Market Overview
Global equity markets fell modestly in February, as tariff risks, uncertainty about the U.S. inflation outlook, and cooling enthusiasm for artificial intelligence (AI) dampened risk appetites.
The month was marked by mounting concerns about the U.S. economic outlook. Markets were rattled by the latest reading from the closely monitored Consumer Price Index, which suggested that year-over-year price growth in January had unexpectedly accelerated from December’s rate and raised the likelihood that interest rates would remain elevated in the near term. The Federal Reserve (Fed) appeared to confirm these expectations when it stated that while significant progress had been made in bringing domestic inflation closer to its 2% target, “we’re not quite there yet.” The policies of the new Trump administration, especially its intention to impose tariffs on key U.S. trading partners, further clouded the inflation outlook and became a source of growing market anxiety after a string of economic reports, including one from the Fed’s preferred gauge of domestic inflation, indicated a deterioration in consumer sentiment and consumer spending, due in part to expectations that prices could rise further. The yield on the benchmark 10-year U.S. Treasury note ended February at 4.22%, 32 basis points (bps) lower than a month earlier.
Across the Atlantic, encouraging inflation data released during the month for some of the eurozone’s largest economies raised expectations that the European Central Bank (ECB) will lower interest rates at its next policy meeting in March. Meanwhile, in the U.K., the Bank of England (BOE) lowered interest rates by 25 bps in February amid a slowdown in domestic inflation. The BOE stated that additional rate cuts were on the horizon, but the pace and magnitude of the reductions would be determined in a deliberate manner at each policy meeting. The developments in Europe unfolded amid threats by the Trump administration to impose tariffs on European goods exported to the U.S., which could precipitate a trade war and trigger higher inflation at a time when the Continent is struggling with stagnant economic growth. In February, the yield on the 10-year German Bund, Europe’s principal safe-haven asset, fell 5 bps, ending the month at 2.41%.
The surprising news last month that a Chinese start-up had developed a lower-cost artificial intelligence (AI) model that performed as well as those created by its U.S. Big Tech rivals continued to reverberate across global stock markets. The stock prices of AI leveraged companies worldwide remained under pressure during the month on worries that the frenzy over the technology has led to overspending. Notably, the Chinese start-up’s breakthrough fueled a surge in China’s technology stocks, reflecting foreign investors’ renewed interest in the country’s internet companies.
With the new earnings season in full swing, investors received the latest update on how company profits have held up amid shifting market dynamics. In the U.S., 76% of the companies in the S&P 500 Index that reported results topped consensus estimates, which was above the long-term average of 67%. The fourth-quarter earnings growth rate is estimated to have increased 18.2% from a year earlier. In Europe, 51% of the companies in the STOXX 600 Index that reported results posted better-than-expected earnings, below the 54% that do so in a typical quarter. The year-over-year fourth-quarter earnings growth rate is expected to have expanded 4.2%. In Japan, 58% of the companies in the TOPIX reported positive earnings surprises, surpassing the 54% beat rate over the past four quarters. The fourth-quarter earnings growth rate is estimated to have increased 23.7% from a year earlier. In Hong Kong, 54% of the companies in the Hang Seng Index registered better-than-expected earnings, surpassing the 48% beat rate over the past four quarters. The fourth-quarter earnings growth rate increased 12.1% from a year earlier.
Against this backdrop, equity markets in the developed world retreated while those in the developing world rose modestly in February. In the U.S., the S&P 500 underperformed, as a sell-off of AI-linked stocks and concerns about the domestic interest-rate outlook dampened risk appetites. Across the Atlantic, the pan-European STOXX 600 gained, thanks in part to earnings revisions and the strong performance of defence stocks amid expectations of increased military spending across the Continent due to concerns about the Trump administration’s commitment to security obligations. In Japan, the TOPIX fell, as a stronger yen hurt the stock price of index-heavyweight exporters such as automakers. Meanwhile, in China, the Hong Kong-based Hang Seng Index jumped, as foreign investors bid up shares of Chinese internet companies in the wake of a Chinese start-up’s advance in AI.
Consumer discretionary was the worst-performing sector in February, as fears about stubbornly high U.S. inflation led traders to dump shares of companies that make and provide non-essential goods and services. Consumer staples was the best-performing model.
Outlook
Increased uncertainty surrounding the U.S. economic outlook and key policy measures of the Trump administration, especially tariffs, began to weigh more heavily on markets during February and interrupted a previously clearer line of sight towards decelerating inflation and a strong likelihood of success in achieving a soft-landing. Our base case scenario remains unchanged—with expectations for moderate deceleration in economic activity and a gradual, non-linear easing of inflation towards the U.S. Fed’s average 2% target. This is a highly constructive backdrop for our Infrastructure portfolio, in our opinion.
However, if policy uncertainty and the potential repercussions from bilateral trade disputes result in a weaker economic outlook and put short-term upward pressure on price levels, it is fair to assume the pace of central bank rate cuts may slow and the magnitude may be diminished while long-term rates experience increased volatility.
While we view this latter outcome as a less constructive backdrop overall, we would also expect Infrastructure to exhibit superior defensive characteristics vis a vis the broader market and powerful secular growth trends in key aspects of critical infrastructure investment would result in impressive resilience against a decelerating economy.
Electrification and the growing demand for power serve as an example. Utilities were a key positive contributor to performance during 2024, albeit this was heavily concentrated in the U.S. While we maintain a favourable sector outlook for Utilities and foresee scope for upward earnings revision, valuations have also re-rated higher, and we do not expect the same pace of returns for utilities to continue in the U.S. On the other hand, we continue to find very compelling valuations and opportunities in utilities outside the U.S.
Outside of the utilities sector, midstream energy, namely oil & gas storage and transportation, looks to have mostly shrugged off the downward pressure from oil & gas commodity prices as the earnings outlook remains favourable and valuations look compelling.
The vast majority of the cash flows associated with the portfolio’s holdings are fee-based and enjoy strong support from the volume of energy molecules transported as well as favourable spread differentials at key access points.
Elsewhere within the portfolio, we see an abundance of opportunities stemming from large-scale investment in transportation infrastructure, information technology and energy development & security, leading to increased demand for materials, capital goods and industrial equipment. We believe the portfolio remains well-positioned to take advantage of these opportunities in real asset infrastructure businesses as well as key enablers, including materials, services, and technologies, that will both facilitate and benefit from increased investment in infrastructure.
We believe publicly listed infrastructure remains well-positioned to benefit from a continued brisk pace of investment, with plenty of runway ahead, and an end to the rate-hiking cycle, as eventually lower interest rates are used to discount cash flows that have been adjusted higher either for regulatory or contractual inflation-adjustment, or the indirect benefit of inflation adjustment that tends to stem from owning and operating high fixed cost, long life assets.
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Equity securities will fluctuate in price; the value of your investment will thus fluctuate, and this may result in a loss. Securities in certain non-domestic countries may be less liquid, more volatile, and less subject to governmental supervision than in one’s home market. The values of these securities may be affected by changes in currency rates, application of a country’s specific tax laws, changes in government administration, and economic and monetary policy. Emerging markets securities carry special risks, such as less developed or less efficient trading markets, a lack of company information, and differing auditing and legal standards. The securities markets of emerging markets countries can be extremely volatile; performance can also be influenced by political, social, and economic factors affecting companies in these countries.
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Published on March 24, 2025.