With market concentration at record levels, it is critical to diversify both within and beyond the US market.
It was a strong start to 2025 for investors, with both equities and bonds broadly delivering positive returns.
In the equity market, we saw a departure from the status quo of the last two years, with Europe (+7.1% on the month) outperforming the US (+2.8%), and value stocks (+4.5%) beating their growth counterparts (+2.6%). The return of President Trump to the White House, along with his ‘America First’ policy agenda, proved supportive for US equities, but the emergence of Chinese artificial intelligence (AI) company DeepSeek, called into question the US technology sector’s ability to deliver against lofty expectations. As we highlighted in our 2025 Investment Outlook, how the technology boom evolves will ultimately be more important than politics in determining equity market leadership, and with market concentration at record levels, it is critical to diversify both within and beyond the US market.
Bond markets were characterised by heightened volatility in January. President Trump’s proposed policy mix of tax cuts, immigration curbs and tariffs fuelled expectations for higher US inflation, pushing up yields globally. Ultimately though, the Bloomberg Global Aggregate Bond Index ended the month up 0.6%, amid tighter credit spreads and a softer-than-expected US December inflation print.
Commodities were one of the top performers of the month, with the broad Bloomberg Commodity Index rising 4.0%. Gold and other metal prices rose on the back of Trump’s tariff threats, while oil prices were lifted by cold winter weather and US sanctions on Russia.
Equities
The best performing major equity market in January was the MSCI Europe ex-UK Index, up 7.1% on the month. Gains were supported by the financials and consumer discretionary sectors owing to the solid global economic backdrop and tentative signs of improvement in the eurozone macro data. The eurozone composite Purchasing Managers’ Index (PMI) edged into expansionary territory at 50.2 in January. Meanwhile, retail sales came in at 1.2% year on year for November, marking the fifth consecutive month of growth. Europe’s outperformance, however, can most likely be attributed to its low weighting to the technology sector ( just 10% of the index) and analysts revising up their 2025 earnings expectations in response to positive surprises in the fourth quarter earnings season.
UK stocks also outperformed, with the FTSE All-Share up 5.5%. With three quarters of the index’s revenues derived abroad, the sharp depreciation in sterling added a tailwind to the UK market.
In the US, the S&P 500 Index returned 2.8% in January. The US economy continues to show signs of strength, with 256,000 jobs added in December and healthy GDP growth of 2.3% annualised in the fourth quarter. President Trump’s promise of deregulation and tax cuts further fuelled optimism over the economy. However, the US market’s heavy tech concentration weighed on performance towards the end of the month, as DeepSeek’s ability to produce efficient low-cost AI models hurt Nvidia, which was the largest constituent of the S&P 500 Index. Nvidia’s market value fell by nearly $600 billion on 27 January, the largest one-day wipeout in US stock market history.
In China, equities edged up marginally over the month, driven by more positive domestic economic data and less aggressive tariff threats from Trump than the 60% suggested on the campaign trail. The lacklustre performance of Indian equities (-3.5%), however, weighed on the overall performance of the MSCI EM Index (1.8%) and MSCI Asia ex-Japan Index (0.8%). This fall marked the fourth consecutive month of declines in Indian stocks, driven by a combination of multiple compression, weak earnings and an uncertain economic outlook.
Japanese equities were the laggard in January, with the TOPIX delivering 0.1%. The Bank of Japan (BoJ) delivered a 25 basis point interest rate hike as its confidence in the sustainability of domestic wage growth increased. The upward pressure on the yen proved to be a headwind for the export- oriented equity market.
Fixed income
10-year Treasury yields climbed around 20 basis points in the first two weeks of January, as Trump’s return to office fuelled investors’ expectations for fiscal largesse and inflation stickiness. However, US government bonds subsequently rallied, initially on the back of a weaker-than-expected December US inflation print, and subsequently following the AI tech sell-off. As a result, US government bonds delivered 0.5% on the month.
European government bonds also experienced volatility, with Italy flat on the month and Spain down 0.1% in January. German Bunds fell a more sizeable 0.4%, with this weaker performance perhaps reflecting increasing expectations for debt brake reform and greater fiscal stimulus after the upcoming federal election in February.
In the UK, international drivers – coupled with growing concerns around the stagflationary domestic outlook – briefly pushed 10-year Gilt yields to the highest level since 2008. A weaker-than-expected UK December inflation print, however, calmed the market and UK bonds ended the month up 0.8%.
In credit markets, spreads tightened across high yield and investment grade bonds. The US high yield market (+1.4%) outperformed its European equivalent (+0.6%), and global investment grade bonds returned 0.6% in January. Meanwhile, a weaker US dollar was a tailwind for emerging market debt, which was up 1.2% on the month.
Conclusion
January highlighted the risk to investors posed by high US stock market concentration and lofty earnings expectations, underscoring the importance of regional diversification. Outside of equities, tighter credit spreads helped lift bond returns. While the global economic outlook looks rosy for now, as we outlined in our 2025 Investment Outlook, government bond allocations will be critical in the event that elevated political tensions undermines business confidence and weakens global growth. If, however, it is inflation and fiscal largesse that remain the key concern, alternatives will be the better diversifier in times of turbulence.