Has January 2025 set the tone for the year ahead?
It seems we can expect increased volatility and ever changing US policy following Trump’s inauguration
Introduction
President Trump was formally inaugurated on 20 January but was largely moving markets well before that. Threats of tariffs on Canadian and Mexican imports has been a key theme as Trump looks to tackle immigration and drugs through tariff implementation. Although there is an argument that the US doesn’t necessarily need materials from Canada and Mexico there are strong supply chains around these imports which will be disrupted.
While inflation readings have largely been in line or better than expected the Fed kept rates on hold which is exactly what the market expected. Overall, the meeting was a bit of a non-event although the Committee’s statement did appear to lean slightly hawkish. Traders are now only pricing in a single 25 bps cut this year.
Locally the MPC cut rates by 25bps which was also largely expected although two of the members voted to hold. Expectations are mixed although it looks like there could be a further 50-75bps of cut during the course of the year which will help drive some growth locally. Many commentators are noting the fragility of the GNU and that the honeymoon phase could be over. President Ramaphosa made a statement saying the GNU is still fully committed so we will have to see how this plays out over the coming months. To date the local market remains muted as investors are now looking for change implementation as opposed to just discussions.
The ECB also cut rates by 25bps and believe the 2% inflation target is well within reach although there is more of a growth concern in the region. There is also significant political noise coming out of France and Germany which is adding to uncertainty in the region. This puts them on the back foot as they face likely negotiations with the US on trade.
Earnings season has also ramped up with good results being rewarded whereas misses are being severely punished. The market AI theme was unsettled by the release of Deep Seek which is an AI model out of China supposedly built far quicker and at a much lower cost than the likes of ChatGPT. After an initial negative reaction markets have largely recovered although there is ongoing debate on the cost of AI investment going forward and a lot of the information around Deep Seek still needs to be validated.
There is no doubt if these trends continue we are in for a volatile year where calm heads need to prevail. Volatility will also create opportunities so we are watching for these and positioning portfolios accordingly.
Macro Environment
The main focus in January has been geopolitical movements as Trump officially took power and immediately started implementing changes with sweeping Executive Orders and a number of ‘tweets’ or statements about Tariffs from China through to Canada and Mexico. He is also set on taking over Greenland from Denmark as he believes its location is critical to US defense and it needs to be protected from Chinese influence. This ‘shooting from the hip’ is similar to in his first term and will be something markets will need to adapt to again going forward.
The other focus in January was once again on rates as central banks next move came into focus. The FOMC kept rates on hold which was expected by markets while most other developed nations saw a cut of 25bps. The rate differential is helping boost the USD as it looks like the FOMC rate cutting path will be slower than other regions as inflation is proving a little sticky. The US labour markets remains strong and underlying growth is still good so there is no cutting urgency and the Fed can remain data dependent. The Fed’s caution relates to a slowdown in disinflation as per the chart below, the initial progress on CPI was very effective although in recent months there is more of a sideways trend. The Fed will likely continue to monitor this and take a more cautious approach with rate cuts going forward.
Asset Allocation
Our local asset allocation remains unchanged at the start of 2025. We still prefer our bias to a Rand hedge portfolio based on the uncertainty in SA. Our offshore asset allocation also remains unchanged as volatility picks up we are actively managing the risk and reward in portfolios. We have maintained the existing bond allocation. In addition, we have been adding to our Structured Notes position as an effective way to maintain equity exposure while providing some hedged protection with the US market looking a little stretched.
Market Performance
Markets started off the year with a positive month with all three of the indices ending in the green in January. As per the below chart the YTD performance for the S&P500 is up 2.70% (in USD) and the MSCI World is up 3.40% (in USD). Locally the JSE had a strong end to January and currently has a YTD performance of 2.21% (in ZAR).
Bonds
We saw significant moves in the long end of the US Treasury curve as the market started searching for term premium and demanded compensation for the uncertainty in the fixed income market. This largely flowed through to other areas of Fixed Income. The 30 year nearly touched 5% which was last seen in the height of bond volatility in 2023. As outlined by the chart below we have seen significant moves in the 30-year highlighting the bond market uncertainty over the past two months and how rate expectations continue to shift dramatically.
Equities
January has seen a number of big names reporting with four of the Magnificent 7 releasing results. Meta had good results and was rewarded by the market while Apple presented a more optimistic forecast that the market liked. Microsoft saw some pressure in their cloud business as data centre growth is proving a constraint. Although their results were good the market didn’t like this aspect and they saw a small sell off. Tesla was the anomaly as they produced poor results yet the stock went up off the basis of Musk’s rhetoric about ‘fully-self-driving’ (FSD) and robotaxis being around the corner. Generally companies that have beaten expectations have been rewarded while those that have missed have been severely punished by the market due to lofty valuations.
To date for Q4 2024 77% of the S&P500 companies have reported a positive EPS surprise and the year over year growth rate is 13.2%. At the end of 2024 the estimate for earnings growth was sitting at 11.8% so there have been positive revisions and it has been a good season so far. The S&P500 forward valuation is still stretched at 22.0 versus the 5 year average of 19.8 and the 10 year average of 18.2. However, should this strong earnings momentum continue the valuation will be supported and as the chart below reflects the earnings line will catch up to price.
Conclusion
There is no doubt President Trump will implement policies that are good for America and good for growth. However, within that we can expect a lot of noise that will cause all markets (currency, fixed income and equities) to see an increase in volatility. While we believe there will be good opportunities for portfolios this year we also need to manage the risk as volatility will exacerbate the downside. The Team is actively staying on top of the various moving parts and we are available to clients to unpack positioning and thoughts for this first quarter.