SMF February 2025 Update

Top 3 investment trends 

1. Tariffs: what goes around, comes around

February began with threats of imminent tariffs by President Trump on Canada, Mexico and China which were expected to be implemented from 4^th February (25% tariff on the former two and 10% on China). All three countries have deeply integrated trade channels with the US, accounting for around 40% of all US imports. Whilst Canada and Mexico were successful in agreeing a last-minute extension with the US on the proposed tariffs, following constructive border-security conversations, the tariffs on China were implemented swiftly. Given China’s retaliatory action, Chinese equities sold off, contrasting the relief rally in Mexican and Canadian currency markets which saw the Canadian Dollar bounce back from a 9-year low. However, this relief was short-lived as Trump resurfaced his tariff threats towards the end of the month on Canada and Mexico, with an additional 10% tariff threat directed at China (all of which are now live and developing).

2. Inflation jitters resurface

The threat of higher tariffs interacted with growing fears of inflation in February, with several data points initially raising concern. In particular, headline US inflation was ahead of expectations at +0.5%, marking its strongest monthly reading since August 2023. However, the underlying detail showed that this increase was concentrated within certain categories which are affected by more temporary, seasonal factors for example, car and truck rentals. Likewise in the UK, headline inflation data beat forecasts but there were signs of easing within services inflation which came in below the Bank of England’s expectations. In the Euro Area, despite inflation data also exceeding market expectations, headline figures trended lower in February with a +2.4% increase compared to the +2.5% rise last month. Despite the inflation surprises, investors’ risk-off sentiment dominated fixed income markets, with most global bonds ending in positive territory for the month.  

3. European stocks surge ahead

Politics dominated headlines out of Europe in February as the US announced the beginning of negotiations with Russia over ending the war in Ukraine. The potential for progress towards a resolution boosted market sentiment, triggering a fall in oil prices and a rally in European equities, most notably for European defence stocks. The Stoxx 600 was up over 3.4% for the month, outpacing the S&P for the third consecutive month, with defence stocks such as Germany’s Rheinmetall surging +33.2% on the month. The result of the German election at the end of the month, which saw the CDU/CSU secure the largest vote-share (28.5%) as expected, provided further support for European equities, particularly domestically-focused mid cap stocks. Friedrich Merz (leader of CDU/CSU) has subsequently expressed interest in increasing defence spending, as did Keir Starmer who pledged to increase the defence budget from 2.3 to 2.5% of GDP, which was an additional tailwind for the broader defence sector.

February 2025 Market performance (GBP terms)                                                                       

Past performance is not a reliable indicator for future performance.

Source: Morningstar as at 28 February 2025. All equity and commodity returns are in GBP and fixed income is GBP hedged.

How did SMF perform?

Growth assets

February was an eventful month for risk assets; the month started with a broad relief rally across equity markets, following the reversal of US tariffs on goods from Canada and Mexico. Improved sentiment saw both the Stoxx 600 and S&P 500 hit new all-time highs by mid-February. However, when tariffs came back into focus towards the end of the month, caution returned to markets. Given this backdrop, most equity markets ended in negative territory, including the S&P 500 with the Mag-7 posting their worst monthly returns since 2022. European and UK equities were the exception, delivering positive returns. Both markets benefitted from their exposure to defence companies as confidence in America’s continued guarantee of European security came into question following Trump’s direct negotiation with Russia over Ukraine. Within the Growth sleeve, our UK equity fund was the best performing allocation for February. In terms of tactical positioning, our overweight in North American equities and underweight in European equities detracted. However, this was partially offset by our overweight exposure to the US financial sector which outperformed the broader US market.

