Markets: Quarterly review Q1-2025:

Through Q1-25 was saw Trump spread widespread disruption across North America through DOGE job-cuts; auto-tariffs against Mexico and Canada; and a deluge of executive orders. His threats and bluster helped undermine long-standing economic, trade and security alliances. US Dollar fell an average of 4.1% against most major currencies. China’s DeepSeek AI model introduced a substantially cheaper AI model that was comparable to US AI models, thereby triggering a widespread investor reassessment of expectations, assumptions, and related costs (ROI) across the western tech sector. 

We saw US markets progressively fall through Q1-25 on the back of import tariffs against steel and aluminium; tariffs on Mexican and Canadian autos and parts; declining consumer confidence and activity; down-ward pressure on Mag7 stocks from the DeepSeek impact; and Trumps’ threats to impose tariff on all countries. The Fed kept rates steady at 4.25-4.5% but cut US growth forecast for 2025 from 2.1% to 1.7% and raised its inflation outlook from 2.5% to 2.7%, largely recognising the increased risks from up-trending economic instability. Consumer sentiment for March was 57.0, far below the 64.7 expected. Energy and Healthcare sectors performed well whereas almost all other sectors underperformed, especially tech.

The Eurozone outperformed through Q1-25 as global investors rotated out of the Mag7 and US markets on the back of DeepSeek. In February Germany elected a new Government under Friedrich Merz (CDU) on the back of his pro-growth and expanded domestic defence-spending programmes. However, the National optimism fade in March on the back of worries over US tariffs to German manufacturers. The ECB cut rates in January and March to reach 2.65%, and inflation eased to 2.3% in February. Financials, energy, industrials, utilities, and communications outperformed whereas consumer discretionary, IT, and real estate sectors underperformed.

UK equities and GBP had a positive performance through the quarter led by Financials, energy and healthcare sectors as global investors rotated away from US equities. UK SME’s continued to suffer from Brexit disruption along with the now impending cost impacts from National Insurance and minimum wage increases. While the UK narrowly avoided a technical recession 2024, sentiment remains fragile for 2025 as Government spending cuts start to reach into the broader economy. While the OBR outlook for the UK was seen as stable, it is warning that the planned increases to defence spending along with global trade instability could add increased pressures for further tax increases or further spending cuts; or both.

While Japanese equities fell 3.4% (in Yen terms) through Q1-25, much of this occurred in March especially after Trump announced 25% tariffs on all imported cars for early April. Despite the BOJ raising interest rates end January to 0.5%, progressive market declines through January and February were much fuelled by export uncertainty; increasing risks to Japan from a US recession; and rising global trade risks. Financials outperformed whereas most other sectors underperformed. Interestingly, US acquisitions of stakes in Japanese companies increased noticeably through Q1 on the back of the still weak Yen (versus USD).

Asia (excl. Japan) had a positive quarter as China, Singapore, Hong Kong, and South Korea outperformed, whereas Thailand, India, Indonesia, and Taiwan underperformed. China saw its equity markets move higher on the back of Government stimulus; liquidity injections to large banks; interest rate cuts; and further property sector support. The launch of DeepSeek also helped the Chinese IT sector move sharply higher as global investors re-assessed Chinese tech sectors’ growth potential considering this AI model delivers comparable performance at a fraction of the capital and energy costs from western equivalents. Taiwan markets fell sharply by double-digits on concerns from Trump chip tariffs in addition to worries that US chip purchase volumes would decline markedly on the back of DeepSeek. Indian markets fell as it showed signs of a slowing economy after the RBI lowered rates to 6.25% in February, and compounded by worries over the potential impact from US trade tariffs on the broader economy.

Emerging markets (EM) moved higher through the quarter, dominated by geopolitics and a weakening USD. An improved outlook for the Eurozone helped East-European EMs to outperform on the back of the new German Governments’ proposed loosening of fiscal policy to support expanded defence spending. China’s DeepSeek model was also seen as supportive of EM companies due to its lower capex and opex, collectively seen by global investors as a stimulus for faster adoption across EM markets. Brazil had a positive quarter on the back of a weakening USD as its central bank continued to battle inflation by raising rates three times Q1-25 to 14.25%. Mexico outperformed on the back of US tariffs being postponed. South Africa had a positive Q1-25 after it cut rates in January. DRAM prices helped South Korea deliver a positive quarter. UAE and Saudi Arabia were also positive for the quarter on the back of a rising energy sector. Indonesia and Thailand declined sharply in USD terms from growth concerns compounded by US tariff impact worries.

We saw Global Sovereign Bonds perform well through the quarter as the macro landscape shifted noticeably on the back of geopolitics and trade war threats. US Treasuries outperformed through Q1-25 as yields fell (prices rose) on expectations that US recession risks would spike if Trump implemented his tariff threats against all countries. Canadian yields strengthened only moderately due to tariff uncertainties and its ambiguous economic impact after the US auto tariff announcements were redefined near the end of March. Conversely, German Bunds sold off early March after Germany’s new Government announced Defence and security fiscal exemptions from its strict debt rules, together with its announcement of a €500Bn infrastructure fund. Indeed, the Bund sell-off recorded Germany’s largest one-day jump since the 1990 reunification. UK gilt yields rose marginally on the back of economic uncertainty through the quarter as stagflation risks and the prevailing fiscal fragility weighed on markets. Japanese bond yields rose marginally as investors weighed improved GDP and inflation metrics against the risks from BOJ normalising interest rates. Chinese bond yields were largely steady as investors waited to see how Government stimuli would offset risks and impacts from US tariff risks. Corporate and High Yield bonds generally outperformed Sovereigns despite some divergence in direction between USD and Euro denominated assets.

Commodities generally had a positive Q1-25, especially gold and silver as global investors and central banks sought to offset some of the prevailing global economic risks, particularly from trade tariff threats. Coffee and sugar prices rose sharply over the quarter much on the back of climate impacts to harvests. Cotton, wheat, corn, and most agricultural products saw sharp price declines as a good number of producers are seen to be delivering bumper harvests. Energy and copper saw higher prices whereas most other industrial metals were mixed or fell, much on the back of trade uncertainty.

Trumps’ promise to make the US the global crypto capital through progressive regulatory plans together with the idea that crypto assets would form part of the US Federal Reserve have little substance so far, aside from pushing crypto temporarily to record levels. As a result, crypto assets were caught in the middle between those announcements and the risk-off sentiment impetus from tariffs threats. Consequently, crypto market cap fell 18% Q1-25; with Bitcoin -12%, Ethereum -45%, and Altcoins -35%.

Andy Blandford