Investing & Performance | 13 February 2025

Monthly update: global equities rally while europe sees renewed optimism

Markets maintained positive momentum in January despite a competitive Chinese AI model stirring markets.

1. WHAT’S HAPPENING IN FINANCIAL MARKETS?

Global markets performed well in January despite volatility at the end of the month. Much of the momentum that carried stock markets to all-time highs throughout 2024 continued into the new year.

However, this rally was brought to a halt towards the end of the month as a competitor artificial intelligence (AI) model launched in China.

Global markets suffered a brief sell-off following the launch of a cost-effective chatbot, DeepSeek – an alternative to the widely used ChatGPT developed by OpenAI. The US technology and energy sectors were particularly impacted as investors worried that the US could lose its stronghold as a leader of AI development.

Elsewhere, after a challenging 2024, Europe is showing signs of recovery. European stocks reached a record high in January, bolstered by improving sentiment towards the region and a series of robust corporate earnings releases.

Global bond yields also surged (prices fell), before falling back. Over the past couple of months, yields have been rising, primarily driven by US Treasuries as the country’s economic strength and expectations of fewer interest rate cuts pushed yields higher.

 

Japan bucks trend on interest rates

In contrast to other major central banks, the Bank of Japan raised interest rates once again to combat rising price pressures.

The US Federal Reserve, facing a robust economy and rising inflation concerns, opted for a more cautious approach, leaving rates steady for now. And the European Central Bank has implemented another 0.25% rate cut, with more expected throughout the year.

Fahad Kamal, Chief Investment Officer at Coutts, says: "Overall, the broader environment for growth and inflation remains sound. Notably, market leadership is broadening, with Europe outperforming the US and noticeable shifts in sector performance away from technology’s dominance – both healthy signs."

 

“Despite volatility caused by the launch of Chinese AI competitor DeepSeek, the broader environment for growth and inflation remains sound.” 

 

Fahal Kamal, Chief Investment Officer, Coutts

 

2. WHAT DOES THIS MEAN FOR YOUR INVESTMENTS?

We maintain an overweight position in equities, primarily through our allocation to the US, and have recently added a position in Japanese equities. Additionally, we are underweight developed government bonds. This helped our investments withstand the recent fall in bond prices. 

The recent market volatility in the tech sector, while understandably making some feel uncomfortable, is actually a relatively normal part of equity market investing. Overall, looking at the longer term, we still see continued resilience in the US economy and solid company earnings.

There are potential risks from, among other things, inflation – which has been stickier than expected – and US government policies, particularly trade tariffs. But we continue to monitor these developments and stand ready to make changes if required.

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.

3. THIS MONTH’S SPOTLIGHT: europe's growing sentiment lifts stocks

European equities have had a strong start to the year, outperforming their US counterparts in January. It is a significant turnaround from 2024 when the market struggled amid economic uncertainty and weaker investor confidence. This rebound is largely down to improved market sentiment, as negative expectations about the region have eased.

Last year, Europe faced significant challenges such as high inflation, rising interest rates and economic slowdowns in key markets like Germany. However, investors have started to re-evaluate the region as many believe these pressures may be stabilising or becoming more manageable.

Also, the European Central Bank is expected to make four or five additional interest rate cuts this year. This should help create a more supportive environment for European companies by encouraging economic growth and improving business conditions.

Fahad says: "There's been a lot of negativity around Europe, but such times can leave room for even small improvements to have a large, positive impact on markets.”

If you are a Coutts client and would like to discuss any of this in more detail, please contact your private banker.

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