Market and Economic Summary
February was marked by significant uncertainty surrounding both US economic conditions and foreign policy, which dominated news flow this month. These factors, combined with stretched valuation levels across key developed markets, led to heightened volatility and a particularly weak US equity market performance, underperforming both Developed and Emerging Market indices. While risk assets in the US saw declines in February, we saw the opposite trend in the US bond market as US Treasury yields saw their steepest monthly decline since July last year. As a result, longer-dated US Treasuries performed well, as falling yields led to an increase in bond prices. Turning to other markets, Emerging Market (EM) equities produced a standout performance relative to Developed Market peers, with a strong performance from China and Korea coupled with a weaker dollar led the emerging market basket higher this month. On the other hand, EM bonds lagged behind their Developed Market (DM) counterparts.
In January 2025, inflation rose across major economies, signalling persistent price pressures. In the US, the annual inflation rate increased to 3%, up from 2.9% in December, ahead of market forecasts. The UK saw a more pronounced increase, with annual inflation reaching 3% in January, its highest level since March 2024, up from 2.5% the previous month and exceeding expectations of 2.8%. In the Euro Area, inflation was confirmed at 2.5%, the highest since July 2024, driven largely by a surge in energy costs (1.9% vs. 0.1% in December). Japan recorded the steepest increase, with inflation climbing to 4.0% from 3.6% in December, reaching its highest level in two years.
In other economic news, Japan’s economy showed strong growth in the fourth quarter of 2024, expanding at an annualised rate of 2.8%. This marks the third consecutive quarter of robust growth, a welcome development after a period in which the economy contracted in two of the preceding three quarters. In the UK, the Bank of England (BoE) lowered its benchmark interest rate by 0.25% to 4.5% in its February 2025 decision, the third rate cut since the easing cycle started in August 2024. The BoE emphasised that monetary easing would remain gradual this year, as concerns over slowing growth continue to compete with persistent underlying inflation in services. In the United States, employment continued to grow at a healthy rate, with 143,000 jobs added in January and unemployment edging down to 4.0%. However, consumer confidence in the US saw a significant decline in February, dropping by 7.0 points to 98.3—its sharpest decline in nearly four years. Lastly. in Germany, Friedrich Merz’s conservative CDU won the 2025 election on February 23, with a record voter turnout of 82.5%. The far-right AfD made significant gains, rising to 20.8% and becoming the second-largest party, while Olaf Scholz’s SPD experienced its worst performance in decades, securing just 16.4%.
South African equities ended the month flat, underperforming the EM composite despite the strong performance of index heavy weights Prosus (+11.6%) and Naspers (+12.3%). The Resources sector (-6.2%) ended the month in negative territory giving up some of the strong January gains. Key detractors were Sibanye Stillwater (-21.8%), Thungela Resources (-19.2%) and African Rainbow Minerals (-16.6%). Both the Industrials and Financial sector ended the month with a positive performance, with AB InBev (+20.3%) and Discovery (+14.3%) contributing to performance for the respective sectors. SA Retailers, including Shoprite (-3.8%), Spar (-5.1%), Foschini (-4.4%) and Truworths (-8.5%), faced challenges throughout the month following reports that the Treasury was considering a 2% VAT increase. This potential hike raised concerns about reduced discretionary spending, which could negatively impact retailers’ future cash generation opportunities. Lastly, the property sector ended the month down -0.3%, extending a YTD decline to -2.6%.
South African bond yields rose for the third consecutive month in February. However, the accrued interest income from these bonds was sufficient to offset the decline in bond prices, resulting in a marginally positive return for the month. The publication of the budget, which was ultimately not tabled and subsequently postponed, highlighted that South Africa’s fiscal challenges are unlikely to be resolved soon.
SA’s headline year-on-year inflation for January, released in February, increased to 3.2%, up from 3.0% in December, in line with consensus forecasts. The reweighted basket of goods used to calculate inflation had a minimal effect on this increase, with the new weights expected to show a more significant effect once the revised categories are surveyed. The rise in headline inflation was largely driven by base effects from fuel, increasing by 0,9% in January compared with December, which saw its price increase for the third consecutive month.
Economic data for December, released in February, showed modest growth of 0.6% in Q4, rebounding from a contraction in Q3. However, much of the improvement can be attributed to the “normalisation” of the agriculture sector. Among the six sectors for which monthly data is available, accounting for 41% of GDP, mining, manufacturing and electricity had a negative impact on quarterly growth, while transport, wholesale trade and retail contributed positively. The retail sector also benefited from the boost provided by the two-pot redemption.
The South African Cabinet has delayed the tabling of the 2025 Budget Speech by Minister of Finance, Enoch Godongwana, to 12 March 2025. The Minister was originally set to present the government’s key financial, economic and social priorities for the upcoming fiscal year. However, in an unprecedented move, the speech has been postponed for further deliberation.
Most major developed equity markets posted negative returns over the month dragging the MSCI World Index (-0.7%) lower. In contrast, the MSCI Emerging Markets Index (+0.5%) ended the month positively, outperforming its developed market peers.
Within emerging markets, China’s Shanghai SE Composite (+1.9%) and Korea’s KOSPI (+0.3%) ended the month higher. Performance in major developed markets displayed mixed performance, with Europe showing positive sentiment. The UK’s FTSE 100 (+3.4%) and Germany’s DAX (9.6%) both ended the month positively. In contrast, Japan’s Nikkei 225 (-3.5%) posted a negative return for the month.
In the US, tech-heavy NASDAQ 100 (-2.7%) ended negatively, underperforming the broader market. Furthermore, the S&P 500 (-1.3%) posted negative returns for the month, as the Technology, Consumer Discretionary and Industrials sectors detracted from performance.
Impact on Client Portfolios
Portfolios delivered mixed returns in February, as heightened uncertainty around US economic conditions and foreign policy led to increased volatility and weak US equity performance. However, developed markets outside the US saw positive performance, with European equities performing strongly over the month, contributing to performance. Funds with Emerging Market (EM) allocations posted marginally positive returns, largely driven by strong performance from Chinese and Korean equities. Locally, South African equities and bonds were flat over the month, while the property sector declined. The rand showed mixed performance against major currencies, but its appreciation against the US dollar provided a slight headwind to global assets denominated in USD when measured in rand terms.
We remain comfortable with the current positioning of client portfolios, both from an asset allocation and a manager selection perspective. We will continue to follow our valuation-driven approach by allocating assets to the most attractive areas of the market from a reward-for-risk perspective and ensure we build robust portfolios. We are confident that we will continue to deliver on the specific investment objectives of each client portfolio independent of the prevailing market environment.
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