Our MPS team's monthly news and views covering January

For information purposes only. Any views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

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Please refer to the glossary at the end of the document. the glossary at the end of the document.

January 

Financial markets have started the year in a similar fashion to the way they ended the last – in weak form. However, investors were unlikely to feel as low as the Canadian Prime Minister who resigned just six days into the New Year.

The Managed Portfolio Service investment team believes the downbeat start to 2025 has been a result of concerns interest rates could be cut less than previously expected. This is because of strong US data, especially employment figures, alongside the inflationary threat of tariffs from the new President.

Bond markets, also known as debt markets or fixed income markets, were particularly impacted by this. As US corporate earnings season – the period where most of their listed firms release financial results – took hold, some strong numbers provided a boost to financial markets, and many regained their winning ways ahead of Trump’s inauguration.

The incoming President’s no-nonsense approach to conflict helped broker a long-awaited Gaza ceasefire deal, reducing a hotspot of geopolitical risk over night. This, along with Trump’s promise of a lower oil price, meant reduced inflation risks as well. Both helped the S&P 500 Index, the main US financial market for listed company shares, to reach an all-time high during the month.

Domestic US economic data continues to paint a healthy picture, with the economy expanding at an annual rate of 2.3% between October and December. However, with core consumer price inflation ticking up 0.2% to 2.9% the Federal Reserve, the central bank of the US, signalled it is in no rush to cut interest rates until inflation and jobs data make it appropriate to do so.

Following the monetary and fiscal stimulus from China last September, China announced that it had indeed achieved its GDP growth target of 5% for 2024. Although generally investors views of this region are mixed, China continues to play an important role in the overall health of the global economy. As China enters the Year of the Snake – as of 29 January, the Lunar New Year – much is riding on whether the traits of renewal and regeneration will persist this year. However, this could depend on its relationship with the US and the extent of tariffs that may be imposed on China.

In Europe, political uncertainty continued to dog markets, particularly government bonds (investments that take the form of debt issued by governments) which have reacted to more unstable politics in France and Germany. Economic surveys of managers within companies sent mixed messages. Although the findings suggested businesses were edging into expansionary territory, analysis showed this was driven solely by the service sector elements of the economy. Meanwhile the trend for manufacturing data within the bloc contracted for an eighth consecutive month. With weak consumer and manufacturing sentiment, it was reported that growth stagnated over the final quarter of 2024. This fragile backdrop encouraged the European Central Bank to cut interest rates from 3% to 2.75% with concerns over lacklustre growth superseding worries about persistent inflation and tariffs. These measures helped spur a turnaround for European company shares. They led other developed markets in January after trailing behind them for much of the previous quarter.

Within the UK, service sector data implied a faster than expected expansion at the start of 2025. However, lower job opening rates and new orders took the shine off this news, together with a surprise fall in pre-Christmas retail sales. Despite the Bank of England holding rates at 4.75% in January, the weaker growth outlook compared to the US raised the prospect of a softer Pound. This raised questions about the Chancellor’s Budget and UK bond yields spiked on the potential for further government borrowing. Despite the UK seeing a rise in inflation expectations following the government’s plan to raise minimum wages and employment taxes, the data showed UK inflation fell from 2.6% to 2.5% in January. As a result, both bonds and equities (company shares) performed better, with the FTSE 100 Index even reaching an all-time high as investors looked ahead to a possible interest rate cut. The Bank of England Monetary Policy Committee was expected to lower rates on February 6 amid weak economic growth, which it has since done.

Toward the end of the month, the UK Chancellor strove to change the downbeat prognosis for the UK economy by announcing plans to kick-start growth via ambitious infrastructure plans. This even included an 'AI Opportunities Action Plan' with leading tech firms committing £14bn to the project. Many will be hoping that stirring renewed optimism around an economy that is performing better than Europe, could change the tide for the UK financial market.

As a change to the data dependent narratives of recent times, the final week of the month saw a switch of focus to an announcement by a lesser-known Chinese stock called DeepSeek. This company announced the development of an AI model that reportedly dispensed with the top-of-the-range chips that US company Nvidia appeared to have a monopoly in, while being far less energy intensive too. This resulted in the price of Nvidia, one of the largest stocks in the S&P 500 Index to fall. Its market capitalisation (the total value of its shares) fell by $600 billion. While the Nvidia move helped drag the main US index lower by month end, the alternative version, S&P 500 Equal Weight Index (where all 500 companies are given the same 0.2% weighting within the index) managed to remain in positive territory. We have been cautious about what we consider to be excessive concentration risk in the S&P 500 Index, with the top companies making up a big proportion of the overall index. Concentration risk is the risk that losses may occur from having a large portion of your holdings in a particular investment, asset class or market segment. We also have concerns over ‘valuation risk’ within the S&P 500 Index, with the potential for significant losses for investors if company shares are overvalued. We are mindful that we could see a repeat of the painful outcome of overpaying for growth that drove the dot com boom and bust at the turn of this century We fear a poor outcome for expensive technology stocks fuelled by AI, while cheaper and overlooked parts of the market could offer more favourable investment returns.

While we should expect to see a divergent interest rate policy between the US and Europe (including the UK), we are conscious of the current divergence in investor perceptions of the economic and monetary backdrop. In the US, healthier company and economic data continue to support buoyant financial markets, despite interest rates looking to be more elevated for much longer than most investors initially believed would be the case. In contrast, a weaker backdrop in Europe and the UK is fuelling expectations for interest rate cuts to provide stimulation. So far financial markets have responded in a way that is positive to this. To us this looks like the US financial market is responding to good economic data in a way that is positive, whereas in Europe we have seen weak economic data being taken positively. We remain alert to the difference between these narratives and may soon see whether one of them begins to give.

Glossary

Bonds (or fixed income)

Types of investments that allow investors to loan money to governments and companies, usually in return for a regular fixed level of interest until the bond’s maturity date, plus the return of the original value of the bond at the maturity date. The price of bonds will vary, and the investment terms of bonds will also vary.

Bond yield

This is calculated by taking the level of interest paid by the bond, divided by the price of the bond, expressed as a percentage. As the price rises, the yield falls and vice versa.

Government bonds

A type of bond, issued by a government. They pay out a regular fixed amount of interest until the bond’s maturity date, when the issue value of the bond should also be repaid. In the UK they are called gilts and in the US they are referred to as treasuries.

Volatility

A measure of the frequency and severity with which the price of an investment goes up and down.

Yield (also see bond yield)

The dividend per share divided by the stock's or fund’s price per share and expressed as a percentage. The historic yield is the dividend income distributed during the past year and expressed as a percentage of the share price on a particular day.