Inside the markets | Model Portfolio Service Review

What a month for markets. January has felt like a particularly long month for those of us investing in markets, and much of that has got to do with the returning President of the United States of America, President Donald Trump, entering the White House, and quite frankly, uh, saying quite a few things that I'm not sure were on anyone's bingo card for this year. So maybe the renaming of the Gulf of Mexico, the taking over of the Panama Canal, invading Canada and Greenland, and more recently, although technically probably a February thing, a. Gaz and Riviera.

There's been lots of rhetoric, some of which impact markets and some of which doesn't. However, it has caused quite a lot of volatility. There've also been quite a few presidential orders signed, many of which the market still hadn't had time to dig into and, grapple with.

Despite all this kind of chaos, uh, actually, equity markets were up for the month. Not in a straight line, of course, it has been volatile, but they were up for the month. And unlike 2024, when European equities were the laggard, actually in January and this year so far, they've actually been um those that have outperformed, and it's been areas like healthcare, financials, and in particular banks that have led the way there in European markets, partly due to good earnings and also partly due to a rotation out of US technology names.

Now the US market, while still positive, uh, was a laggard during January, and that was because of the uh maybe the shaken confidence in the outlook for those names perceived to be beneficiaries of AI. You'll remember the announcement about Deepeek, the Chinese generative AI model, that was apparently produced for much lower cost and using inferior chips than some of the models that have been produced in the US. And of course that has given rise to concerns over whether as much investment is needed and as many chips are required in the future, you know, and then again in turn puts question over the revenue streams that have been forecast for some of those magnificent 7. The stocks that are perceived to be beneficiaries.

So when we look at the US market in January, the technology sector was actually in negative territory for the month and all other sectors in positive territory. So you would find that an index like the Dow Jones Industrial Average was about performed, whereas the NASDAQ would have underperformed in relative terms. Closer to home in the UK, UK stocks did pretty well, particularly large caps. In fact, large caps did a lot better than the small and midcaps.

In the small and midcap space. Returns were positive but muted,

you know, partly because of concerns over the fiscal health of the UK, which has been an ongoing discussion since the new Labour government came to power, but also due to concerns over, you know, economic growth in the UK as well.

Overall, developed markets have outperformed emerging markets for the month, but it's worth reminding ourselves that emerging markets aren't just a single homogenous asset class.

China and India were the laggards really, but areas like Brazil, Colombia and Poland actually did pretty well.

In government bond markets, well, there was some volatility, they kind of continued their weaker performance seen in the sort of latter end of 2024 as yields were rising. But actually, um, as the, Government bond market looked away from concerns about  sustainability of debt and towards inflation towards the end of January actually yields started to come down again. And in the UK in particular, we had a an inflation print that was a little bit better than expected. It's worth reminding ourselves actually that in the UK the guilt market has in some people's eyes has been the victim of bond vigilantism, but actually when we look at the moving yield and compare it to the the moving yields in the guilt market, the treasury market and the Euro government bond market, actually it's been pretty synchronised.

There might be a bit of extra pain taken by the guilt market, but actually, you know, it looks pretty similar. So I'd say those vigilantism concerns are perhaps potentially slightly overblown.

There were some central bank actions in January. You had the ECB which um cut rates by 25 basis points, uh, although Christine Lagarde did mention that um there are some the the risks to the economy are to the downside and and sort of called out those trade concerns specifically.

In the US, the Fed kept er rates on hold after a few um cuts in succession. And um also really kind of dashed hopes really with the rhetoric about the fact that there might not be any rate cuts forthcoming, certainly in the near term which obviously caused a, a market reaction. And then in Japan, the Bank of Japan bumped the trend, raising rates by 0.25%, up to 0.5% upgrading their inflation forecasts, but also, like the ECB, just tempering expectations about economic growth and warning of potential disruption from those sort of trade and tariff concerns.

I think it's worth mentioning elsewhere in the fixed income markets that corporate bond spreads either stayed similar levels in the US and got even tighter in Europe and the UK and that was true in both investment grade corporate bonds and also the high yield market.

Now, as you'll know, the high yield market has a shorter duration profile, so it's less sensitive to interest rates, and it's typically a riskier part of the market in the credit. Risk sense, so that did quite well along with equities during the month. And for those of you who need the definition, corporate bond spreads are the difference between the corporate bond yield and the underlying perceived risk-free rates from the government bond. So spreads are actually very, very tight relative to history at the moment. So it pays to be discerning, I think, about where you take that credit risk. 

The macro picture overall looks reasonable, so economic growth is forecast to be positive, and the US again leading the way uh according to the forecasts. But also, you know, generally speaking at a global level is expected to be below trend. That should be reasonably positive for most asset classes, assuming inflation remains under control.

But there are some market dynamics I think it's worth keeping an eye on, and, and one of the major ones I'd pick out, given that we've seen some weakness in January, is the US equity market. Now the US equity market now dominates global equity indices. I think maybe go back 1015 years, it made up around 40, 45, maximum 50% of global. Today it's more like 70, 75% depending on which global equity index you look at. And when you look at the US market itself, it's actually highly concentrated, as concentrated as it has been in over the last few decades, I would say.

So the top 50 stocks in the S&P 500, so the top decile of stocks now make up around 70% of that market. So you, you can see that there's about 50 stocks that are dominating global stock markets. And while they may continue to do well, if you have a passive global equity portfolio, for example, it's quite a lot of eggs in one basket, I would say that's probably the way of thinking about it.

So, uh, our US equity allocation is meaningful, but, but much less than those sort of 70% numbers. I do think it's worth reminding ourselves as well though, that it is the largest, most liquid and arguably the most innovative stock market in the world.

But at these lofty valuations, any disappointments like we saw with the China Deepeek announcement could be quite painful, that's something to keep an eye on.

Until the next time.