In the US, the Federal Reserve maintained a cautious stance on monetary policy, keeping interest rates at 4.25%–4.5% in January. Policymakers noted that rates could remain restrictive if inflation stays elevated but might be eased if economic conditions weaken. Inflation edged up to 3% in January, slightly above expectations, with energy costs rising for the first time in six months. Meanwhile, consumer sentiment fell sharply in February, reaching its lowest level since November 2023, as concerns over tariffs and the economic outlook weighed on expectations.

The manufacturing sector showed modest expansion in February, with the PMI rising, signalling continued recovery despite slowing new orders and cautious hiring. In contrast, the services sector contracted for the first time in over two years, with the PMI falling below expectations. Businesses cited political uncertainty, spending cuts, and rising tariffs as key challenges. Input cost inflation increased due to higher food and wage costs, though heightened competition kept selling prices in check. The data suggests a mixed economic picture, with manufacturing rebounding but services under pressure.

In the Eurozone, business confidence dipped and the ECB responded by cutting interest rates by 25 basis points, aiming to ease borrowing costs while maintaining a cautious, data-driven approach. In February, manufacturing showed signs of improvement, with the PMI indicating the slowest contraction in nine months. However, new business and employment continued to decline, and input costs rose. The services sector expanded for a third consecutive month, albeit at a slower pace, with weakening business sentiment and persistent cost pressures. Despite some stabilisation, challenges remain.

In the UK, manufacturing sentiment dropped in January to its lowest level in over two years, with output and new orders, especially exports, declining sharply. Rising costs and inflation, led to reduced investment and the Manufacturing PMI fell further in February, indicating the sharpest contraction since December 2023.

The UK services sector saw modest growth in February, but new work declined at its fastest pace since late 2022, while rising costs fuelled inflation pressures and employment weakened. Despite this, business activity expectations improved. In response to slowing growth, the Bank of England cut interest rates by 25 basis points to 4.5% in February, marking its third cut since August 2024, while signalling a cautious easing approach.

Global equity markets were under pressure in February, with heightened volatility. The S&P 500 and Nasdaq posted their worst monthly declines since April 2024 and September 2023, falling 1.4% and 4.0% respectively. The MSCI World Index declined by 1.3% while in the UK, the FTSE 100 rose by 1.6%. In stark contrast, the FTSE 250 fell by 3.0%, the Small Cap Index dropped 3.3%, and the AIM All-Share Index declined by 2.0%. The Fledgling Index bucked this trend, rising 0.6%.

Our portfolio was also under pressure in February with the NAV decreasing by 3.6%. We sold our holding in GAMA Communications, reduced our position in Cakebox and Tritax Big Box while adding to our holdings in Impax Asset Management, PayPoint, and S&U. Additionally, we initiated a new position in Dunelm Group, a UK-based home furnishings retailer specialising in furniture, décor, textiles, and homeware. Notable contributors to performance included Alpha Group and NWF Group. The largest detractors from our performance were Impax Asset Management and PayPoint.