• Equity Markets plagues by AI and import tariffs
• US economy charges ahead, Eurozone stagnates
• Partial profit-taking on equity overweight

Global and U.S. stocks indices posted gains in January despite challenges from a more hawkish Federal Reserve, the introduction of DeepSeek's low-cost AI model, and aggressive tariff policies from the newly reinstated Trump administration.

The MSCI All Country World Index rose 3.3% for the month, with European markets outperforming as the region’s benchmark climbed 7.1%, compared to the S&P 500’s 2.7% increase. European equities benefited from strength in the financial and consumer discretionary sectors, supported by a solid global economic backdrop and signs of improvement in the eurozone. The region's composite PMI moved into expansionary territory at 50.2, while retail sales marked their fifth consecutive month of growth. However, the U.S. market’s heavy reliance on technology stocks weighed on performance toward the end of the month, as DeepSeek’s cost-efficient AI model put pressure on Nvidia and other AI-related stocks.

All major equity markets advanced, though MSCI Japan posted a modest 0.1% gain, as the country’s central bank diverged from the global trend by raising interest rates in January, reflecting increased confidence in sustained domestic wage growth. This rate hike strengthened the yen, creating a headwind for Japan’s export-oriented market. Meanwhile, Chinese equities (MSCI China) recorded a 1.1% gain, driven by government intervention, which saw state-owned insurers inject hundreds of billions of yuan into the stock market. Some of the strongest January returns came from markets that had underperformed in late 2024. Switzerland led global markets with an 8.4% gain, while the UK rebounded 6% following a weak fourth-quarter decline of 0.2%. These gains were fueled by strong corporate earnings, a sharp depreciation in the British pound, a 25-basis-point rate cut by the European Central Bank, and expectations of further monetary easing.

Earlier in the month, President Donald Trump, upon returning to office, announced plans to impose 25% tariffs on imports from Canada and Mexico, citing concerns over fentanyl trafficking and trade imbalances. He also signaled additional tariffs on Chinese goods. Investor uncertainty grew further with the launch of DeepSeek’s low-cost AI model, which raised concerns about the ability of U.S. technology firms to meet high expectations. Adding to the uncertainty, the Federal Reserve paused rate cuts at its first policy meeting of the year, indicating that there is no urgency for further easing. As Trump begins implementing his economic agenda, investors should brace for potential market volatility and policy surprises, particularly regarding trade. In this environment, portfolio diversification will be essential.

Despite these challenges, market sentiment remained resilient, supported by moderate inflation and solid economic growth in the U.S. The Consumer Price Index (CPI) showed core inflation easing to 0.2% in December, down from 0.3% the previous month, while job growth (256,000) exceeded expectations. The U.S. economy expanded by 2.3% in the fourth quarter, marking the fastest pace of consumer spending growth in two years. Additionally, President Trump’s promises of deregulation and tax cuts further bolstered economic optimism.

Fixed income markets saw heightened volatility in January. U.S. Treasury yields initially rose following stronger-than-expected December employment data but later declined as inflation (PCE index) aligned with expectations, reinforcing market projections for two rate cuts in 2025. The Bloomberg U.S. Treasury Index gained 0.5% for the month, while the Pan-European Aggregate Index edged up 0.1%. German Bunds underperformed, falling 0.4%, possibly due to increasing expectations for fiscal stimulus and debt brake reform ahead of Germany’s federal elections in February.

Commodities were among the strongest-performing asset classes in January, with the Bloomberg Commodity Index rising 4.0%. Gold and other metals saw price increases in response to Trump’s tariff threats, while oil prices were lifted by cold winter weather and U.S. sanctions on Russia.

We have maintained an overweight position in U.S. equities within our investment policy for a considerable period. The asset class’s strong performance relative to others caused this overweight to exceed our initially intended target. As a result, we opted to take profits and reduce the position back to its original target allocation.

 

We remain optimistic about US equities. Growth is solid and leading indicators are generally positive. So why take profit? Mainly because of the position exceeding the size we envisioned but also because of the substantial uncertainties. The reaction to the news about DeepSeek demonstrates that US equities have priced in an enormous amount of optimism. We therefore wanted to restrict the overweight somewhat.

We’re reinvesting the proceeds in US government bonds and hedging the exchange risk, reducing our exposure to the US dollar in the process. We held an underweight in US investment grade bonds. This meant that we’ve profited from the upturns in yields in the past few months. As a result, we now think it’s a good time to reduce the underweight in US investment grade bonds marginally. On balance, we continue to prefer equities to bonds.

Please find attached our last Asset Allocation Update for February.