February monthly investment update - Reflections on January 2025 and a look ahead

Often seen as one of the quieter months of the year, January turned out to be unparalleled.

During the month, we saw Israel and Hamas agree a signed cease fire agreement (and hostage release deal), and Donald Trump return to the White House.

Other news saw Wall Street suffer big losses as Chinese AI startup DeepSeek, launched what appeared to be a cheaper alternative to ChatGPT. Taking investment markets by surprise, the news briefly wiped billions of dollars off the market value of mega-chip giant Nvidia.

In the US, Mr Trump’s inauguration on 20 January, was taken indoors for the first time in 40 years due to freezing temperatures. Nearly 31 million viewers in the US did the same as the ceremony, held in the Capitol Rotunda, was televised across 12 broadcast and cable networks. As the now 47th president of the United States, it’s Mr Trump’s second term in office since his departure in 2021.

With President Trump back at the helm, we’re accustomed to ’expecting the unexpected’, but second time round, we do at least have some experience of his ‘modus operandi’. He wasted no time in signing sweeping executive orders to ‘come good’ on some of his top campaign issues – such as a crackdown on immigration and rollbacks on climate change policies. In addition, he has made it clear he wants OPEC (the syndicate of top oil producing nations) to lower oil prices, and the Federal Reserve to cut US interest rates – no doubt tough conversations lie ahead.

The highly publicised ‘trade tariff’ story (where the President intends to put taxes on countries importing goods into the US) only started to gain traction at the end of January. Stock markets kicked off the year with 4% gains, so it remains to be seen if these are sustainable once trade tariffs negotiations start to gain momentum. We, therefore, expect volatility to increase from February onwards as they become the negotiating tools that President Trump will use with countries worldwide.

Uncertain times and ‘green shoots’

We repeat many times in our updates that markets dislike uncertainty, including US politics. But in all the mayhem during the month, it’s refreshing to see that progress has been made in other areas which may help to dampen volatility caused by the new Trump administration. For example, if the ceasefire in Gaza continues to hold, then that would be one blessing for markets and humanity alike.

Sticking with America for a moment longer, the US Federal Reserve cut interest rates in December, but not in January - seemingly keeping one eye on the new administration's economic policies. The scope to which further interest rate cuts in the US will now happen depends on how many of President Trump’s likely policies (such as those trade tariffs) impact prices and future inflation.

In recent months, Switzerland, Canada and Sweden, along with the EU, have all been cutting interest rates. In the UK, at the end of January, there was strong optimism that the Bank of England would lower rates too, by at least a quarter percent, in February.

UK growth stalls

Which leads us on to talking about the UK and its lack of economic growth which continued to concern financial markets in January. This follows the announcement of just 0.1% growth reported for November, along with disappointing mortgage data, underwhelming retail sales numbers (for December) and low business optimism scores in recent months. If economic growth does turn out to be slower than expected, then more government borrowing (in the form of extra issuance of government bonds) might be needed to plug the economic hole caused by that absence of growth – which may dampen investors’ spirits further.

As a consequence, financial markets pushed long-term UK government borrowing rates (known as gilt yields) to their highest levels for 30 years, before easing back. The reassurance came from slightly improved December inflation readings – showing signs that service sector inflation may finally be softening. The real prize though, will be more tangible signs that wage growth is easing back in the months ahead.

There is still cause to be optimistic

We know it has been a tough time for bond investors in recent years, with the move higher in interest rates (2022 was one of note). December 2024 was also a poor month, reflecting those concerns mentioned earlier about government borrowing levels. Nonetheless, we continue to buy more fixed income investments for our funds (corporate bonds and government bonds) as we remain optimistic that bond markets can return to producing positive returns in the years ahead as interest rates - particularly in Europe and the UK - are reduced.

Our thinking is that in Europe, core inflation continues to hold below 3%, and we see little to suggest that the European Central Bank (ECB) can't continue to cut interest rates in 2025. They have, after all, already made one 0.25% reduction in January (mentioned earlier). Economic growth in Europe ground to a halt in Q4 2024, according to provisional data, so this also suggests there is scope for further ECB rate reductions in the year ahead.

Stock markets (equities) have the potential to generate good long-term returns. However, we’re mindful that individual company valuations vary significantly - with some shares now far more expensively priced than others. This is where the expertise of our Fund Managers and Analysts plays a vital role in selecting investment opportunities. The DeepSeek episode, and sharp falls in specific shares (think Nvidia), only serves to highlight that valuations do ultimately matter and that ‘expensive investments’ have further to fall – particularly if they produce disappointing results or get caught out by external events - not least announcements coming out of the White House.