Stay ahead of the curve with our experts’ breakdown of this month’s market shifts and the insights shaping our portfolio positioning.
Fast reading:
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A good start for equity markets in 2025. So far this year, the euro area is the strongest region, and Information Technology (IT) has fallen to the second worst-performing sector.
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We maintain a favorable outlook on European fixed income. Investing in European credit remains compelling.
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It is advisable to phase into markets when starting out on an investment journey.
Equity markets: Good start to 2025
Equity markets had a good start to 2025. At the time of writing, the world equity index is up 2.7% since the start of the year. There has been a change of leadership this year, by sector and by region. The euro area is the strongest region this year, up almost 11%. Information Technology (IT) – last year’s leader with gains of 40% in euro terms – is the second-worst performing sector this year.
Some of the excess performance of the euro area is merely recovery from a relatively poor 2024 when it underperformed the US by 23% in euro terms. Fears about the impact of the new US Administration’s trade policies were a major factor behind this relative weakness in the euro area. What we have seen thus far in 2025 is that the US government has pulled back from some of the extreme policy positions and left a ‘door open’ for negotiation. In recent weeks, the region has also gotten a relative boost from a potential end to the war in Ukraine.
In January, a shudder went through the IT sector as a Chinese company, DeepSeek, claimed to have found means of deploying AI (Artificial Intelligence) tools at less cost, requiring less power and capital expenditure than currently thought. This has dampened the performance of the IT sector (up a ‘mere’ 3.8% this year) but has had little impact on the users of AI tools. Communication Services was the second-best performing sector last year (+39%) and is the best this year (+8%). The AI theme is still important; it is just moving on to the next phase: deployment.
The other important theme this year in equity markets has been earnings delivery. The second-best performing sector so far this year is Financials, driven by robust fourth-quarter earnings from US banks and insurers. Earnings resilience will remain an important focus for us this year, especially as the global economy could face challenges due to policy changes in the US. In those circumstances, it is best to stick with quality companies and industries with structural growth attributes.
Bernard Swords, Chief Investment Officer
Bond markets: Volatility persists
Since our last edition in November, market volatility has persisted as investors navigate ongoing geopolitical tensions and inflationary pressures. Early January saw a surge in investor concerns linked to President Trump’s tariff threats, alongside significant economic indicators, notably robust December retail sales in the US, which suggested increasing US demand. This environment triggered a global bond sell-off, prompting investors to recalibrate their expectations regarding interest rate cuts. Consequently, yields across the curve rose, with the 10-year US Treasury yield peaking at 4.79% in mid-January.
However, subsequent releases of weaker Consumer Price Index (CPI) data from the US tempered some of the previously hawkish sentiment. This fostered optimism that the Federal Reserve Bank (Fed) may still implement rate reductions later this year. In Europe, the European Central Bank (ECB) announced a 25-basis point rate cut on January 30, lowering the deposit rate to 2.75% and signalling the potential for further reductions. This decision was driven by continued signs of economic weakness, with growth figures falling short of expectations and stagnating during the fourth quarter of 2024.
Our February asset allocation meeting highlighted the geopolitical factors influencing market dynamics. Divergence remains a prominent theme, as the Federal Reserve maintains a status quo on interest rates amid a climate of US exceptionalism, while the ECB continues its path of rate reductions. We maintain a favourable outlook on European fixed income, identifying opportunities for moderate returns, particularly within the higher-quality corporate bond sector. The rationale for investing in European credit remains compelling, supported by resilient fundamentals, strong balance sheets, low leverage, and robust inflows into Euro-denominated investment-grade assets.
Moyah Flanagan, Fixed Income Strategist
Market entry and timing
Typically, it is advisable to phase into markets when starting out on an investment journey. For an investor who is building capital, starting relatively small and contributing regularly to an investment account, or who retains significant liquidity outside of the portfolio being considered, this phasing-in may happen naturally. But for an investor who has substantial capital to start with, and for whom preservation of capital is prominent among their stated objectives, we will typically enter the market in several stages within the first year.
By default, we invest higher-risk mandates with approximately a third of the available capital amount at the initiation of the investment and then two more thirds each quarter thereafter. This schedule can be varied in accordance with the view of the Investment Committee if market developments are seen to offer opportunity to accelerate or decelerate the process. Lower risk mandates may also be deployed more quickly.
Why do we phase in? The ranges of best and worst investment outcomes over a one-year time horizon are very broad, with the scale of upside and downside risk not far from balanced. As time passes, this balance of risk and reward shifts in favour of positive outcomes and preservation of capital, especially for multi-asset portfolios. So, in an ideal world, we could limit risk exposure in year one but be fully invested for the long term. This is what phasing-in can achieve. Indeed, phasing in over several quarters can have a dramatic impact in reducing portfolio volatility in the first year but does not materially change median outcomes over five-year-plus time horizons.
Exceptions to this preference can occur in the wake of significant market drawdowns or where valuations appear relatively attractive for other reasons. In the current environment, where earnings resilience remains critical to sustaining strong valuations, notably in the US, and where geopolitical risks may create volatility, sticking to a plan of phasing in is preferred.
