February 2025 Market Report
February was a timely reminder of why we advocate for prudent portfolio diversification across asset classes and geographies. US and Australian equity markets reversed gains made in January, however the overall impact was mitigated by positive performance from European and Asian equities in addition to global bonds.
The Reserve Bank of Australia cut interest rates for the first time since 2020, however cautioned borrowers against interpreting the cut as part of a prolonged easing cycle. Currently, the market is pricing in two further rate cuts in 2025.
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Global Markets
February was a timely reminder of why we advocate for prudent portfolio diversification. US equities, which have accounted for the lion’s share of investor returns over the past two years, declined as markets soured on President Donald Trump’s protectionist trade policy.
The US government formally announced a 25% tariff on neighbours Mexico and Canada in addition to a 10% tariff on China. The tariffs on Mexico and Canada were then delayed 30 days after the parties agreed to stricter border measures. By month-end, it became clear the tariffs would formally be reinstated in early March, albeit this time with carve-outs. Trump then flagged further “reciprocal” tariffs without citing specific targets.
The capricious trade policy sparked concern over a potential economic slowdown in the US and sent the S&P 500 benchmark down 1.0% in local currency terms. Fortunately, this was offset somewhat by a rotation into European equities and an appreciation of global fixed income, minimizing negative returns for diversified portfolios.
Technology companies, including Amazon and Microsoft, continued to move lower as the ripple effects of the nascent Chinese AI model Deepseek spread. News that Microsoft had cancelled some data centre leases also tempered bullishness surrounding the artificial intelligence thematic.
Adding to the volatility was US inflation that exceeded expectations. Headline inflation increased to 3.0%, the fifth consecutive monthly increase, all but erasing the possibility of rate cuts in the immediate future. Readers should note that the US inflation target is 2%, unlike Australia, where the goal is the midpoint of a 2-3% target range.
Notwithstanding remarks from President Trump regarding future tariffs, the MSCI Europe Index increased 4.0% in February and has jumped 10.2% in 2025. Europe’s relatively lower valuations, coupled with the potential end to the Russia-Ukraine war, have caught investors’ attention. Moreover, there is cautious optimism that Germany will emerge from two years of recession after Europe’s largest economy voted for a new pro-growth government.
Renewed optimism regarding technology companies boosted the Chinese market, with the Hang Seng up 13.2%. The National People’s Congress during March will potentially bring new policy announcements supportive of the local economy. Interestingly, company earnings overall have retraced, with market gains primarily attributed to multiple expansion.
Oil fell 3.9% for the month and is down 12.1% for the year on the expectation of increased supply from the US in addition to prospective peace in Europe and the Middle East. This should translate into lower fuel prices and place downward pressure on inflation. Gold hit another all-time high before settling 2.9% higher in February.
Australian Markets
The S&P/ASX 200 fell by 3.8% in April, pressured by the previously mentioned tariff challenges and modest half-year reporting results. It appears unlikely that Australia will be a significant focus for the Trump administration’s future tariff measures, considering our trade deficit with the US.
However, the country’s largest exports (iron ore, energy, education) are directed towards several nations that are in the US administration’s crosshairs, namely China, South Korea, Japan, and Europe.
The February reporting period, when most ASX companies report half-year results, also weighed on sentiment. Despite earnings that were largely in line with expectations, share prices still gave up gains made in January.
This was best evident in the financial sector, dominated by the big four banks, which fell 4.7% despite no change in earnings estimates. Market reactions such as these suggest expectations likely ran ahead of head of fundamentals in the lead-up to the results. For long-term investors, this should not alter your investment timeline.
The Reserve Bank of Australia reduced interest rates for the first time in over four years, bringing the cash rate down to 4.10%. While the market had predicted the 25-basis point cut, the decision was more line ball with the nine-person Board having a “very active debate” over whether to hold or cut.
Ultimately, the better-than-expected December consumer price index, where core inflation fell to 3.2%, gave the RBA confidence that cost pressures were reducing sufficiently in the right direction to support lower interest rates.
The decision however was accompanied by a hawkish press conference from Governor Michele Bullock, who cautioned borrowers against interpreting the cut as part of a prolonged easing cycle. The RBA’s policy statement highlighted several uncertainties that could restrict further easing, not least the resilient domestic labour market.
Unemployment fell to 4.0% in the December quarter, below the central bank’s 4.3% forecast, with liaison surveys concluding employers are still struggling to find workers. There will also be a federal election called in the next two months, where both sides are expected to announce unbudgeted spending promises that could reignite inflation concerns.
The Governor expressed that market pricing of three rate cuts in 2025 was “far too confident”. Markets now expect two further rate cuts this year. Australian 10-year Government Bonds initially fell but finished the month in the green in line with global markets.
Conversely, the Australian Dollar rallied strongly but ultimately ended the month marginally above USD$0.62 upon continued strength in the US Dollar.
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