- Geopolitical noise dominated markets, driving mixed results for asset classes
- Global fixed income broadly positive, supporting stronger performance
- European and UK equities were positive highlights, but the US weighed
The Liontrust Multi-Asset class funds and portfolios delivered mixed results in February,1 with higher exposure to equities dampening performance, although European and UK stocks were positive highlights.2 Global fixed income was broadly positive, largely due to a contraction in US yields amid elevated investor uncertainty, which helped our lower-risk funds and portfolios to deliver the strongest performance. Commodities were also higher over the month, with gold a significant positive factor once again.2
Overall, markets proved their resilience in February, responding proportionately to a variety of challenging news events.
Equity performance so far this year has reflected to some extent a rotation away from the fully priced US equities that performed so well in 2024 – and much of the past decade – into better value areas. European and UK equities, for example, started the year at a valuation discount and buying demand has helped to drive their prices higher. They remain good value despite their relative outperformance so far.
In addition to growing investor uncertainty, the contraction in US yields was partly due to markets having become too pessimistic on rates in January. Economic data in February generally pointed to a slow-down, with inflation sticky but showing few signs of re-acceleration. The market awaits clarity on President Trump’s tariffs to decipher the impact on growth and inflation.
High yield debt, which is more exposed to company profits and therefore akin to equities, showed its resilience in the face of slowing growth. We believe high yield is in a sweet spot, where the main US government policies point to manageable risks, rather than anything existential. In this context, high yield produced very stable returns in February. We use high yield as a driver of yield-orientated returns in portfolios. We acknowledge that spreads over government bonds are tight, but the all-in yield remains very attractive.
Europe leads the equities pack
Europe ex-UK was the strongest-performing equity region in sterling terms over the month. The region’s stocks initially rallied – and gas prices fell - when President Trump announced peace talks with Russia, raising hopes for an end to the three-year war.3 But Europe’s defence stocks soared when it became likely that the continent would have to pay substantially more to finance its own security. More warnings from President Trump on tariffs also weighed on equities,4 but more positively, eurozone inflation data just slightly above expectations meant the European Central Bank was still on track to cut rates in March.
Overall, we remain cautious on Europe ex-UK equities, having cut our tactical outlook on them from neutral to a negative two out of five last year. We see the continent as still facing significant economic and political problems.
BoE cuts rates
UK equities were also in positive territory, while gilts extended their gains so far in 2025 on the back of a global bond rally and the prospect of faster interest rates cuts by the Bank of England (BoE).5 The BoE was firmly in cutting mode in February and cut the base rate by a quarter-point to 4.50% in a 7-2 vote in which the dissenters preferred a 50bps cut.
US market weighs
US equities delivered the most negative returns over the month in sterling terms of any sub-asset held in our funds and portfolios. They marked a record high during the month but declined overall as gloomy reports signalled that the US economy faced growing challenges from elevated borrowing costs and inflation on top of a cloudy political picture.6 Data pointed to weakening business and consumer confidence and concerns over the impact of President Trump’s tariffs on inflation. The Federal Reserve cut interest rates but forecast a slower pace of monetary policy easing this year. Indeed, there is a growing groundswell of opinion that the next move in rates in the US will need to be up rather than down as was largely anticipated over 2024.
Japanese economy strong
Japanese equities also drifted lower in February, although this followed their double-digit return in sterling terms in 2024. Latest data pointed to a strong economy, with fourth quarter GDP up an annualised 2.8%, significantly outstripping expectations and marking the third consecutive quarter of growth.7 The data showed that Japan’s economy remains robust despite the cycle of rising interest rates initiated last year by the Bank of Japan. We maintained out positive outlook on Japanese equities, including small caps, in our Tactical Asset Allocation review this quarter. We continue to believe that the inflationary regime in Japan, which should encourage more consumption, combined with improving corporate governance, could create a more positive environment for the economy and – crucially – the stock market to flourish. Elsewhere in Asia, Chinese technology stocks entered a bull market after rising more than 20% in a month following the DeepSeek AI announcement in January.8 Foreign investor interest in Chinese stocks has been rekindled after the announcement triggered a reappraisal of China’s technology sector. Again, we retained our positive outlook on Asia Pacific ex-Japan and emerging market equities in our TAA review this quarter because of their strong economic and demographic fundamentals and attractive valuations.
Diverse investment drivers
Financial markets are finding some support from a global economy that continues to rumble along. The support is conditional and judicious in that selloffs are focused on areas of the market that prove to be of concern rather than more broadly. There is also less naivety in markets compared with last year. Optimism remains, but it is cautious due to the political uncertainty.
This has helped demonstrate the importance of having a diverse range of drivers within investments, especially regarding equities. One of the lessons of history is that the outperformance of any particular asset, sector or market eventually ends. At some stage, capital moves and market leadership changes. It is prudent to remain meaningfully – rather than naively – diversified when building investments to take advantage of a range of market drivers.
It is also important to apply this approach through a disciplined investment process and to have the patience to look through the short-term noise – which could generate plenty of challenges to optimism this year – and focus on long-term fundamentals. We are entering an era where politics and geopolitics may, once more, be a significant source of volatility: markets have historically done well over the medium to long term regardless of political direction, so it is important to stay alert to opportunities while actively using fixed income as a counterweight to equity risk.
- Source: Financial Express, 3 March 2025
- Bloomberg, 3 March 2025
- Source: Financial Times, 13 February 2025
- Source: Financial Times, 27 February 2025
- Source: Financial Times, 7 February 2025
- Source: Financial Times, 21 February 2025
- Source: Financial Times, 17 February 2025
- Source: Financial Times, 12 February 2025
KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds and Model Portfolios managed by the Multi-Asset team may be exposed to the following risks:
- Credit Risk: There is a risk that an investment will fail to make required payments and this may reduce the income paid to the fund, or its capital value;
- Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss;
- Liquidity Risk: If underlying funds suspend or defer the payment of redemption proceeds, the Fund's ability to meet redemption requests may also be affected;
- Interest Rate Risk: Fluctuations in interest rates may affect the value of the Fund and your investment. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result;
- Derivatives Risk: Some of the underlying funds may invest in derivatives, which can, in some circumstances, create wider fluctuations in their prices over time;
- Emerging Markets: The Fund may invest in less economically developed markets (emerging markets) which can involve greater risks than well developed economies;
- Currency Risk: The Fund invests in overseas markets and the value of the Fund may fall or rise as a result of changes in exchange rates;
- Index Tracking Risk: The performance of any passive funds used may not exactly track that of their Indices.
The risks detailed above are reflective of the full range of Funds managed by the Multi-Asset team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID.
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
