Inflation continues to be a concern. The legendary Rudy Havenstein once said, “Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair." Because of this, Apex Banks like the Fed and BoE aim to target a healthy level of inflation at a target of 2% to give them more room to lower interest rates to stimulate the economy. Despite nearly three years of effort, the Fed is still far from its 2% inflation target, while risk assets, especially equities, have strongly rebounded from 2022's bear market.
As inflation remains a key concern for investors, with central banks like the Fed and BoE striving to maintain a healthy 2% target, this market commentary examines the complexities of a tariff-sensitive global economy. We'll analyse developed market resilience in the face of persistent inflation and potential policy shifts, then turn our attention to the diverse landscape of emerging markets, highlighting both opportunities and vulnerabilities amidst trade tensions and fluctuating commodity prices. Join us as we provide insights to help you make informed investment decisions in today's dynamic market environment.
January 2025 Market Commentary
Global Market Landscape: A Tale of Two Worlds
Developed Markets Performance
Executive Summary:
In January 2025, developed markets saw a return of 3.53%, which is surprisingly good! However, investors are a bit worried that President Donald Trump's tariff plans might make it harder for Wall Street to get those interest rate cuts they're hoping for this year. The S&P 500 was almost at record highs, but it did experience some ups and downs in the first week of February 2025 due to news about Trump's potential tariffs on major U.S. trading partners.
Because tariffs are typically viewed as inflationary, the Fed faces a challenge. The central bank paused its rate-cutting cycle last month and is now waiting for economic data to confirm it's safe to continue easing monetary policy.
Market Summary:
The celebration is on hold, mirroring the current stasis in the fed funds rate.
In 2021, year-over-year inflation peaked at approximately 9% between 2020 - 2025. However, the Federal Reserve's interest rate increases haven't quite had the effect they were hoping for in terms of slowing down the economy or reducing price pressures. Even with these restrictive policies in place for a long time, the U.S. economy has remained surprisingly strong. We saw this in the December 2024 jump in industrial production, where mining, factory output, and utilities all increased significantly, going against the downward trend seen in manufacturing over the past couple of years.
This is just one example of how the economy keeps pushing back against the Fed. And even though there might be more challenges ahead, it's clear the economy is holding its ground.
Investment returns could be boosted by secular, rather than cyclical, trends.
Given the U.S. economy's resilience and the persistence of inflation, the likelihood of the Fed consistently easing its policies has diminished. Despite the current positive sentiment, the extended period of elevated interest rates could trigger an economic downturn. Consequently, rather than attempting to anticipate or oppose the Fed's decisions, investors should focus strongly on their long-term objectives, identify significant secular trends, and diversify into asset classes capable of thriving across diverse market scenarios.
The BOE’s February 2025 decision to cut interest rates to 4.5%, while acknowledging a weakened growth outlook and increased inflation forecasts, presents a complex challenge for investors. This move signals a belief that stimulating economic activity takes precedence, even at the risk of potentially exacerbating inflationary pressures. Looking ahead, several key factors will determine the success of this strategy. Firstly, the effectiveness of the rate cut in boosting business investment and consumer spending will be crucial. However, the simultaneous rise in expected inflation could offset these benefits, as higher costs may dampen demand. Secondly, the BoE's tolerance for inflation exceeding its 2% target will be closely monitored. Any signs that the bank is losing control of inflation could trigger a swift reversal of policy, leading to market volatility. Finally, the UK's vulnerability to external shocks, such as fluctuations in global energy prices or changes in international trade policy, remains a significant concern. These factors could further complicate the BoE's efforts to navigate this uncertain economic landscape, requiring investors to carefully assess the evolving risks and opportunities in the UK market.
Emerging Markets Performance
Executive Summary:
Emerging markets (EM) presented a mixed picture in January 2025, with the MSCI EM Index returning 1.79%. This lagged behind the performance of developed markets, reflecting ongoing concerns about global trade tensions and the potential for slower growth in China. While India continued to attract investor interest, driven by strong economic growth and easing inflation, other EM economies faced headwinds.
Brazil grappled with fiscal concerns despite modernising its industries, while South Africa struggled with high government debt. The prospect of continued elevated interest rates in developed markets also weighed on investor sentiment toward EM assets.
Market Summary:
EM equities experienced a volatile January, influenced by several factors. While positive Q4 2024 GDP data from China provided a boost, concerns persisted about the sustainability of its growth, projected to slow to 4.5% in 2025 due to weak domestic demand. Anxieties surrounding potential US tariff increases under a new Trump administration also loomed large. Mexico, Brazil, and Colombia are particularly vulnerable. These tariffs threaten to disrupt EM export-oriented economies, potentially leading to currency depreciation and reduced investment flows. India's market distortions caused by retail-driven investments also create a risk of correction. Oil price volatility, driven by geopolitical tensions and production cuts, further complicated the EM landscape, impacting commodity-exporting economies.
Forward Outlook: Portfolio Considerations
Prevailing global economic trends and market dynamics indicate potential benefits from allocating capital to publicly listed infrastructure as part of a well-diversified investment strategy. These entities, which own and operate assets vital for the movement of people, energy, goods, commodities, and information, underpin broader economic activity. Given its historical effectiveness in hedging against inflation, listed infrastructure presents a compelling asset class, particularly in the current economic environment marked by persistent inflation and the risk of increased tariffs.
The increasing prevalence of artificial intelligence (AI) and other data-dependent technologies has fuelled the growth of data centres, positioning them as an attractive global investment. The global datasphere, as projected by International Data Corporation, is expected to reach 181 zettabytes in 2025, a nearly twelvefold increase from a decade prior.
Data centre supply is growing, but power limitations across regions will likely keep it below demand for the foreseeable future. This is evident in Europe, where increasing supply hasn't prevented vacancy rates from decreasing and rents from rising. In North America, vacancy rates hit a record low of 2.8% in 2024 due to tenant expansion. The UK, particularly London, also has very low vacancy rates (currently 9.8%, projected to fall to 7.9%), reflecting high demand exceeding supply.
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Disclaimer:
The commentary you find on this page is for information only; it is not intended as research or a recommendation suitable to your circumstance. Please seek financial advice from a professional before acting on investment decisions.
As is the very nature of investing, there are inherent risks, and the value of your investments will both rise and fall over time. Please do not assume that past performance will repeat itself and you must be comfortable in the knowledge that you may receive less than you originally invested.
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