Quarterly Investment Outlook – Q1 2025

The final quarter of the year was fairly muted as markets took stock of rich valuations, stubborn inflation and a potentially tougher global trade environment in 2025. Global equities gained +1.8% over the quarter, led once again by US technology stocks, with the ‘Magnificent 7’ returning +25%, compared to the ‘average’ large cap US stock which returned +3.7% (based on an equal weighted average). Japan was the only other region in positive territory, gaining +3.0% over the quarter, whilst the UK (-1.1%) and Europe (-3.3%) were both softer. Emerging markets also came under pressure, falling - 8.1% as China’s economy appeared to stall and stimulus measures failed to achieve a sustained kickstart.

Within fixed income, both government bonds (-0.55%) and corporate bonds (-0.25%) were a little weaker as expectations for rapid interest rate cuts dissipated in the face of higher inflation, however, the higher level of interest payments offset what would otherwise have been a worse performance. By way of example, only one, maybe two more cuts are now priced into US interest rates for 2025, with markets expecting interest rates around 4% at the end of the year. As recently as October, markets had thought year-end US interest rates would be about 3%, which would be five or six cuts from where we are at the start of the year. This comes as inflation has fallen to the 3% level but has proven quite sticky here, enough to put paid to the goldilocks scenario but nonetheless an environment that equities can continue to perform in, though it does make thriving a bit of a tougher ask.

Ben Seager-Scott