February 2025 Market Review: AI Shifts, Tariff Volatility and Europe’s Rising Influence

Tariffs are one factor driving inflationary pressures that will likely define a very different decade ahead for investors. In this context, US inflation has picked up again, rising to 3% as of the last reported data point, surpassing economists' predictions and putting additional pressure on interest rates. This favours sectors less sensitive to borrowing costs, such as healthcare and insurance, which have shown resilience compared to the highly valued information technology and consumer discretionary sectors. These latter sectors are underrepresented in the TBAM funds of funds, despite constituting a significant portion of US equity market indices.

On the US domestic front, its recently created Department of Government Efficiency (DOGE) led by Elon Musk has issued an ultimatum to federal employees to document their weekly productivity or face termination. Already thousands of probationary federal workers have been laid off. Whilst the numbers are small in comparison to the US economy (even with economic multiplier effects) this does little for wider worker confidence.

Thus, contrary to the prevalent "Make America Great Again" rhetoric, the Atlanta Fed's GDPNow model, a running estimate of real GDP growth using currently available economic data, estimates for Q1 that US GDP growth violently plunged from +2.3% to -1.5% by the end of February, largely on the back of a huge increase in imports during January and a sizeable drop in consumer spending during the month. As of the time of writing this report the estimate has fallen further to -2.8%.

In contrast, and in response to the US administration’s shift in its foreign policy, other nations have begun to doubt their reliance on the US. Friedrich Merz, Germany’s chancellor-in-waiting, has questioned the commitment of the US towards Europe and has emphasised the need for Europe to boost its own defence capabilities. For Germany this could represent as much as 1% of the nations GDP. The scale of European potential, should it speak with one voice, should not be underestimated.

As President Trump continues to leverage the US exceptionalism narrative towards political ends, financial markets have, so far in 2025 at least, voted in favour of non-US assets. Breaking with the trend of the last 10 years, US equities have begun this year lagging in performance relative to other major equity markets.

Markets

Equities

Over the last decade, the value equity markets have placed on a dollar of US earnings has grown from around 1.2 times that of the rest of the world to over 1.6 times. In the case of comparison with the UK, US earnings are valued nearly double.

Bonds

The US Federal Reserve’s “wait-and-see” stance on further interest rate cuts has seen short-term yields anchored whilst the longer end of the curve has declined as US treasuries have rallied.

Longer term yields face tension between concerns over slowing growth, skepticism surrounding fiscal sustainability and inflation uncertainty. The increasing inversion of spreads in the middle of the curve over the month reflected the bond market’s increased anxiety over weakening economic growth data. The allocation to US treasuries in the T. Bailey Multi-Asset funds contributed to their performance over the month.

Commodities

Gold has rallied almost 9% year-to-date in US dollar terms, buoyed by its dual role as an inflation hedge and safe-haven asset. The T. Bailey Multi-Asset Funds’ 4.5% allocation to the iShares Physical Gold ETC has provided meaningful portfolio diversification during February’s volatility and contributed to performance.

However, the standout, albeit somewhat volatile, performer so far this year has been copper, which has continued to reach new record highs and is up 10% year to date in sterling terms.

Your Money

Whilst the monthly factsheets for the T. Bailey funds of funds provide asset allocation information for the thematic and regional focus of each of the underlying funds held, a more detailed description involves looking through those portfolios to the underlying assets held by each of these sub funds.

In doing so, we continue to maintain broad diversification across regions, sectors and asset classes alongside a focus on relatively cheaper non-US assets.