Investors, who had previously been focused on the potential resurgence of US inflation, now appear far more concerned about a possible economic slowdown. Indeed, the tariff measures implemented by President Trump could erode corporate profit margins, particularly for those firms unable to pass higher costs on to the end consumer. Furthermore, the actions of the Department of Government Efficiency (DOGE), led by Elon Musk, may eventually weigh on consumer confidence and potentially drive-up unemployment.
Yet, the resilience of the US economy remains unwavering. This is evidenced by a 2.3% increase in US GDP in the fourth quarter of 2024. Additionally, corporate earnings for S&P 500 companies are expected to grow by more than 10% this year, according to analyst consensus. Finally, should these economic risks persist, the Federal Reserve retains substantial room for manoeuvre to resume monetary easing, likely by the beginning of the second half of 2025.
February witnessed a notable outperformance of Asian equity markets, particularly China, a rare occurrence in recent years. The MSCI China Index ended the month up more than 11%, surpassing both the global equity index and a declining S&P 500 over the same period.
One of the primary drivers of this renewed optimism stems from evolving Sino-American trade tensions. Contrary to initial fears, the tariffs imposed by the Trump administration were far less severe than the 60% rate mentioned during the election campaign. Unlike the 2018 trade war, China is no longer the sole target of US sanctions. Several of Washington’s longstanding economic partners, including Canada, Mexico, France, and Germany, are now also affected, forcing them to reassess their trade relations with the US. This shift in dynamics has been perceived as a relatively more favorable outcome for Beijing than initially anticipated.
Another major catalyst was the "DeepSeek” moment in late January, which caught markets by surprise. The emergence of this low-cost, open-source AI model instantly repositioned Chinese AI firms on the global stage, breathing new life into the country’s technology sector. After years of underperformance, during which companies like Alibaba and Tencent lagged significantly behind the Magnificent 7, this unexpected development led some investors to reconsider their exposure to Chinese tech stocks.
Finally, a crucial factor reinforcing this wave of optimism has been President Xi Jinping’s renewed support for the domestic tech ecosystem. One of the main reasons behind the decline of Chinese tech stocks in recent years was Beijing’s regulatory crackdown on its own industry leaders. However, the high-profile meeting between Xi and the country’s top tech executives marks a symbolic shift, signalling the potential for policy easing and industry revitalization.
While a short-term profit-taking risk cannot be ruled out after such a strong rally, the valuation gap between Chinese equities and their global counterparts remains significant. Investor sentiment toward the Chinese market is beginning to shift, and this changing perception, combined with attractive valuations, diversification opportunities, and renewed policy support, could drive a continued reallocation of capital toward China in the coming months.
US 10-year Treasury yields have fallen back to 4.2%, just six weeks after reaching a recent high of 4.8%. The highly active US policy, both domestically and internationally, has played a significant role in driving investors back toward the relative safety traditionally offered by the bond market.