Our investment experts explore the key trends in January 2025: the reasons behind the surge in yields, the effects of Trump’s tariff policies and the implications of DeepSeek’s entry into the AI market.
Top three investment trends
1. Bond market turbulence
Bond markets had a turbulent start to the year, with yields reaching new recent highs in January.
20-year US yields breached the key five per cent milestone, which has only happened on one other occasion since the Global Financial Crisis (GFC). In the UK, 30-year gilt yields reached levels last seen in 1998 (5.2 per cent). US volatility was driven by the potential inflationary impact of Trump's trade policies, alongside several data releases. The US job market continues to look buoyant, with January non-farm payrolls surprising to the upside with 256,000 new jobs created. The Institute of Supply Management (ISM) services print, which is a key measure of economic health in the US service industry, indicated the highest level of economic expansion in nearly two years.
In combination, these factors led markets to reduce interest rate cut expectations from the US Federal Reserve (Fed) as well as the Bank of England (BoE) for 2025, contributing to a global bond sell-off. In the UK, the impact was magnified, largely due to the increased spending and borrowing announced in the Autumn Budget. Since a peak in mid-January, bond yields have fallen following softer inflation data in the UK and the US. In the second half of January, this led to new speculation around continued central bank cuts.
2. Trump 2.0: orders from Day 1
President Trump was inaugurated this month for his second term, vowing for a new “golden age for America”.
President Trump announced immediate overhauls of domestic and foreign policy
On his first day in office, he announced immediate overhauls of domestic and foreign policy to be implemented through over 100 executive orders. In his first two weeks, as many as 50 of these were signed. These orders include declaring a national emergency at the US-Mexico border due to fears over immigration and drug smuggling, and declaring a national energy emergency in a bid to boost domestic energy production.
On his inauguration day, markets were particularly sensitive to tariff policies, although a slight delay in their imposition provided some initial relief. However, by the end of the month, the White House confirmed tariffs would be imposed on Canada, Mexico and China. In response, the US dollar surged, while in turn, the Canadian dollar was the worst-performing G10 currency in January, weakening 1.1 per cent against the US dollar.
3. DeepSeek sends market shockwaves
Chinese startup DeepSeek sent shockwaves throughout the market this month. This was triggered by the company’s development of a sophisticated AI model at a fraction of the cost of its US rivals.
DeepSeek developed a sophisticated AI model at a fraction of the cost of its US rivals
It achieved this without using Nvidia’s market-leading chips, which have been a mainstay for AI development. While there were some losers following the news, such as the NASDAQ (a key indicator of the performance of technology and growth companies) which fell 3 per cent and Nvidia, which dropped 17 per cent on the day, Apple and Meta's stocks rose as markets speculated they could develop AI-capable devices more easily and at a lower cost.
DeepSeek was the obvious winner, as it became the most downloaded app on the day on numerous app stores, marking a meteoric rise despite being relatively unknown a few days prior. This aggressive sell-off was short-lived, however, and ultimately, the Magnificent Seven ended the month up about 2.5 per cent.
How did we position MAF Core and MAF Plus portfolios?1
Growth assets
Global equities had a strong start to 2025 with all key equity regions posting positive returns in January, led by European equities. The Stoxx Europe 600 hit new record highs this month, driven by strong earnings reports in technology and healthcare stocks, and continued easing by the European Central Bank (ECB), which overshadowed weakness in the region’s macro data releases. While the S&P 500 also set a new record in January, DeepSeek’s entry into the AI market led to volatility for US tech stocks in particular, as did Trump’s announcement of tariffs on Canada, Mexico and China.
We expect US equities to outperform EM equities, especially with the US trade policy against China
In terms of our active positions, in MAF Plus, our overweight position in North American equities and underweight in EM equities were additive to returns. Given continued macro resilience, and good earnings growth in the US, we expect US equities to outperform EM equities, especially with the additional tailwind of aggressive US trade policy against China.
Our allocation to US financials followed a strong earnings season. The US financial sector is well-positioned to benefit from a resilient US economy, keeping debt defaults at bay, and higher interest rates which are supportive of banks’ profitability. Trump’s drive for deregulation is also seen as a tailwind for the sector.
Defensive assets
Fixed income markets struggled at the start of the month, as strong US macro data triggered a global bond sell-off. The resilient ISM release and a significant upside surprise in non-farm payrolls drove 20-year US treasury yields to new recent highs. This trend was mirrored across global bond markets, particularly in the case of UK gilts.
Persistently weak growth within the euro zone is supportive of continued rate cutting by the ECB
However, by the end of the month, this trend had reversed, with fixed income assets posting overall positive returns for January. Softer inflation data out of the UK and US, paired with a dovish ECB, saw bond yields trend lower as investors increased their expectations for rate cuts.
Given this backdrop, in MAF Plus, our overweight position in gilts was additive, as was our underweight position in Japanese government bonds as the Bank of Japan (BoJ) continued its rate-hiking cycle. Also, we have diversified our overweight fixed income position by rotating some exposure into German bunds. Persistently weak growth within the euro zone is supportive of continued rate cutting by the ECB, in contrast to the US where fiscal, and inflationary, concerns remain salient.
Alternative assets
Alternative assets also posted positive performance in January. In MAF Plus, both our allocations to AIMS and our synthetic gold holding performed well, with the latter benefitting from uncertainty stemming from US tariff developments.
Gold's status makes it a potentially attractive asset given uncertainty around inflationary pressures
We also re-opened an overweight position in gold. Its safe haven status makes it a potentially attractive asset given uncertainty around potential inflationary pressures (notably in the US) and geopolitical and trade tensions.
Lastly, we opened an FX trade – long US dollar and underweight pound sterling. Weaker macro prospects in the UK may prompt the BoE to cut more aggressively, putting downwards pressure on sterling. In contrast, inflationary concerns (driven by Trump’s fiscal and tariff policy) are likely to provide support for the US dollar.
Market outlook and positioning: what do we believe happens next?
From an active asset allocation perspective, we maintain a long position in equities, with a preference for focused exposure within the US market. We continue to see the current macro environment of resilient growth as favourable for equities, supporting corporate profitability. Regarding global fixed income, the potentially inflationary effects of the proposed Trump 2.0 policies present a risk to central bank easing biases, most notably in the US.
The effects of the proposed Trump 2.0 policies present a risk to central bank easing biases
Although, we believe Europe is more insulated from this effect (core Europe and the UK), where the continued focus on growth risks is likely to place a ceiling on bond yields. We also have an overweight position in gold, given its safe haven appeal, and an FX position in which we are overweight USD and underweight GBP (an additional expression of our growth concerns within the UK relative to US’ strong macro backdrop).
In terms of equity regions, we have a focused overweight position in US equities, which is diversified through our sector position in US financials. Going forward, US companies are expected to benefit from a combination of corporate tax cuts, deregulation policies and fiscal stimulus in the US. Earnings have also continued to be robust, as shown throughout 2024, helping to stabilise valuations. In terms of US financials, the sector is well-placed in an environment of potentially higher rates which is supportive of banks’ profitability.
In Europe, evidence of stagnation continues to mount
Regarding our fixed-income allocation, we are short Japanese government bonds with overweight positions in UK gilts and German bunds. We believe that Japan is still in a hiking cycle given their domestic inflationary pressures, with another 0.25 per cent rate hike delivered in January by the BoJ. In Europe, evidence of stagnation continues to mount, painting a weaker macro picture relative to other developed economies.
Given this, we believe our overweight German bunds and gilt position could benefit from continued central bank easing, particularly in the case of the UK where we see potential for greater rate cuts than market expectations.
