World Market Summary
The main event in January was Trump’s return to the White House, but his welcome was short-lived as DeepSeek tested the narrative of US exceptionalism. The Chinese start-up provided the exceptionalism in January, producing an AI model with equivalent computing power to Chat GPT, but at a fraction of the cost. Microsoft has since commenced an investigation into the validity of this achievement and Open AI is looking for a further £32 billion funding round in an effort to remain ahead of the competition. Taking a step back from the knee-jerk reaction, this breakthrough likely only improves the investment case for AI stocks, given that cost reductions will serve to accelerate adoption and, therefore, demand for AI.
Nevertheless, the sell-off provided an important reminder of just how concentrated the US market is in a few names. Nvidia’s 17% decline was the largest single-day market cap loss in global market history, and the S&P 500 was down on the same day despite 70% of its constituents registering gains. Similar levels of concentration can be seen across the developed markets and active management is therefore especially important at this juncture.
Despite the market jitters across the pond and gilt yields rising to 1998 highs, European markets had a very strong month with the FTSE 100 registering its best month in two years. This was somewhat counterintuitive when looking at the weak economic data, as bad news in the data was viewed as good news for markets. The reason being is that the weak data resulted in an Europe Central Bank (ECB) cut and the market is now pricing in three cuts from the Bank of England, expecting one in the first week of February. After a dramatic spike in the middle of the month, gilt yields finished broadly where they began the year, due to the market pricing in more cuts.
Meanwhile, in the US, the strength of the data and the prospect of Trump’s inflationary policies has left the Fed “in no hurry” to bring rates back down to neutral and they are likely to remain on hold for some time. The divergence between US earnings and bond yields is consequently at relatively extreme levels, which is not conducive to strong equity market returns going forward.
The UK is a different story with healthy distributions and very cheap valuations. This continues to be highlighted by the large amount of corporate activity and we will be watching to see if Diageo does in fact split the G and spin Guinness out for what analysts would expect to fetch a market cap of $10 billion.
Finally, gold continued its bull run to hit another record high as tariff concerns mount and the precious metal continues to benefit from central bank buying.
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Our weightings are based on sterling as a base currency.
United Kingdom (UK)
UK equities markets enjoyed a buoyant start to 2025, with the FTSE 100 leading the charge up 6.2% and delivering its best monthly gain for over two years. Despite the yield on 30-year Government Bond hitting the headlines, as it rose to its highest level since 1998, the FTSE 100 was spurred by a positive inflation surprise, rate cut expectations climbing and a weaker sterling driving it to record highs. The more domestic FTSE 250 posted a modest 1.78% increase as the aftermath of the Budget continued to hit business confidence for more domestically exposed companies.
With markets still grappling with the outlook for rate cuts, the unexpected cooling of inflation in December to 2.5%, better than the consensus 2.6% lifted spirits and eased pressure on Chancellor Rachel Reeves. Encouragingly, core inflation moderated from 3.5% in November to 3.2% in December. Services inflation also receded from 5% to 4.4% over the month.
After three months of stagnation, the UK economy returned to growth in November registering a small 0.1% uptick but still below the 0.2% consensus. Pubs, restaurants and construction helped drive the growth. In a welcome boost, the International Monetary Fund (IMF) lifted its growth forecast to 1.6% for the UK in 2025 and predicts it will be the fastest-growing European economy over the next two years. The flash composite Purchasing Managers Index (PMI) also came in higher than forecast for January. However, retailers saw a slump in volumes for January commentating on weak demand and poor consumer sentiment. This was echoed in the British Chamber of Commerce who noted business confidence at its lowest level since Truss’ mini-budget of 2022.
Despite affordability pressures, the UK housing market remains in solid health and, according to Rightmove, has started the year with a bang. January marked the fifth consecutive month of price rises although Nationwide alluded to signs of softening. Foxton’s reported sales were at their highest level in nearly a decade for London property. Mortgage approvals also came in higher than expected for December.