Defensive assets

Despite market concerns about perceived strength in inflation data, and future inflationary pressures from tariffs, fixed income markets fared better than equity markets in February. Initially, inflation surprises across developed economies drove bond prices lower, and yields higher, with 10y US bond yields posting their largest daily spike since 2015 at over 4.6%. Within Europe, concerns about increased defence spending also put downwards pressure on bond prices. However, risk-off sentiment in response to the reemergence of Trump’s tariff threats, and fears about weakness in US growth, led investors to seek safety in global bond markets towards the end of the month. Given this, our Global Investment Grade Bond fund posted strong performance in February and was the top performing fund in the defensive sleeve for the month. Regarding active positions, our overweight positions in German Bunds and UK Gilts were additive, although our underweight to French government bonds was a detractor. Within FX, our overweight USD v underweight GBP detracted this month.

Alternative assets

Alternative assets performed well in February, helping to cushion some of the equity weakness. Both our property holding and AIMS delivered positive performance over the month, with the latter also benefitting from its tactical fixed income positions.

Key active management themes in February 2025

• 1. Opened new active positions
  • Overweight 10y German bonds v underweight French 10y bonds
  • We opened a relative value trade within European government bonds, preferring to be overweight German Bunds versus French bonds. This reflects our expectation of increased fiscal risks, specifically in France, which are likely to drive French bond yields relatively higher and hence, bond prices lower.
  • Opened an overweight North American v underweight European equities position
  • This reflects our view of relative macro weakness within the Euro area compared to the US, as well as the view that investor hopes for a Russia-Ukraine ceasefire in the near-term may be overstated.

• 2. Increased allocations within existing active positions
  • Increased our exposure to North American equities
  • We increased our overweight position in US equities at the start of the month, as market sentiment improved following the announcement that US tariffs would be paused on Canada and Mexico.
  • Increased our FX exposure; overweight USD v underweight GBP
  • Given attractive entry levels, we took the opportunity to increase our overweight position in USD vs an underweight in GBP.

• 3. Took profit on some existing positions 
  • Closed our underweight Japanese government bonds position
  • Following Japanese bond yields reaching new historical highs (driving prices lower), we decided to close our underweight Japanese government bonds position at this opportune time. 

SMF Strategic Asset Allocation

Source: Aviva Investors. This diagram is for illustrative purposes only, asset allocations are subject to change. The reference fund is SMF, based on its strategic asset allocation as at 30 June 2024.

Top 10 Equity holdings

Source: Aladdin, as at 26 February 2025. The reference fund is SMF. The companies mentioned are for illustrative purposes only, not intended to be an investment recommendation.

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in February 2025.

Market outlook and positioning: what do we believe happens next?

From an active asset allocation perspective, we maintain a preference for a focused overweight position within the US market, in which corporate profitability has remained resilient. In contrast, we are underweight European and Emerging Market equities, relative to US equities. Regarding global fixed income, the potentially inflationary effects of the proposed Trump 2.0 policies present a risk to central bank easing biases, most notably in the US. Although, we believe the Euro Area and the UK are more insulated from this effect, where the continued focus on growth risks could place a ceiling on bond yields. We now also have an FX position in which we are overweight USD v underweight GBP as an additional expression of our growth concerns within the UK relative to the US’ strong macro backdrop.

In terms of equity regions, we maintained a focused overweight position in US equities in February, which was diversified through our sector position in US financials. Going forward, US companies may benefit from a combination of corporate tax cuts, deregulation policies and fiscal stimulus in the US. Earnings have also continued to be robust, as shown in the most recent earnings season, helping to stabilise valuations. In terms of US financials, the sector is well-placed in an environment of potentially higher rates which is supportive of banks’ profitability. We also have relative value trades, with underweight positions in Emerging Market equities and European equities against an overweight in US equities. We expect continued macro underperformance in Emerging Markets relative to the resilient growth in the US, and are continually monitoring developments in Europe.

Regarding our fixed-income allocation, we maintain an overweight position in UK Gilts, and in February opened an overweight German Bunds v underweight French Bonds position. We believe our overweight German Bunds and Gilt position could benefit from continued central bank easing, particularly in the case of the UK where we see potential for greater rate cuts than market expectations. For France, we see specific fiscal risks where expected increases in spending, compared to the rest of Europe, are likely to put downwards pressure on bond prices. 

Any companies, or markets, mentioned are for illustrative purposes only, not intended to be an investment recommendation.

