Europe and the UK lead the way
Emerging markets, Asia and Japan rose by a more modest 2% overall, while global bonds rebounded after a weaker start to close the month 1% higher. The crude oil price rose 3.2% to a five-month high, as fresh US sanctions on Iran and Russia threatened to crimp supplies and freezing temperatures swept across large parts of the Northern Hemisphere. Gold has been rising relentlessly since November 2022, as central banks continue to diversify their assets and the dollar's role as a reserve currency is gradually reduced. Other commodities such as industrial metals and agriculture were also strong.
The AI disruptor is here
Chinese start-up DeepSeek rocked the industry with a major innovation, raising questions about US dominance of AI and casting doubts on sky-high valuations for companies such as Nvidia. DeepSeek's answer to ChatGPT claims to produce comparable results at a fraction of the cost and was the top app on Apple's iPhone download charts. It has been hailed as "one of the most amazing and impressive breakthroughs" by renowned tech investor Andreessen, as it can be run on much less powerful machines than the premium Nvidia hardware thought, until now, to be essential. It is also open source: the code has been gifted to the world for anyone to use, edit and share, lowering the drawbridge for smaller players and threatening the current stranglehold of big US technology companies. The shares of AI-related companies such as Nvidia fell sharply as a result.
President Trump was inaugurated for a second term. US investor sentiment has been buoyed by his "America First" policy programme, although other regions are less enamoured with his agenda. The imposition of tariffs of 25% on all imports from Mexico and Canada, along with 10% on all those from China, sparked a global sell-off at the end of the month. China hit back with 10–15% tariffs on a range of US goods and opened an anti-trust probe into Google, although Mexico and Canada were issued a last-minute reprieve in return for agreements to increase border security.
A new all-time high at home as rates diverge
UK and European shares began the year on a strong footing. Both regions benefited from the rotation out of US technology stocks into other markets and sectors. Domestically orientated value sectors such as banks delivered robust returns, along with more defensive sectors such as staples, healthcare and utilities. The UK recorded a new all-time high. The market was further buoyed by news that inflation had slowed unexpectedly in December, with the annual rate declining to 2.5% from 2.6% in the previous month. This allowed the Bank of England to cut rates by a further 0.25% to 4.5%, a move welcomed by the bond market, where it will lessen the fiscal burden of financing the budget deficit. Bond investors were also reassured as the Chancellor reiterated her pledge to adhere to the Government's fiscal rules, calling them "non-negotiable".
The Federal Reserve held rates steady and signalled that there may be no further cuts forthcoming, having made 1.0% worth of cuts over the prior three meetings. The ECB cut rates as expected by a further 0.25% to 2.9%, with President Christine Lagarde warning that risks remain tilted to the downside given rising trade frictions and weak consumer confidence. Elsewhere, Japan raised its official interest rate by 0.25% to 0.5%, a widely expected move that supported financial stocks and lifted the yen modestly. Corporate earnings results for the fourth quarter were ahead of expectations, and ongoing improvements in corporate governance, notably share buybacks and dividend hikes, provided further support to the market.
A note from the desk
I am pleased to share our monthly update on market events. The overview seeks to summarise market movements together with our views and the rationale for the positioning of investments going forward. As always, should any aspect of this commentary prompt a question, we would welcome the conversation.
Martyn Charlwood · Managing Director
A warning shot for the AI bull market
Bullish exuberance has returned to the markets in a big way following the presidential election. The improvement in optimism is unsurprising given the many anti-business policies and regulations implemented by the previous administration; with many of these hurdles now being repealed, businesses are feeling much more confident about the future. However, the new administration's "ready, aim, fire" approach to foreign trade policy and tariffs looks likely to make for added market volatility. During the President's first term, tariff threats came and went on a regular basis, and investors are hoping this will be the case this time around.
The drama in artificial intelligence has largely fizzled out for now, but a warning shot has been fired. The emergence of disruptors such as China's DeepSeek could make the valuations that have powered the bull market in US technology tough to justify, questioning the idea that companies wanting to make use of, or compete in, AI must make massive and very energy-intensive investments to do so. Yet any potential loss to US technology could be a significant gain for the world, accelerating the adoption of AI and boosting innovation and growth across the global economy. Although disruptive for the current incumbents, it could be very positive for productivity overall, supporting the idea that gains should broaden to other sectors going forward. Diversification into cheaper markets and sectors remains an effective way of managing portfolios from both a risk and a return perspective.
Any potential loss to US tech could be a significant gain for the world.
In equities we are positive overall, with a focus on markets outside of the US in the expectation of a broadening rally.
The United Kingdom
UK equities represent a strong value-orientated opportunity, with many high-quality companies trading at valuations significantly below global peers, and a compelling income stream. Sector exposures in the UK are very different to other global markets: minimal exposure to technology, but greater exposure to cash-generative financials, energy and basic materials, along with high-quality consumer staples. This should prove beneficial if expectations for a sector rotation in 2025 prove correct.
Emerging markets and China
The US monetary policy outlook is likely to be supportive for emerging markets, where equities look set to benefit from stronger domestic growth. Action by the Federal Reserve also provides greater flexibility for the region to initiate its own policy easing cycle without fear of negative repercussions for its currencies. We are cautiously optimistic on China, based on cheap valuations and expectations of further policy support.
Bonds over cash
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. From an income perspective, yields are now attractive in both absolute and real terms relative to the level of inflation. Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer, which remains our central view, with the exception of index-linked bonds.
Gold as portfolio insurance
We continue to view gold as essential portfolio insurance. The combination of higher geopolitical risk, lower interest rates and strong central bank demand has created a highly favourable environment for the yellow metal. Our exposure to both physical bullion and gold mining shares across standard portfolios has been a major contributor to outperformance versus benchmarks.
Infrastructure and renewables
The infrastructure and renewables sectors look set to benefit from some weighty commitments outlined by the Government in its new policy agenda. These include £35bn in roads and updating the digital grid, £20bn in green transport and a further £12bn in energy transition and renewables investment such as hydrogen, offshore wind and solar energy projects.
Capturing the upside, controlling the risk
Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk, to dampen volatility and smooth the path of returns.
Important information
This article is a marketing communication intended for general information only. It does not constitute personal advice, a recommendation, or an offer to buy or sell any investment. If you are unsure whether an investment is suitable for your circumstances, please seek personal advice.
Past performance is not a guide to future performance. The value of investments and any income from them can fall as well as rise. Capital values are at risk and not guaranteed. Forecasts and views expressed in this commentary represent our assessment at the time of writing and are subject to change.
To discuss how this commentary applies to your own portfolio, we would welcome a conversation.
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