Q1 2025 Market Commentary

17/04/2025

Global Markets

Note: All quoted equity performance figures are in GBP terms.

It was a tumultuous first quarter of 2025, as equity markets experienced losses with the MSCI World index finishing the quarter down 4.7%, while Emerging Markets showed more resilience, being only marginally down by 0.1% in comparison.

Donald Trump’s trade tariffs were the dominant theme of the quarter. As Q1 drew to a close, investors anticipated “Liberation Day” and the announcement of new tariffs on 2nd April, which many feared would further strain US consumers, especially alongside planned public sector job cuts by DOGE. Meanwhile, news from China that DeepSeek had developed an AI model matching the capabilities of global leaders prompted investors to question the US’s continued dominance in this area – a key factor behind the strong outperformance of the “Magnificent Seven” stocks.

In the UK, the FTSE 100 Index delivered a positive return of 6.1% on the quarter. This return was driven predominantly by strong performance from larger companies, upheld by global investors turning away from US technology stocks, and towards large cap financials, energy and healthcare sectors. The UK economic outlook still looked rather bleak despite news that the UK had avoided a technical recession at the end of 2024, meaning UK small and mid-sized companies still suffered.

The Japanese equity market declined, with the TOPIX Index ending the quarter down 1.5%, and the Nikkei 225 performing lower still, due to underperformance in larger technology and exporter sectors. Trump’s tariff policies made the Japanese equity market face selling pressure, exacerbated by an announcement in March that the US would impose a 25% tariff on imported cars.
Finally, Emerging Markets outperformed US indices but lagged their European counterparts. Although marked by trade tariffs and US policy uncertainty, a falling US 10-year Treasury yield and a weaker dollar supported Emerging Markets overall during Q1.

Equity Styles

Global Value (+4.6%) was the strongest performing equity style over the quarter, and the only equity style to outperform broader markets, as investors looked for stocks with strong fundamentals and moved away from the mega cap area of the market. The growth style delivered the lowest return at -9.6%. MSCI World, Momentum and Quality all delivered negative returns in Q1 as well.

Inflation

Central Banks generally decided to maintain their interest rates, attempting to balance inflation and stimulate growth. In the US, inflation was 2.8% in the 12 months to February, which was down from 3.0% in January 2025. In response, the Federal Reserve maintained its benchmark rate, in the 4.25%-4.5% range.

In the UK, inflation was influenced by rising energy costs and increased food prices. The Consumer Prices Index including owner occupiers' housing costs (CPIH) rose by 3.7% in February. The Bank of England maintained a cautious approach, reducing rates to 4.5% in February and then keeping interest rates steady while monitoring inflation trends closely through March. The central bank highlighted the temporary nature of the inflation spike, expecting it to fall back to the 2% target later in the year.

The eurozone experienced a decrease in inflation, with the annual rate dropping to 2.2% in March from 2.3% in February. Key drivers included lower energy prices and moderated service costs. The European Central Bank (ECB) lowered its key interest rates by 25 basis points in March to 2.5%, aiming to support the disinflation process and ensure inflation stabilises at its 2% medium-term target. The ECB's decision reflected its updated assessment of the inflation outlook and the dynamics of underlying inflation.

Fixed Income

Note: All quoted fixed income performance figures are in GBP-hedged terms.

In Q1 2025, the US fixed income market performed well despite volatility, driven by higher starting yields and steady interest rates, which supported bond prices and attracted investors seeking stable income streams. In the UK, fixed income assets benefited from stable interest rates and moderate economic growth, with strong demand for high-quality credit reflecting investor confidence in government and corporate bonds. Meanwhile, the eurozone experienced lower yields and moderated inflation, with the European Central Bank's decision to cut key interest rates by 25 basis points in March improving bond market sentiment and providing a favourable environment for fixed income investments.

Despite this market uncertainty, overall, we are satisfied with how our portfolios have performed. Whilst we are never pleased with a negative market return for the quarter, when we compare how our portfolios have held up against their peers, we feel we have weathered the storm and are well positioned to benefit from future market movements.