Market Data – February 2025

Market Returns - 1 Month to 28 February 2025 (in AUD)

Market Commentary

February 2025 was dominated by ongoing aggressive U.S. trade policies and a highly anticipated—and widely speculated—RBA rate cut. Markets initially reacted cautiously to the Trump administrations tariff threats, though they ultimately interpreted many as negotiating tactics rather than permanent policy. The month saw a 10% tariff implemented on $200 billion of Chinese imports, while Mexico and Canada initially earned temporary reprieves following diplomatic exchanges.

Global markets diverged significantly, with European equities surging almost 5% followed closely by gold, outpacing U.S. indices. Bond yields swung dramatically – with U.S. 10-year Treasury yields initially dropping 20 basis points on growth fears before rebounding after a relatively steady jobs report. The unemployment rate ticked up to 4.1%, delaying expected Fed cuts as Powell stated the Fed was in "no hurry" despite Trump's calls for lower rates to offset tariff impacts.

In Australia, the RBA cut rates by 25 basis points to 4.1% – its first reduction since 2020. While Governor Bullock tempered expectations by cautioning that inflation pressures remain, markets are pricing in additional cuts by year-end.

The Australian reporting season revealed mixed results. While corporate earnings overall exceeded expectations, with a net 16% beat on EPS, sector performance was varied. Cyclical retailers like JB Hi-Fi and Temple & Webster delivered standout results while major banks disappointed, triggering a potential rotation away from financials. Technology and industrial sectors outperformed while consumer stocks lagged.

Looking ahead, markets remain focused on potential retaliatory tariffs against the U.S. from China, Canada and the EU, alongside geopolitical tensions surrounding Ukraine, and central bank uncertainty amid persistent inflation concerns. Despite February's mixed performance across regions, ongoing volatility is expected to test market resilience in the coming months.

Australian Equities

Conflicting messages about tariffs, culminating in the announcement of 25% tariffs on Canadian and Mexican imports and threats of similar tariffs on European Union goods triggered defensive positioning across global markets.

Technology stocks faced severe headwinds, with the sector declining 23.2% and contributing significantly to underperformance. WiseTech Global (-27.7%) and Block (-31.6%) were particularly weak.

IDP Education (-24.7%) was another notable detractor amid concerns about impacts on international student flows from potential immigration restrictions.

Financial stocks also struggled, declining 12.0% and representing the largest sector drag on performance. National Australia Bank fell 12.1% alongside weakness across the banking sector, consistent with the market rotation away from financials noted in weekly commentaries.

Nanosonics was the portfolio's standout performer, returning an impressive 36.2% and making the largest positive contribution. Telstra (+7.3%) also performed well as defensive Communication Services stocks found favor amid the uncertainty. Origin Energy (+4.7%) demonstrated resilience in the Utilities sector, which proved relatively defensive during the market downturn.

Defensive Income

February was a great month of performance for global fixed income. US economic data suggested a weakening economy while geopolitical turbulence led to heightened market uncertainty. The US 10y yield closed the month down -33bps at 4.21%, capturing a risk-off bid. High yield spreads widened, up 9bps to 309bps on the CDX HY 5y spread.

The Australian bond market saw a flattening in the curve, particularly at the mid to longer end. The domestic ACGB 10y yield declined 13bps to 4.29%, and our 2y yield fell 7bps to 3.70%. The Reserve Bank reduced the cash rate by 25bps to 4.10%, as they try to simultaneously combat prospects of a weakening economy and sticky inflation. Domestic credit spreads were stable month-on-month, with the AusBond Credit FRN OAS 3bps tighter at 62bps. The AusBond Credit BBB- to BBB+ OAS fell 4bps to 117bps. Our 5y constant tenor Big Four Tier 2 FRN spread tightened 4bps to 148bps.

Prime delivered strong return of +0.57% in February, marking another strong month to start 2025. This performance contributed to an impressive 1y and 2y return of +7.10% and +6.69% p.a., outperforming the Bank Bill Index by +2.63% and +2.41%, respectively. Positively, this has been achieved with no negative months recorded since May 2023 (which was a modest negative 3bps). This excellent performance has been achieved while maintaining consistently low exposure to interest risk (~1.5y duration) and high credit quality (A- portfolio average credit rating).

The top performers for the Portfolio were Pimco Global Bond Fund (+1.30%) and Yarra Higher Income Fund (+0.76%), contributing weighted returns of +16bps and +9bps, respectively. MQGPF was the only detractor (-1bps), driven by a fall in market price. During the month we sold out of this position as well as IAGPF, the last of our remaining exposure to AT1 hybrids, which are trading at historically tight margins. This provided us with sufficient liquidity to bid into both DN1 and MA1, which both begun trading in the first week of March. DN1 has traded well initially, however volumes are starting to fall away faster than we anticipated. MA1 has remained par-bound, however volumes are far healthier. We expect to reduce both exposures over the coming months, to reduce our mark-to-market sensitivity to LIT sell-offs.

International Equities

The Prime International Growth Portfolio returned -1.5% in February 2025, another month dominated by market uncertainty around U.S. trade policy under the second Trump administration and mixed economic signals globally.

The iShares Europe ETF was the standout performer, returning 3.1% as European markets demonstrated resilience amid reports of mediation in Ukraine. This positive sentiment boosted European equities despite renewed tariff threats from President Trump.

Value-oriented strategies showed strength with the Pzena Global Focused Value Fund returning 2.3%, benefiting from a market rotation away from technology stocks. Similarly, the Trinetra Emerging Markets Growth Trust performed well with a 2.0% return, supported by strong credit growth in China and improving sentiment after President Xi's meeting with tech leaders.

However, growth-oriented exposures significantly detracted from performance. The Munro Concentrated Global Growth Fund (-3.7%) and iShares S&P 500 ETF (-3.2%) were the largest detractors as U.S. markets bore the brunt of volatility from tariff threats and weaker-than-expected economic data. The NASDAQ particularly suffered as tech giants like Alphabet reported disappointing results despite strong numbers by standard metrics.

Looking ahead, markets remain focused on the evolution of U.S. trade policies, potential retaliation from trading partners, and central bank responses to this changing environment. The portfolio's diversification across styles and regions provides some resilience against ongoing geopolitical and economic uncertainties.

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