The ascend of world equities was interrupted in February, when American stocks tumbled. Global performance was dragged down, because US equities currently represent two-thirds of all shares (65,75% as of the end of February 2025) – the MSCI All-Country World Equity index lost 0,6% (in USD) for the month. Other world regions did better, with European and Chinese shares being notable outperformers. The main reason for the fall of US stocks were growth concerns in view of Donald Trump’s eccentric policies. The president reiterated his plans to impose import levies on several big trade partners at the beginning of March, after having postponed them earlier. This regulatory uncertainty, coupled with investors’ concerns about the tariffs’ implications on economic growth, inflation and consumer spending, weighed on returns. Particularly hard-hit were the last year’s stellar performers, the Magnificent Seven stocks (AAPL, AMZN, GOOG, MSFT, META, NVDA, TSLA), as investors worried whether the artificial intelligence hype would continue and how sustainable the profits of U.S. mega-cap tech stocks were. Judging by the completed fourth quarter earnings season, the U.S. economy demonstrated strong fundamentals – companies from the S&P500 chalked up an average earnings growth of almost 18%, compared to the same period year earlier. Although this was considerably better than the analysts’ expectations (just 12% growth), it did not dissolve fears and the growing uncertainty of the impact of the new administration’s policy agenda. Corporate and consumer sentiment soured, and concerns about future economic growth started to re-surface. The Atlanta office of Federal Reserve (Fed) surprisingly projected negative GDP growth for Q1 of 2025. Indeed, consumer confidence dropped drastically, among fresh worries about inflation risks. The U.S. dollar also lost ground, falling by 0.7% over the month against a basket of other currencies – thus boosting the returns for American investors from international assets and dollar-denominated global indices. While U.S. stocks fell, European shares outperformed. Elections in the Eurozone’s largest economy, Germany, were won by the Christian Democrats, but second came the extremist, anti-EU, Alternative for Germany. Uncertainty remained elevated among ongoing discussions about the war in Ukraine and potential increase in defense spending across Europe, along with Trump’s aggressive tariff threats. In the UK, the Bank of England cut interest rates by 25 basis points to 4.5%, citing softening job market and weakening consumer demand. Over in the Pacific, Australia’s central bank also cut its interest rate by 25 bps (for a first time since 2020), while the bank of New Zealand followed suit with a (third consecutive) rate cut of 50 bps. Emerging market equities were aided by the weakening US dollar – most pronounced was the surge in Chinese stocks, where tech companies rose on the continued enthusiasm around the AI start-up DeepSeek. Credit-wise, all major fixed income sectors delivered positive returns over the month, led by the falling U.S. yields (bond prices and yields move in opposite direction). Investors favored U.S. Treasuries, and they were the best returning sector in February, outperforming European and other bonds. In contrast, European corporate bonds did better, as tightening of the high-yield spreads reflected the uncertainty around U.S. economic future. In Asia, both China and Japan recorded an increase in bond yields – but overall for the month, the Bloomberg Global Aggregate bond index returned 1.43% (in USD). The advantage of globally diversified balanced portfolio was demonstrated in February by the strong performance of European equities, while the positive returns from fixed income showed that bonds can again provide diversification protection against equity losses.
          The American stock markets’ positive momentum in January continued into February, but then sharply reversed course in the final two weeks of the year’s shortest month. Of the three major U.S. indexes, the tech-heavy NASDAQ was hit the worst, retreating around 4.0% in February, while the broad S&P 500 and the narrower Dow Jones fell 1.4% and 1.6%, respectively (in USD). Investors’ main worries came from some softer economic data, but more importantly from concerns about the potential impact of Trump’s trade tariffs on the US economy. Markets showed a clear preference for risk-off assets – Consumer Staples stocks led the winners for the month. Whilst, the sectors that suffered the most were Information Technology, along with Consumer Discretionary and Communication services. Particularly bad was the drop of the so-called Magnificent Seven (Mag7) stocks – especially those fueled by the artificial intelligence rally – as investors questioned whether the high profit expectations and expensive valuations were justified. Shares of NVIDIA fell 8.5% in one day, following the chipmaker’s eagerly anticipated earnings report – the company still beat expectations, but it was the smallest size of earnings surprise for the last eight quarters. Another notable loser of Mag7 was Tesla, as revenues data showed dwindling sales in Europe - the stock has been crushed this year (-27.5% YTD), wiping out all of the gains it made after Donald Trump’s presidential win last November. Inflation data raised some concerns over the health of the US consumer. The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, showed prices rose 2.6% on a year-over-year basis (down from 2.9%), still above the Fed’s long-term target of 2%. The report also noted that while personal incomes rose 0.9% in January, spending contracted, a sign that consumers may be becoming more cautious in the face of persistent inflation and uncertainty. Indeed, American consumer confidence index fell sharply in February (from 105.0 to 98.3) – the steepest monthly drop in almost four years. More worryingly is that the expectations component of the index – which measures consumers’ outlook for personal income, business, and labor market – fell below 80, which can be indicative of an upcoming recession. The U.S. economy still looks resilient – it grew at an annualized rate of 2.3% in the fourth quarter of 2024, but some cracks might be appearing: the labor statistics report showed that only 125 000 jobs were added in January – significantly below the previous month 307 000, and below expectations of 170 000. It is becoming clear that Trump’s trade war and the imposition of tariffs on even friendly trading partners is starting to worry consumers – he has threatened to impose 25% tariffs on all goods from the EU, and said that the tariffs on Canadian and Mexican goods would come into force in early March (following a one-month pause). Like most statements from this President, it was unclear whether his threat was real or just a negotiating tactic to obtain lower duties for American exports. With the level of uncertainty raised to new heights, the Fed’s meeting notes revealed that no more rate cuts will be coming until “further progress on inflation” is seen (the Fed had kept rates on hold in January). The pessimism about the economy could be seen in the fixed income markets too. As investors allocated to less riskier assets, U.S. Treasuries generated positive returns across the board. Concerns over some disappointing economic data caused yields of U.S. government bonds to fall to their lowest levels in nearly three months.  The yield of the 10-year U.S. Treasury note closed February at 4.2%, down from a recent peak of 4.8% in mid-January. The 2-year Treasury yielded 3.99% at month-end, keeping the yield curve’s slope normal (not inverted).