United States (US)
January saw the inauguration of Donald Trump for his second term in the White House promising a ‘Golden Age’ for America. His first days have started with all the bluster one has come to expect. Dozens of executive orders were signed and the threat of tariffs looming large. It was, however, AI darling Nvidia that stole the show in January, falling 17% in a day and registering the largest market cap loss of an American company in history as Chinese firm DeepSeek unveiled a low-cost AI model that requires far fewer resources and energy than its US peers. Despite volatility, US markets continued their upward trajectory with the S&P 500 gaining 2.78% and the Nasdaq 2.25%.
The US economy grew slower than expected for the final three months of the year, registering 2.3% growth, which was behind the 2.6% consensus and slower than the previous two quarters. That said, for 2024 the economy performed well ahead of expectations, supported by strong consumer spending and low unemployment. Services PMI remained strong, registering the biggest growth in output and new orders since March 2022. Activity climbed to a near three-year high in December and US Job openings came in hot for November, ticking up ahead of forecast to 259,000.
Consumer Price Inflation (CPI) ticked up to 2.9% in December, meeting expectations, although core inflation slowed. Later in the month, the Federal Reserve’s (Fed) preferred measure, the Core Personal Expenditures Index, showed a 0.2% uptick month to month, in line with forecasts. Despite Trump’s attacks, the Fed held firm with interest rates maintaining them in the 4.25-4.5% range after a string of cuts towards the end of last year. Fed Chair Jerome Powell indicated a ‘wait and see’ approach on further cuts in the wake of uncertainty over future policy direction and its implications.
Europe
Europe was the strongest performer in January despite continued weakness in economic data, with Germany’s DAX up close to 10%. This was helped by inflation remaining contained, which enabled the ECB to cut 0.25% and provides the prospect of more to come. However, it is concerning that the rate-cutting cycle is now well underway and we continue to see deterioration in a large portion of the data.
The Eurozone as a whole unexpectedly failed to register any growth in Q4, with both France and Germany unexpectedly contracting. This is a continuation of the trend that peripheral economies such as Spain are having to do the heavy lifting with the largest economies in a rut. European economic sentiment did pick up, but with both France and Germany continuing to be plagued by political volatility and unproductive coalitions, it is hard to see a material turn in fortunes any time soon. We remain cautious on Europe overall, given rate cut optimism is now elevated, data remains weak, political uncertainty is rife and tariffs are likely.
Emerging Markets and Asia
Emerging market sentiment weakened in January as Trump’s return to the White House drove a stronger dollar and reinforced expectations of higher US interest rates. Tariff tensions dictated market moves, but the rhetoric around a gradual tariff rollout, along with a cordial Trump-Xi call pre-inauguration offered some relief. The FTSE Emerging Markets index ended the month higher, supported by strong returns from Brazil, while Chinese markets closed for the Spring Festival.
China’s economy grew 5.4% in 2024, exceeding its 5% target but entering 2025 on weaker footing. The official Manufacturing and Non-Manufacturing PMIs eased, pointing to faltering momentum. Despite stimulus measures late last year, demand remains weak, with industrial profits contracting for a third consecutive year, underscoring persistent deflationary pressures. Weak economic data has raised expectations for larger fiscal stimulus at the upcoming Two Sessions, the annual meeting of the National People’s Congress in March.
Elsewhere in Asia, central banks diverged in policy responses. Japan delivered a widely anticipated hike and revised up 2025 inflation forecasts, with all measures exceeding the BoJ’s 2% target. South Korea held rates steady, but reported weak Q4 growth as political instability dampened consumption, which increased the odds of a February rate cut. India’s 2025 budget outlined a cut in the 2026 financial year (FY26) deficit to 4.4% of gross domestic product (GDP) for FY26, which was poorly received by markets but a more balanced budget strengthens macroeconomic stability and allows more room for future rate cuts.
