February In Review: Sentiment Soured, Deeply

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An unraveling of animal spirits and optimism led the ASX 200 index lower over February with investors vigorously rotating out of the winners into defensive stocks and sectors.

-Growth and momentum tumble as gold glitters
-Safe defensive harbours rise to the occasion
-Trump tariffs and a growth scare depress sentiment
-Asset price boom, but is liquidity falling?

By Danielle Ecuyer

Equity Market Performance in February 2025

If January was characterised as the risk-on rally, then February’s performance stands in stark contrast, with the S&P/ASX200 tumbling -3.79%, on a total return basis thus including dividends, underperforming the S&P500’s -1.3% decline.

The risk-off tone has delivered the big rotation, not only out of all the favourite trades from the last couple of years, such as technology and momentum, but also geographic outperformance with US markets underperforming China, Europe and the UK, but not Japan.

Macquarie attributes the February strength of China’s market performance, rising 11.6%, to the DeepSeek announcement in late January, which helped to boost China Technology stocks and may have accelerated the switch out of Australian equities.

The S&P/ASX Information Technology sector sold off by -12.28% in February, bringing the 2025 year-to-date decline to -8.63%.

In Australian dollar terms, the S&P Europe 350 index rallied 3.48% in February, and is up 9.68% year-to-date. The S&P Emerging broad market index also gained, up 1.72%, with a boost from China.

The S&P/NZX 50 sold down -3.03% over February, with a year-to-date decline of -3.88%.

Commodities and gold

Scanning across the Dow Jones Commodity Index, copper rallied 4.4% with gold up a further 2.47%, lifting the shiny metal’s gain to 40.41% for the 12 months ending February, with copper the next best performer at 10.70% over the period.

Macquarie’s total return assessment for gold stocks (All Ords) stands at 59.1% over the 12 months to February 28, composed of a 56.8% capital gain plus 4.7% in dividends.

In contrast, the ASX energy sector declined -15% over the period, with a capital fall of -19.7% only partially offset by 4.7% in dividends. The S&P GSCI Crude Oil index fell -2.4% in February and has advanced 3.38% over the last 12 months.

February proved a tale of two opposing stories, with Australian gold stocks providing extra performance cream on top of the gold price cake, while Australian energy stocks, including LNG and gas exposures, suffered at the hands of individual companies versus commodity price pressures.

Company-specific market movers

Company specifics were in focus over February when it comes to sector performances. WiseTech Global’s ((WTC)) share price fell -25.2% due to governance issues relating to the resignation of independent board members and personal shenanigans from founder, CEO, now Executive Chairman, Richard White.

The healthcare sector also suffered from company specifics, with Cochlear shares down -17.8% post an earnings downgrade, and Mexico tariffs an overhang for Fisher & Paykel Healthcare ((FPH)), down -11.7%.

CSL ((CSL)) experienced softness in its US vaccine business, Seqirus, with investors all too aware of the potential impacts from the Trump administration. The health sector declined -7.6% in February, making it the second-worst-performing sector.

Despite the RBA’s delivering a -25bps cut in the cash rate in February, real estate fell -6.2%, and financials, which have rallied 24% on a 12-month basis to the end of February, posted a fall of -4.4% over the month.

Morgan Stanley says Banks experienced the weakest monthly return in over two years, down -5.2% on a total return basis.

The most expensive of the lot, CommBank ((CBA)), outperformed the rest of the sector, with National Australia Bank ((NAB)) suffering along with other momentum stocks. Momentum as a factor declined -5.3%, including the likes of WiseTech Global, Goodman Group ((GMG)), ResMed ((RMD)), Car Group ((CAR)), Block ((XYZ)), and Fisher & Paykel Healthcare.

Defensive sectors and reporting season takeaways

Defensive sectors performed the way they are meant to in a risk-off environment. Utilities rallied 3.2%, also supported by a positive earnings result from APA Group ((APA)), up 9.8%. Food & Beverages rose 7.8%, supported by a2 Milk Co ((A2M)), and the Telecom sector went up 5.6%, supported by Telstra Group ((TLS)) on the back of another dividend increase plus a share buyback.

Macquarie’s analysis of the reporting season shows companies that returned capital performed well, specifically with new buybacks announced, including in media, insurance, and commercial services.