           European shares continued to perform strongly in February. In local currency terms, the pan-European STOXX Europe 600 Index ended the month 3.3% higher, recording its longest streak of weekly gains (10 in a row) in more than 12 years. Continental stock exchanges results were mixed: major indices in Germany, Italy, UK were up, while, for example, Frances CAC 40 index fell. The uncertainty about U.S. trade policy looms over the continent, but encouraging company results and gains in defense stocks helped to overcome it. The best performing sector was again Financials, particularly banks, which continue to show robust corporate earnings and returns on equity that outstrip their American counterparts. Other top performing sectors were Communication services and Industrials, and within the latter defence stocks moved noticeably. The talks and likelihood of a ceasefire in Ukraine intensified, but Trump’s shifting NATO priorities and distancing rhetoric revealed that European governments would have to increase domestic military production and spending. The renewed focus on domestic production boosted European defence stocks, and their industry group recorded 9.3% rise in February (in EUR). Alternatively, the poor performers in Europe for the month were the Information technology and Healthcare sectors. Politics was a major theme during the month, not only because of the tense meetings between European leaders and the Trump administration, but also because of important elections on the continent. In Germany, as expected, the Christian Democrats (CDU) won, but alarmingly the far-right Alternative for Germany (AfD) came second. On the economic front news was more encouraging. The purchasing managers’ index (PMI) showed business activity in the Eurozone continued to improve, albeit slowly. The composite PMI (for both manufacturing and services) was 50.2 in February staying in growth territory (a reading below 50 indicates contraction). Inflation painted a mixed picture – it held steady compared to last month in Germany (above expectations), and Italy (below expectations). In France inflation fell to a four-year low rate of 0.9% (from 1.8%). Meanwhile, GDP estimates revealed that Germany’s and France’s economies shrank in the final quarter of last year (by 0.2% and 0.1% respectively). UK equities also rose in February, led by defense companies, and large banks and pharmaceutical companies. The Bank of England cut interest rates by 25 bps even though the Consumer Price Index (CPI) inflation in January jumped to 3% (from 2.5%), its highest rate in almost a year. Other data showed that UK had narrowly avoided a technical recession at the end of 2024, souring investment sentiment, despite the fact that the country is spared from US tariffs, so far. The fixed income markets were also affected by the political turmoil. European government bonds underperformed US Treasuries for the month – the increasing confidence in a ceasefire between Russia and Ukraine boosted hopes for growth and European sovereign yields fell less than in the US. European corporate bonds fared better (than American ones), as investment-grade spreads remaining unchanged, supported by strong corporate fundamentals. Government bonds price rises were also partly contained by concerns about potential increased government borrowing to support spending on defence. Thus  sovereign bonds spreads also changed little in February, and the higher yielding Italian bonds (the 10-year at 3.5%) outperformed German Bunds (the 10-year at 2.4%).
           February brought decent returns for the indices of the Bulgarian Stock Exchange. Against the backdrop of declining stock prices on international markets, the domestic indices managed to record a decent return of over 1% for the month – only  the BeamX index of small and medium-sized enterprises collapsed by more than 7% due to large declines in some of its largest constituents. The flagship SOFIX rose 1.3% for the month to reach 904.25 – surpassing the psychological 900-point mark for the first time in 17 years (September 2008). Turnover on the exchange also improved, rising by almost 40% on a monthly basis, while the number of trades increased by 14% compared to the previous month. Noteworthy is the launch of a new initiative by the BSE and the Central Depository - a crowdfunding platform. Called SpaceCrowd, it is the first Bulgarian platform for financing start-ups and early-stage business ideas. Of the blue-chip names on the domestic bourse, the best performer for the month was again the Real Estate Fund - Bulgaria REIT, which registered a gain of over 6%, while among those with the biggest loss was the commercial bank First Investment Bank AD, whose share price fell by over 11%.

Source: Bloomberg, BSE