In Latin America, Brazil hiked rates by 1% as expected and signalled another increase ahead while intervening in Foreign Exchange (FX) markets to stabilise its currency amid fiscal concerns. Meanwhile, Mexico posted its best inflation reading since early 2021, with core inflation at 3.7% and services inflation easing.
Fixed Income
January 2025 opened with a sharp rise in US real yields and term premiums, driven by market concerns over President Trump’s policies and robust US jobs data reinforcing a hawkish rate outlook. Bond markets saw extreme volatility, initially selling off as inflation fears dominated, before shifting lower as growth concerns gained prominence. US 10-year yields peaked at 4.7%, closing the month at 4.5%, while UK 10-year gilts spiked to 4.8% on deficit concerns, before retreating to 4.5% as the Labour government moved to reassure markets.
Three key central bank decisions set the tone for the month. The Fed held rates steady at 4.25%-4.50% as expected, with Powell emphasising there was no urgency to adjust policy given trade uncertainties and a still-resilient labour market. With monetary policy considered meaningfully restrictive, the Fed retains ample room to cut if conditions warrant.
The ECB delivered a 0.25% rate cut to 2.75%, aligning with expectations. Market confidence in further monetary policy easing is growing amid a weaker growth outlook. European bond spreads have tightened since the start of the year, aided by easing political concerns in Paris, with French bond spreads over German Bunds narrowing to below 0.70%.
Meanwhile, the Bank of Japan (BoJ) hiked rates by 0.25% to 0.50%, its third increase in a year. The move was well-telegraphed, leaving markets largely unfazed. Despite the hike, the yen remains deeply undervalued across valuation models. With core inflation above 3% and Japanese rates still well below neutral levels, further tightening is likely in the coming months as interest rate differentials narrow.
Alternatives
As expected, Trump’s return brought widespread market volatility pushing gold and silver prices higher earlier in the month. Gold benefitted from the dollar’s decline as the market altered its expectations about the severity of Trump’s tariff policy, catapulting the gold price to record highs. Silver has also benefited from the weaker dollar, passing $31 per ounce. The industrial metal would no doubt benefit from less punitive tariffs given its reliance on industrial demand and the impact of tariffs on global trade. With a slight decline in gold and silver later on in the month, it could be viewed as a compelling buying opportunity for many given that market volatility remains elevated.
Trump has called on the Organization of the Petroleum Exporting Countries (OPEC) to push down global oil prices, urging Saudi Arabia and other exporters to bring more supply online. Trump expressed his surprise that prices had not already been lowered, stating that the elevated fuel price was helping to ‘sustain Putin’s war machine’. Whilst largely a concern for the US and Trump, oil prices did fall 2% on the day following the news of Chinese start-up DeepSeek’s low-cost AI model, as it prompted concerns over energy demand to power data centres. Overall, Brent crude ended the month marginally up around $76.
Property
UK house prices ticked up 4.1% in January on a yearly basis, according to Nationwide. This marked an easing from the two-and-a-half-year high of 4.7% and below the forecast 4.3%. On a monthly basis, house prices grew marginally at 0.1% but down from 0.7% in the previous month and again missing forecasts of 0.3% growth. The Chief Economist at Nationwide stated that the housing market remains resilient despite affordability challenges which have improved, but remain stretched by historical standards. Notably, a buyer with an average UK income and a 20% deposit would spend 36% of their take-home pay on a mortgage, compared to the 30% long-run average. Encouragingly, despite high deposit requirements and rising rents, homeownership rates have remained stable.
Construction PMI fell to the lowest in six months. Although this remains in expansionary territory, the slowdown reflects flagging demand and subdued consumer confidence. New orders similarly expanded at a reduced pace with increased commercial new orders offset by cutbacks in residential and infrastructure work. However, optimism for 2025 has improved, although tempered by the UK’s economic outlook and budget constraints.
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Important Information
All Index data figures are sourced by Morningstar and correct as at 31 January 2025, unless otherwise stated.
The value of investments or any income arising from them may fluctuate and are not guaranteed. Past performance is not necessarily a guide to future performance.