Resource companies harboured the most disappointment for investors, and discretionary retail faced macro headwind challenges leading to downgrades for autos, consumer services, and cyclical retail. The broker’s EPS forecast fell -150bps to a decline of -3.3% over reporting season, marking the third year in a row of falling earnings for corporate Australia.

Price-to-earnings (PER) multiples declined across multiple sectors with the greatest PER de-rate reserved for Banks, down -1x to 18x, but as Morgan Stanley explains this is still high by historical norms of 12.4x.

Morgan Stanley noted, despite earnings season delivering a beats-to-misses ratio of 1.6 times to consensus, market weakness at an index level continued into the last week of February as global markets moved to try and price in rising risks around growth from mixed data, notably the US and trade policies.

Volatility around result announcements was also high and earnings revisions for February reporting season were predominantly to the downside. Morgan Stanley’s observation confirms Macquarie’s assessment that aggregate earnings estimates for FY25 are now lower than FY24’s average EPS.

The shift in positioning reflected not only investors gravitating to defensive stocks and sectors but also buying duration, such as longer-dated government bonds. The Australian 10-year bond yield declined from around 4.54% at the end of January to 4.3% at the end of February.

Market sentiment and investor positioning

The risk-off trade and concerns over global growth and tariffs have seen the Australian dollar pull back against the US dollar from an intra day high on January 20 of 64c to 62c at February 28.

Macquarie’s FOMO Meter has declined to 0.23 from a post-US election peak of 1.25.

This corresponds to Morgan Stanley questioning whether a fault line in the “US exceptionalism” narrative has developed. This narrative, including the dominance and strong performance from US technology stocks and the AI trade, is starting to unravel with the US facing challenges from actions by the Trump administration.

Lance Roberts from Real Investment Advice highlighted the American Association of Individual Investors ((AAII)) sentiment indicator is suggesting 60.6% of retail investors in the country are bearish as at February 28, against 40.5% at the February 19 reading.

The AAII retail investor survey is now the most bearish since September 2022. It is only the sixth time since 1987 that bearish sentiment has been above 60%. Roberts stresses the five-week change in the index is the third largest in history.

Morgan Stanley highlights investors are likely to grow tired of tariff headlines, as volumes in US markets are suggesting, and the tariff risk premium into US markets is expected to “wane further.” US Treasuries are expected to benefit.

Tariff headlines also contribute to more investor and policy uncertainty.

Macquarie believes the uncertainty over Trump’s policies and tightening financial conditions could create room for more negative surprises. Cash futures markets are currently predicting the next -25bps rate cut from the RBA will arrive in May, not the March 29-April 1 meeting.

Global liquidity and retirement assets

Regarding global liquidity, CrossBorder Capital’s Michael Howell stated in his latest weekly Global View:

“QE needs to come back in some form, potentially with a less provocative name. Not only are US money markets tightening and liquidity-sensitive assets, like Bitcoin, selling off, but the US economy is faltering as last year’s secretive’ stimulus falls away. Admittedly, the Fed seems curiously reluctant to move, but unless they do, markets will slam into a wall around mid-year when US banks’ reserves fall below the danger line.”

Looking at the weight of money coming from Australia’s retirement assets, UBS details the boom in value by 11% year-on-year to $4.2trn for the December 2024 quarter.

If the pool of savings continues to grow at a similar pace, the increase would be around $1trn every two years.

Contributions advanced 16% in 4Q 2024, and inflows continue to exceed outflows.

Retirement benefits paid out in the four quarters to 4Q 2024 rose 11% to a record $172bn, or around 11% of household income.

Understandably, UBS explains how the retirement system is growing as a major contributor to the “household wealth effect,” underpinning the consumer and putting a brake on RBA rate cuts this cycle.

While dwelling prices rose 0.3% in February from January, this marks the equal-fastest monthly increase since July 2024.

ASX100 Best and Worst Performers of the month (in %)

ASX200 Best and Worst Performers of the month (in %)

ASX300 Best and Worst Performers of the month (in %)

ALL-TECH Best and Worst Performers of the month (in %)

All index data are ex dividends. Commodities are in USD.

Australia & NZ

The World

Metals & Minerals

Energy

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