2025 was a positive start for both growth and defensive assets. Equity gains were led by Europe followed by the UK. This was driven by value companies performing well, reversing the recent trend of growth stocks dominating returns.The UK performance was also helped by a depreciating currency.
The economic picture
Starting with the economic picture, the US economy still appears to be in good health, with 256,000 jobs added in December and GDP growth of 2.3% annualised in the fourth quarter. President Trump’s pledge of deregulation and tax cuts fuelled confidence over the economy. However, the President’s proposal for a combination of immigration controls, tax cuts, and tariffs, have increased expectations for higher US inflation, and as a result of Trump’s tariff threats, Gold and other metal prices increased in response over the month.
Growth Assets
Growth asset gains in Europe were driven by the solid global economic backdrop and cautious signs of progress in the eurozone macro-outlook. Retail sales came in at 1.2% year-on -year for November, marking the fifth consecutive month of growth, whilst the eurozone composite Purchasing Managers’ Index (PMI) crept into expansionary territory at 50.2 in January.
Turning to growth asset returns, the return of President Trump to the White House, along with his ‘America First’ policy agenda, has proven sympathetic for US equities, but the rise of Chinese artificial intelligence (AI) company DeepSeek, led to concerns over the ‘Magnificent 7’s ability to deliver their current high valuation expectations. Putting this into perspective, Nvidia’s market value fell by nearly $600 billion on 27th January, the largest one-day decline in US stock market history. In China, less aggressive tariff threats from Trump helped equities, along with more positive domestic economic data, whilst Japanese equities lagged in January, as The Bank of Japan (BoJ) announced a 0.25% interest rate-hike as its confidence in the sustainability of domestic wage growth improved.
Factor performance
Looking at factor performance, value and momentum led the way in January, with the growth factor facing headwinds over the month.
Defensive Assets
Turning to defensive assets, the US inflation numbers, and technology sell off, led to a positive response from US government bonds and this saw the 10-year Treasury yield decline from its highs in the middle of the month. The UK 10-year Gilt yield ended the month at 4.5%, sharply down from its 4.9% mid-January high as recent data has shown the UK economy to be stagnating.
Summary
In summary, January highlighted the risk to investors which is presented by high US stock market concentration and the high earnings expectations from technology.
This underlines the importance of regional divergence and emphasises our themes of maintaining a balanced portfolio and a broadening of returns as we move through the first quarter of 2025.
Glossary of terms
- Growth Assets – Investments, such as stocks, that aim to increase in value over time.
- Defensive Assets – Investments, like bonds or cash, that are more stable and offer protection in market downturns.
- Equity – Ownership in a company, represented by stocks or shares.
- Value Companies – Businesses considered undervalued compared to their fundamentals, often paying dividends.
- Growth Stocks – Companies expected to grow faster than the market, often reinvesting profits rather than paying dividends.
- GDP (Gross Domestic Product) – The total value of goods and services produced within a country, indicating economic health.
- Deregulation – The reduction or removal of government controls in industries to encourage business growth.
- Tariffs – Taxes imposed on imported goods, affecting trade and pricing.
- Inflation – The rate at which prices for goods and services rise, reducing purchasing power over time.
- Macro-Outlook – A broad analysis of economic conditions and trends.
- Purchasing Managers’ Index (PMI) – An indicator of economic health in the manufacturing and services sectors, with readings above 50 suggesting expansion.
- Factor Performance – The impact of specific investment styles (e.g., value, momentum, growth) on market performance.
- Momentum Investing – A strategy that focuses on buying stocks that have shown strong recent performance.
- Treasury Yield – The return on US government bonds, reflecting investor confidence and interest rate expectations.
- Gilt Yield – The return on UK government bonds, indicating economic conditions and investor sentiment.
- Stock Market Concentration – When a small number of large companies dominate the market, increasing risk if those companies underperform.
- Regional Divergence – Differences in economic and market performance across different geographic regions.
- Balanced Portfolio – A mix of assets designed to provide both growth potential and stability.
- Broadening of Returns – A shift where multiple sectors or regions contribute to market gains rather than just a few dominant companies.
Important Note
The information contained within this document is subject to the UK regulatory regime and is therefore primarily targeted at consumers based in the UK.
This article is distributed for educational purposes only and should not be considered financial advice.
If you are unsure about the suitability or otherwise of any product or service, we recommend that you seek professional advice.
The opinions stated in this document are those of the author and do not necessarily represent the view of Progeny and should not be relied upon to make a financial decision.
Information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Past performance is no guarantee of future performance.
The value of an investment and the income from it can fall as well as rise and investors may get back less than they invested. Your capital is therefore always at risk. It should be noted that stock market investing is intended for the longer term.