Key risks

• Investment not guaranteed: The value of an investment is not guaranteed and can go down as well as up. You could get back less than you’ve paid in.
• Specialist funds : Some funds invest only in a specific or limited range of sectors. This will be set out in the fund’s aim. These funds may be riskier than funds that invest across a broader range of sectors.
• Suspend trading : Fund managers are often able to stop any trading in their funds in certain circumstances for as long as necessary. When this happens, cashing in or switching your investment in the fund will be delayed. You may not be able to access your money during this period.
• Derivatives: Derivatives are financial contracts whose value is based on the prices of other assets. Most funds can invest partly in derivatives so that the fund can be managed more efficiently or to reduce risk, but there’s a risk that the company that issues the derivative may default on its commitments, which could lead to losses. Some funds also use derivatives to increase potential returns – this is known as ‘speculation’ – and an additional risk warning applies to those funds.
• Foreign exchange risk: When a fund invests substantially in overseas assets, its value will go up and down in line with movements in exchange rates as well as the changes in value of the fund’s investments.
• Emerging Markets: Where a fund invests substantially in emerging markets, its value is more likely to move up and down by large amounts and more frequently than a fund that invests in developed markets. Emerging markets may not be as strictly regulated, and investments may be harder to buy and sell than in developed markets. Emerging markets may also be politically unstable which can make these funds riskier.
• Smaller Companies: Where a fund invests in substantially the shares of smaller companies, it’s more likely to move up and down by large amounts and more frequently than a fund that invests in the shares of larger companies. The shares can also be more difficult to buy and sell, so smaller-companies funds can be riskier.
• Fixed Interest: Where a fund invests substantially in fixed-interest assets, such as corporate or government bonds, changes in interest rates or inflation can contribute to the value of the fund going up or down. For example, if interest rates rise, the fund’s value is likely to fall.
• Derivatives: Some funds also invest in derivatives as part of their investment strategy, not just for managing the fund more efficiently. Under certain circumstances, derivatives can cause large movements up or down in the value of the fund, making it riskier compared with funds that only invest in, for example, company shares. There’s also a risk that the company that issues the derivative may default on its commitments, which could lead to losses.
• Cash/Money Market funds : These are different to cash deposit accounts, such as those held with high-street banks, and their value can fall. Also, when interest rates are low, the fund’s charges could be higher than the return from the investment, so you could get back less than you’ve paid in.
• Property Funds: When a fund invests substantially in property funds, property shares or directly in property, you should bear in mind that: · Property isn’t always easy to sell, so at times the fund may not be able to cash-in or switch part or all of its holdings. You may not be able to access your money during this time. Property valuations are made by independent valuers, but effectively they remain a matter of judgement and opinion. Property transaction costs are high due to legal costs, valuation costs and stamp duty, all of which affect the value of a fund.
• High Yield Bonds: These are issued by companies and governments that have a lower credit rating. When a fund invests substantially in high yield bonds, there’s a higher risk that the bond issuer might not be able to pay interest or return the capital that was invested. The value of these bonds is also more greatly affected by economic conditions and interest rate movements. There may be times when it’s not easy to buy or sell these bonds, so cashing-in or switching your investment in the fund may be delayed. You may not be able to access your money during this period.
• Reinsured Funds: Where a fund invests in a fund that’s operated by another insurance company, you could lose some or all of the value of your investment in the fund if the other insurance company became insolvent.
• Long-Term Asset Funds: The fund invests partly in one or more long-term asset funds (LTAFs), giving access to sectors such as infrastructure, venture capital, private equity and debt investments. LTAFs add diversity to the fund, but it takes longer to move money out of them than from many types of asset. This could mean that in exceptional circumstances cashing-in or switching your investment in the fund may need to be delayed. To reduce this risk, we set strict limits on how much of the fund can be invested in LTAFs and monitor this closely.

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but, has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment. In the UK this is issued by Aviva Investors Global Services Limited. Registered in England No. 1151805. Registered Office: 80 Fenchurch Street, London, EC3M 4AE. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119178.