Europe saw the strongest equity market returns during the month, with record highs being reached for the Stoxx Europe 600, Germany’s DAX, Spain's IBEX, and Italy's FTSE MIB. In a value-driven reorientation, investor capital flowed into areas that underperformed in 2024. The best performing sectors were rate proxies such as financials, with industrials and luxury goods also performing well. With economic growth stagnating across the region in the second half of 2024 and inflation compatible with price stability, the European Central Bank is anticipated to continue their interest rate cutting cycle throughout the year.
Despite remaining positive, returns were comparative subdued for US equities as policy developments following the Trump administration’s inauguration dominated the month’s headlines. In particular, the uncertainty around the level and depth of potential trade tariffs has contributed to higher market volatility. With no clear consensus on an alternative method to fund Trump’s proposed tax cuts, it would appear that some level of tariffs will be implemented regardless of whether or not countries acquiesce to the President’s demands.
While the breadth of US equity returns was encouraging, with 77% of S&P 500 companies reporting positive earnings surprises, the key market-leading technology sector took a hit. The performance of China’s comparatively low-cost, open-source DeepSeek AI model led markets to question the extent of US tech giants’ spending on their own models and evaluate how disruptive the model will be for the sector. With many of these companies trading at high valuations with lofty expectations, it is unsurprising that a potential disruptive evolution in the sector has caused waves and investors to reevaluate their positions.
Within UK equity markets, the FTSE 100 saw its best month in more than two years, gaining 6.1%, however the story was less positive for smaller, more domestically directed companies. Concerns that a weak growth backdrop coupled with sticky inflation may put pressure on the UK’s fiscal position led to volatility in UK-focussed assets.
This turbulence was also seen in the gilt market, with the yield on the 10-year benchmark gilt hitting its highest level since the Global Financial Crisis at 4.92% at the start of the month, before declining to below 4.60% to end it. The UK’s “twin deficits” have been attributed to elevated levels of UK bond market volatility compared to international peers. The first of these, the fiscal deficit – the difference between government spending and tax receipts - has been a concern for investors following the autumn Budget as the government is due to increase expenditure by around £70bn each year for the next five years. The second, the widening current account deficit – where the value of the UK’s imports and overseas borrowing exceeds the value of its exports and overseas lending – implies an economic imbalance caused by elements such as low productivity, low investment, or over-consumption. The more a country relies on foreign financing for its domestic debt issuance, the more exposed it is to the global environment. With around 30% of gilts being held abroad, the UK’s deficits could become increasingly problematic if the country’s relative attractiveness for financial inflows fails to materially improve.
Equity returns were also broadly positive across the Japanese, Asia Pacific ex-Japan, and Emerging Market regions, despite influential Chinese equities remaining volatile. Markets fell steeply in China in the first two weeks of the year before rallying towards the end of the month. The release of positive December economic data, President Trump appearing to soften his view on tariff levels, and tech stocks rising on the back of the DeepSeek AI announcement all contributed to the recovery, however the benchmark Shanghai Shenzen CSI 300 index still ended the month 1.5% down.
Property, measured by the FTSE EPRA Nareit UK Index, was also positive over January, a welcome reversal of trends seen over the last quarter of 2024. Net returns were strongest across the UK logistics and healthcare sectors, with REITs exposed to European assets also performing well. With valuations remaining depressed, the risk/reward profile of these thematic trend areas exhibiting resilient rental growth and notable premiums to risk-free yields is appearing to become more attractive to income seeking market participants.
Commodities also saw a strong start to the year, with increased Chinese demand helping to buoy the likes of gold, silver, copper, and aluminium. Oil also traded higher as we moved into the new year with cold weather acting to both increase demand and tighten supply. The upward trend turned over the latter weeks of January however, as the implications of President Trump’s tariff threats on major trading partners and rising US crude inventories tempered supply dynamics.
While it is pleasing to see wide-ranging net positives to start 2025, January also gave investors an initial taste of the trends and perceived risks that are likely to dominate throughout the year. Global political relationships remain fragile, with President Trump’s tariffs and potential retaliations remaining a key unknown. The month also brought a risk we have frequently highlighted back into the forefront: market concentration. Within both the US market and global indices, market concentration is both a risk and an opportunity for active managers. We expect performance to continue to broaden and truly active managers that are appropriately diversified to be rewarded