Portfolio Manager Commentary 2025/1

Strong Start for Investors

The beginning of 2025 provided a constructive environment for investors, with both equities and fixed income assets delivering broadly positive returns. Market dynamics in January deviated from previous trends, highlighting the importance of diversification and strategic allocation across regions and asset classes.

Equities: Regional Divergence

A notable shift occurred as European stocks outperformed their US counterparts. The MSCI Europe ex-UK Index gained 7.1%, supported by financials and consumer discretionary sectors, alongside encouraging eurozone macroeconomic data. Meanwhile, US equities saw a more modest 2.8% rise, influenced by a mix of political and sector-specific developments. President Trump’s return initially boosted sentiment, but concerns emerged regarding US technology sector valuations, particularly after the rise of Chinese AI firm DeepSeek, which pressured high-profile companies such as Nvidia. This underscores the necessity of a diversified approach in global equity markets.

UK equities also delivered strong results, with the FTSE All-Share Index up 5.5%. The decline in the British pound provided a tailwind for UK companies with significant international revenues. Emerging markets experienced mixed performance; Chinese equities rose slightly, supported by positive domestic economic data, while Indian equities struggled due to weak earnings and multiple compression, marking a fourth consecutive month of decline.

Fixed Income and Commodities

Fixed income markets experienced volatility amid shifting inflation and fiscal policy expectations. US government bond yields initially climbed, reflecting concerns over inflation, but later recovered following a weaker-than-expected inflation print and adjustments after the AI-related equity sell-off. Ultimately, US Treasuries gained 0.5% for the month. European bond markets showed mixed performance, with German Bunds falling 0.4%, while UK government bonds posted a stronger 0.8% gain, aided by easing inflation concerns. Credit markets performed well, with spreads tightening across both high-yield and investment-grade bonds.

Commodities were one of the best-performing asset classes in January, with the Bloomberg Commodity Index rising 4.0%. Gold prices surged amid rising tariff threats, while oil prices climbed on the back of cold winter weather and renewed geopolitical tensions. The weakening US dollar also acted as a tailwind for commodity prices, further enhancing their appeal as portfolio diversifiers.

Outlook: The Case for Diversification

Recent market trends emphasize the importance of maintaining a well-balanced portfolio. The divergence in regional equity performance and evolving macroeconomic landscape highlight the need for a disciplined asset allocation approach. While equities remain attractive, risks associated with concentrated market leadership—particularly in the US technology sector—reinforce the case for broad diversification. Exposure to multiple regions and industries can help mitigate volatility and capture different growth drivers.

Fixed income allocations will continue to play a stabilizing role, particularly if political uncertainties weigh on business confidence. If inflation and fiscal expansion remain dominant themes, alternative assets such as commodities and infrastructure investments may provide additional diversification benefits. Additionally, the role of credit markets remains important, as tighter spreads suggest ongoing investor confidence in corporate fundamentals.

Overall, January’s developments underscore the need for investors to remain agile and responsive to changing conditions. A well-structured approach that incorporates diversification across regions, asset classes, and investment themes remains essential in navigating the 2025 investment landscape. While the current economic backdrop appears constructive, maintaining flexibility and a risk-conscious mindset will be key to optimizing portfolio performance in the months ahead.