The big headlines | Quarter 1 2025

In this regular piece, we summarise the key headlines from the previous quarter and highlight any short-term impact they’ve had on investment performance.

Feel free to download and share it directly with your clients or read our interpretation below for further commentary.

“There are decades where nothing happens; and there are weeks where decades happen.” Vladimir Ilyich Lenin

Introduction

Whether you are an investor, a political analyst, a computer scientist, or a Geordie, it has been an extraordinary start to the year. It is one of those periods Lenin refers to where decades have happened in weeks.

Several events this year have catalysed immediate changes in market performance and have the potential to set a very different path for the coming decades. That Germany appears committed to fiscal spending while the US pulls back is nothing short of a paradigm shift. We acknowledge it has been a tricky quarter for investors, but new opportunities abound, and volatility is the price of entry for those seeking to harvest superior long-term returns. Do not fear, embrace these markets.

Tariff Man

Topping the deluge of news flow investors have had to process this year, is tariffs. Will he / won’t he? As my colleague Neal Bailey so neatly articulates at our Invesco Intelligence Seminars, the frequency with which tariffs are threatened, applied, and then removed, through each day of the week, has the feel of a Craig David song!

Much ink has been spilled over Trump’s possible motivations to apply tariffs, whether they are a stick to encourage nations such as Mexico and Canada to tighten border controls, as a revenue generation tool, or simply to place a protective shield around US manufacturers. A combination of all is most likely but the fickle nature of the on / off / on tariffs means it is very hard for US business to plan, and that is starting to take a toll on corporate sentiment and activity. More detail should be gained around April 2nd – Liberation Day – but clarity isn’t guaranteed. 2nd April looms large, therefore, as a date at which the Global Trade War may move into a higher gear, with the US set to apply ‘reciprocity’ of tariffs with each of its trading partners. The new policy framework could be a very economically punishing one, albeit one where the costs are more well priced in Europe and China than they are in the Americas. Investors should remain open to the idea this administration delays implementation or applies ‘reciprocity’ in a more gradual/digestible approach. It should also be apparent that deals are there for the taking, particularly as Europe spends more on both defence and US gas exports. Volatility seems likely, but a more meaningful correction can be avoided if trade policy moves into a more constructive/deal making phase.

Does DeepSeek put Mag 7 in Deep Trouble?

Following another banner year for the ‘Magnificent 7’, the cohort was rocked by the breakthrough of Chinese innovator/upstart, DeepSeek, in January.

Though the headline costs associated with DeepSeek’s models are a little misleading, its models have proved there are alternative and cheaper methods to delivering workable LLMs. This news has caused investors to reassess the AI narrative, that the way to win this battle was only with the latest and greatest chips and more capex spending should be rewarded.

The impact was not felt equally across the ‘Mag 7’ constituents, but the Chinese ‘disruption’ narrative has combined poorly with higher valuations and breadth of ownership, resulting in these names largely leading the US market lower. Those comparing current conditions with the dot.com bust might be disappointed. Many of the largest US tech firms today have very strong balance sheets, earnings performance and some even harbour comparatively ‘reasonable’ valuations. We are not, therefore, anticipating a ‘fire sale’ of assets within this realm. Indeed, long-term opportunities may present during this bout of volatility for the ‘under-exposed’.

From a broader perspective, we see this development fuelling fears of an end to US exceptionalism. For more insight on the potential investment implications of the DeepSeek breakthrough please click on the following link.

Europe Does ‘Whatever it Takes’ (again)

Following the collapse in its governing coalition last year, Germany held Federal Elections in February, seven months ahead of schedule. The outcome delivered a punishing blow to the SPD incumbents, and a return to office for the CDU/CSU. That party will lead a new coalition. While incoming Chancellor, Friedrich Merz, may represent an establishment Party, he is behaving in a manner unbecoming a status quo politician. Already he has called for his nation to do “whatever it takes” to secure European defences, deliberately echoing 2012 Mario Draghi. Within Merz’ collection of policies we highlight an adjustment to Germany’s ‘debt brake’, which frees up additional capacity for considerable spending on both defence and infrastructure projects. The intended scale of fiscal expansion is a step change relative to Germany’s recent past and runs counter to US’ current efforts to rein in its budget deficit. These changes in fiscal paths help explain the stark difference in US and European equity returns this quarter and, will likely be a key factor driving performance in the coming months and years. We discussed this further with European Equity Fund Manager, Oliver Collin on our Time in the Market Podcast¹. 

Bank of England Moves Cautiously (for Now)

The BoE has delivered only one rate cut so far this year, opting to stay on hold in March. As has been the case for the past several quarters elevated wage and service inflation is driving caution in the MPC’s pursuit to lower interest rates, even as MPC members note growing concern in labour markets. Recognising politics is an emotive subject, we reluctantly point to October’s budget as a drag on UK growth over the medium term. The additional tax burden, imparted through increased employer National Insurance contributions, is weighing on labour market health – hiring intentions have fallen - and consumer confidence. Falling mortgage rates are offering only a partial offset so far, but should rates come down more quickly in the coming months then there are reasons to think the UK consumer could start to spend some of their excess savings. On balance we remain alert to the lingering risks recent policy choices present to economic growth and, therefore, anticipate the Bank of England might move at an accelerated pace in cutting interest rates through the remainder of the year. This cautious take on the UK economy doesn’t present a material threat to the UK stock market, however. As is well understood, UK listed businesses derive most of their earnings from overseas. For further updates on UK economic progress and the case for domestic investment please follow the link to the Time in the Market Podcast home site². The Ben Squared weekly conversation regularly tackles the UK economic outlook.