Market Overview

Summary of world markets in January

Equity markets had a tricky start to 2025 but, despite volatility along the way, global equities chalked up a positive result.  The news was dominated by President Trump’s inauguration, with investors on edge as a flurry of executive orders were passed and the “will he, won’t he” of future tariffs kept markets guessing.  There was major disruption to the AI storybook as DeepSeek crashed onto the scene.  Bond markets also began the year on a weak note, but yields retraced their moves as investors regained confidence in the prospect of further cuts to interest rates.

British politicians found themselves in Elon Musk’s sights, giving them an early taste of life working alongside the incoming Trump administration.  Chancellor Reeves was under pressure as rising borrowing costs wiped out her spending headroom, suggesting that she may have to opt for spending cuts or more tax rises in March.  Later, she reinforced the mantra that economic growth is the government’s priority.

According to a survey by the British Chambers of Commerce, UK business confidence has dropped to its lowest level since the time of Prime Minister Truss’ mini budget.  Many firms expect to increase prices in the coming months as they pass on the cost of higher taxes and another increase in the minimum wage.  Other reports confirmed the fact that the labour market is now showing signs of strain, and the CBI reported a sharp drop in sentiment amongst manufacturers.  Retail sales declined by 0.3% month-on-month in December and GDP growth of 0.1% month-on-month in November reinforced the lacklustre picture.  The annual inflation rate unexpectedly edged lower to 2.5%, with services inflation (while still running at 4.4%) less elevated than had been feared.  The Halifax House Price Index increased by 3.3% year-on-year in December 2024.  However, some price weakness was observed in the short term, with mortgage affordability still a challenge.

The main UK equity index chalked up an impressive return, its best monthly gain in more than two years.  Whilst still in positive territory, the mid-cap index lagged as domestically orientated companies reported upon the financial strain of the Chancellor’s tax hikes, notably firms in the retail and hospitality sectors that have a significant wage burden.  Sterling weakness was also helpful for the large-cap international earners.

The UK 10-year gilt yield headed towards 5% due to concerns about inflation and spending plans.  At one point, the 30-year yield reached the highest level since 1998.  However, yields eased back again in tandem with other developed government bond markets, as well as weaker UK economic data that bolstered hopes for further interest rate cuts from the Bank of England.  For the month overall, the broad UK gilt market delivered a positive total return. Corporate bonds outperformed their sovereign counterparts thanks to tightening credit spreads.

Newly inaugurated President Trump wasted no time in disrupting the status quo with his prognostications about, inter alia, absorbing Canada, seizing the Panama Canal and Greenland and renaming the Gulf of Mexico the “Gulf of America”.  He set about signing a rash of executive orders and kept the rest of the world on edge with his tariff rhetoric.  In Germany, amid political campaigning ahead of the upcoming election, there was outrage from some quarters as CDU leader, Friedrich Merz, was criticised after a motion was passed with support from the far-right party, Alternative for Germany.  There were further dramatic events in South Korea, as President Yoon Suk Yeol was arrested on charges of insurrection following the failed martial law order in December.  Justin Trudeau, Canadian Prime Minister, announced that he would step down.  Israel and Hamas reached a fragile ceasefire agreement that involved the freeing of hostages and prisoners on both sides.

Strong US labour market data reinforced fears that interest rates would not be forthcoming as rapidly as had been hoped and this caused stocks to weaken.  Sentiment improved mid-month as global bond yields eased back after a supportive inflation report, reviving hopes of additional rate cuts this year.  At the same time, risk assets struggled to interpret the potential consequences of the new US administration’s policies, real or threatened.

US equities gained ground but – unusually by recent standards – underperformed other main markets.  There was high volatility amongst the mega-cap technology stocks during the month.  The subject of AI was again front and centre.  President Trump rescinded an earlier executive order passed by President Biden, in doing so removing safety and transparency guardrails around AI.  The President also announced a joint venture led by SoftBank, OpenAI and Oracle that will channel funding into AI infrastructure.  However, shortly afterwards, news of Chinese AI start-up, DeepSeek, rocked the technology sector.  It claimed to have created its AI model on less advanced chips and at a fraction of the cost.  This news called the AI investment thesis into question, particularly the idea that it requires the enormous resources of the so-called “hyperscalers”.  In response to this news, AI poster child Nvidia experienced its worst day since March 2020 which, in value terms, translated to the biggest wipe-out in history!  The development also hit energy firms that were expected to profit from the huge draw of AI power demand.

European stocks also performed very well and outperformed developed market peers, despite the challenging economic backdrop.  Indeed, the German market reached a record high, as did the index of Europe’s largest companies.  Relative valuations and a rotation away from US equities attracted buyers to both European and UK markets.

The return of the Japanese market was close to flat, with the market heavily influenced by developments in the US and news around AI.  Sentiment improved later in the month as fears about the scale of US tariffs eased somewhat.

Asian and emerging market indices delivered positive returns but underperformed developed market equities.  Chinese equities initially declined due to anticipated US tariffs and ongoing economic uncertainties but recovered losses when the Chinese regulator pledged that maintaining market stability would be its top priority in 2025.  Korean equities rebounded strongly from last year’s weakness, while India declined due to concerns about growth.

Style-wise, it was a better month for value equities, due in large part to weakness from the technology hardware sector, which impacted growth indices.  Strength from the banking sector boosted the value side of the equation.

The oil price rose early in the month on news of sanctions against Russia, as well as signs that the oil market may be tighter than previously anticipated.  However, President Trump’s calls for lower crude prices in a speech to the World Economic Forum in Davos helped to push the oil price lower.

The gold price rose steadily and reached an all-time high, boosted by safe-haven demand amid uncertainty about the impact of President Trump’s policies.  Looser monetary policy around the world also supported the sentiment towards the precious metal.

Sterling came under further pressure early in the month due to concerns about the UK’s stretched public finances.  The weaker home currency boosted the returns on offer from (unhedged) overseas portfolio allocations.