Market Reflection: February 2025

He is pursuing a similarly transactional policy in his desire to end the fighting between Russia and Ukraine, seeking to secure mineral rights in Ukraine in exchange for support. If we stand back from the day-to-day noise, the clearest trend to emerge is that Europe, in the broadest sense, will be required to fund more of its own military and defence capabilities in future. This was reflected in a pledge by Prime Minister Starmer to increase the UK’s defence budget to 2.5% of GDP at the expense of overseas aid. European defence stocks have performed very well in response. On US soil, Elon Musk and his DOGE acolytes are (almost literally) taking a chainsaw to federal spending. While we might want to applaud the reduction of unnecessary expense, the modus operandi is unrefined, to say the least, and threatens the delivery of various government services. The desired cuts might also weigh on economic growth, a situation potentially exacerbated by companies responding to the uncertainty by voicing increased caution. The “animal spirits” that were unbottled immediately after Trump’s election victory are more subdued now, according to business and consumer sentiment surveys. Even so, we continue to see a full-blown US recession as a low probability outcome, and it is not unhealthy to see some of the more speculative froth being blown off the top of the US equity market. This could offer some attractive longer-term entry points.

• The Bloomberg consensus estimate for World GDP growth in 2025 is 2.9%, a small downgrade from where we started the year (3%). Momentum has slowed fastest in the US, with Citigroup’s Economic Surprise Indicator falling from +43 in November to -10. We remain keen to emphasise that this is not necessarily the harbinger of an imminent recession, more a reduction in the rate of growth.
• Weaker growth momentum has boosted global government bonds. The Bloomberg Global Aggregate Index recovered early losses to show a gain of 2.3% so far this year in US dollars and 1.4% in sterling. For now, concerns about sticky inflation and large fiscal deficits have been put to one side, although we expect them to return into focus in the future and thus retain a relatively short duration bond exposure.
• The MSCI All-Countries Equity Index has delivered a total return of 1.3% in sterling, year-to-date, although the composition of returns is very different to those made last year and in 2023. Hong Kong equities (+19%) have benefitted from a rekindled enthusiasm for China-related technology companies in the wake of DeepSeek’s launch of its ground-breaking Large Language Model. There has also been a rotation into European equities (+11%), widely seen as offering reasonable value and the prospect of increased fiscal and monetary stimulus. The CDU’s victory in Germany’s federal elections has also bolstered the expectations for more business-friendly policies. This year’s losers are the formerly rampant Magnificent 7 US Tech stocks (-8.4%). (Data to 27/2/25).