Investment Commentary - January 2025

It was a strong start to the year for risk assets, with the S&P 500 and Stoxx 600 hitting new all-time highs during the period. Since January often sets the tone for the year ahead, investors are hopeful of this phenomenon persisting. There were, however, a number of jittery moments for investors during the period which cast doubt on the sustainability of this market strength. The most significant of which was the surprise release of a Chinese AI application called DeepSeek, which threatened to upend the prevailing AI narrative. The news that a viable alternative to the AI products of the US tech giants had emerged, on a relative shoestring budget, cast doubt on the belief that improvements in the performance of AI models required ever more computing power and, therefore, huge capital investment. It was also viewed as a challenge to US exceptionalism, which has seen US equities trading at a significant premium to those of the rest of the world. A correction in the US technology stocks would pose a significant risk for investors and this was evident after the news broke, with Nvidia’s market value dropping by approximately $600bn on the day – the largest one-day loss in market capitalisation in history. Since Nvidia alone has a greater index weighting than roughly half of the industry sectors in the S&P, moves of this sort will inevitably cause pain and create near-time headwinds even if other sectors are performing well. President Trump’s tariff threats also weighed on investor sentiment, with markets reactive to new developments.

The Bank of England and the Federal Reserve kept their interest rates unchanged during the period. The European Central Bank continued its easing path, with a further 25bps cut, taking its deposit rate to 2.75%. The Bank of Japan bucked the easing trend, announcing a 25bps rate hike, taking their rate to 0.5%. Further monetary tightening is expected after Japanese CPI reached 3.6% in December. These actions had mixed results for bond returns. Gilts and US Treasuries had a reasonable quarter, returning +0.8% and +0.5% respectively. European sovereign bonds returned -0.1%, weighed down by German Bunds, which fell -0.5%, reflecting increasing expectations of looser fiscal policy once elections have taken place in February. Corporate bonds enjoyed slightly better returns than their sovereign equivalents over the period, with spreads tightening across high yield and investment grade credit.

Within equities, European markets enjoyed a period of meaningful outperformance versus US peers, with, the Stoxx 600 and FTSE 100 returning +6.4% and +6.2% respectively for January. The S&P was up a more modest +2.8%. A Hawkish Japanese Central Bank meant that Japanese equities underperformed, with the Nikkei falling -0.8%. Despite the threat of tariffs and the subsequent underperformance of Chinese equities, Asia and EM, as a whole, performed reasonably well during the period. The MSCI Asia Pacific ex Japan Index returned +0.8% and the MSCI Emerging Markets Index returned +1.8%. From a style perspective, value outperformed growth, with a return of +4.5% for the MSCI Global Value Index versus +2.6% for the MSCI Global Growth Index. From a size perspective, global small cap returns returned +3.5%, with similar returns for global large caps.

For commodities, it was a strong quarter for gold, which climbed +6.6% to an all-time high of around $2,800. Silver did even better, posting a return of +8.3% in January. After a soft patch in Q4, copper came back strong, with a gain of +6.3%. Finally, oil also had a positive month, with Brent crude and WTI returning +2.8% and +1.1% respectively.

Despite volatility created by the US tariff threats, most of the major currency pairs did not move much during the month. After strong gains in 2024, the Dollar index was slightly down in January, posting a return of -0.1%. There were small gains for the Euro and Yen against the Dollar and a small decline for Sterling.

All figures quoted are local currency returns (and USD returns for commodities).