Investment Update – February 2025

What happened in markets?

A month which featured the inauguration of President Trump was never likely to be dull, and in the first two weeks of the year, global bonds continued a sell-off which began at the end of last year, with rate cut expectations being dialled back. UK government bonds were caught in the crosshairs as a robust US economy and concerns over the UK’s public finances saw ten-year gilt yields briefly surpass 4.9%, a level at which the government’s fiscal headroom would be compromised. However, a circuit breaker arrived in the form of weaker than expected inflation data in the US and UK, taking yields lower during the remainder of the month.

Global equities returned just over 4%, although this masked a violent sell-off in some of the US tech giants following news that a Chinese company, DeepSeek, had created a generative AI model which had achieved results comparable to the latest US OpenAI models, but using a fraction of the compute resources and cost, and using lower spec chips. The ramifications are potentially significant, particularly for Nvidia which lost nearly $600bn of market value in a single trading day, the largest single-day market cap decline in history.

Rising bond yields and concerns over lofty Mag-7 valuations prompted a rotation into European and UK equities, with the former returning over 8%. Sectors such as financial and energy performed well, both of which are well represented in European equity indices. Global small caps rose over 4% despite higher bond yields in the first half of the month, and gold jumped 8%.

*All returns in Sterling. Source: Morningstar direct

What did we do in the funds?

We remain slightly underweight in UK and US government bonds and used the sharp rise in yields to increase our positions in high yield across the fund range and add to our position in the Artemis Short-Duration Strategic Bond Fund in Esprit Balanced and Growth. This was partly funded by reducing sterling corporate bonds and a global strategic bond fund. At the start of the month, we also introduced a position in gold in Esprit Careful Growth, funded by a reduction in UK index linked gilts.

We modestly increased US equity exposure, at the expense of UK equities, by introducing the L&G S&P 500 US Equal Weight Index Fund across the Esprit range. It has the same constituents as the widely used S&P 500 but each company is allocated an equal weight of 0.2%.

With US earnings growth broadening out, the fund therefore provides greater exposure to sectors outside of the technology sector than the S&P 500 market cap index. Secondly, and as demonstrated during the month, Mag-7 stocks are under increasing pressure to meet earnings forecasts in order to justify current valuations. Any deterioration in the earnings outlook for the US tech giants would likely result in a period of outperformance for the equal weight index.

What is the outlook?

The speed at which the Trump administration announced 25% tariffs on Canada and Mexico before hastily postponing their implementation by one month is a sign of things to come. An unorthodox and unpredictable US President adds a layer of policy uncertainty that can’t easily be modelled by investors. That said, the momentum behind the US economy combined with Trump’s pro-growth policy agenda means we maintain a cautiously optimistic view.

Bonds have been a rollercoaster ride in recent years, but yields are attractive, and government bonds in particular should provide a useful hedge to equities should the global economy experience a tariff-induced slowdown.

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Written by:
Charlie Lloyd
Head of Investment, Shackleton

Important information:

This document is issued by Shackleton, which is a trading style of Shackleton Advisers Limited. Shackleton makes no warranties or representations regarding the accuracy or completeness of the information contained herein.  We have prepared the following document based on our view of the current market. Nothing in this document shall be deemed to constitute financial or investment advice in any way. We recommend you speak to your adviser before making any decisions.  This document shall not constitute an invitation or inducement to any person to engage in investment activity. Past performance is not a guide to future returns and the value of capital invested and any income generated from may fluctuate in value.