in developed markets. Europe continued to outperform as it did last month, and the UK performed strongly too. In both cases, it was banks and defence companies that led the way. The defence companies' performance is relatively intuitive, given that there's a lot more pressure now on Europe to be more self-sufficient, increase military and defence spending, and of course, those companies in those sectors in Europe are perceived to be beneficiaries of that.

In the US, the equity market was down, so the S&P 500, the broad measure of US equities, was down for the month. The NASDAQ index, which is the more growth-oriented index, was down even more. This leads us to believe that growth stocks underperformed, and the continuation of that trade outside of US technology and AI into Europe has continued for the month.

It's important to remember that US stocks dominate the global index. They make up 2/3 to 75% of global equities depending on which global index you're looking at. This presents a risk from a concentration perspective, but also a currency perspective, having so much exposure to the US dollar if you're a sterling investor. Returns this month were worse still for sterling investors as sterling appreciated against the dollar. It's not my base case that this continues, but it is an above-zero probability, so something for a sterling-based investor to consider in terms of how much US exposure they want to have, and therefore how much US dollar exposure they want to have.

Elsewhere in developed markets, Japanese equities were perhaps the weakest, partly due to ongoing trade concerns that are worrying most global markets, but also due to an incredibly strong yen over the period. While a strong domestic currency could be helpful for some stock markets, when the yen is led by more export-oriented companies, it can be a hindrance as it was during February. The yen performed so strongly that it was actually the strongest performing G10 currency during the month.

As I alluded to, bond markets were positive. They acted as a diversifier, and that was pretty much across the spectrum of bonds. Investment grade credits in the developed world and emerging market debt led the way, so the best returns came from there, followed by government bonds and developed market high yield credit too. Yields in the US in particular fell, so the US 10-year fell from around 4.5% yield at the start of February down to about 4.2% by the end. A lot of that was due to increasing concerns around growth, and of course, that benefited the fixed interest complex across the piece, as I've just mentioned. Spreads remained relatively tight in investment grade. They widened a little bit in high yield credit but not enough to totally dampen returns in that space.

What was also a beneficiary of those falling yields was the global REIT area of the market, so listed property companies that are traditionally beneficiaries of a falling interest rate environment. What didn't benefit was global smaller companies, which can benefit from falling yields, but in this case, the increasing concerns over global growth offset the benefits that may have been achieved from falling yields in that part of the market. Interest rate expectations in terms of cuts have changed a little bit in the US. They've become a little bit more aggressive. At the start of February, just under 2 cuts were priced in for this year. Now it's just under 3, so that's an increase in interest rate expectations in terms of the cuts that the US may see.

In the UK, it's gone the other way, so it was just under 3, and now it's just under 2.5 for the year. In Europe, it looks to be relatively unchanged from where it was at the start of February. Going back to how I started this call, there's going to be a lot of volatility and a lot of noise out there. Our approach is to try to look through that and focus on the fundamental factors that drive markets like valuations, earnings growth, and interest rates. We try to build well-diversified, robust portfolios that balance their risks across a number of exposures so that we're not overexposed to one thing and we're not relying on one thing working for our portfolios to succeed. I'd suggest that that's the best approach in times such as these, where market conditions are volatile. It's also worth remembering that having that toolkit and having a medium to long-term investment view means that volatility can be your friend. It allows you to exploit some of the dislocations that happen in markets. So I wouldn't think of all of this volatility as a bad thing, it can throw up opportunities that flexible investors can benefit from.

I hope that's been a useful review. I'm not going to predict what next month's review is going to be, given what January and February have brought so far. Best of luck in markets and in your businesses between now and the next review. I'll see you next time.