January 2025 Update
Making The News
- Tech Mega-Cap Crack
After a wobble in December, Developed markets returned to form with a strong start to the year (MSCI world +3.6% MoM). Instead of markets being led by mega-cap tech shares, January returns were lifted by European shares (EuroStoxx 50 ,+8% MoM), which significantly outperformed US shares (S&P 500 +2.8% MoM). Partially driving the relative underperformance of the US mega tech stocks was the release of “Deep Seek”, an AI model that competes with the performance of Open AI’s Chat GPT at a fraction of the cost without access to Nvidia’s cutting edge chips. As a result Nvidia’s share price plummeted to -11% MoM, as investors questioned the sustainability of the chipmaker’s profits.
- Trump 2.0
Trump’s inauguration was quickly followed by him signing a number of executive orders, with CNN reporting that the new administration had issued 66 executive orders by the end of January. At the start of January, Investors began pricing in expectations of inflationary policy from the new administration, pushing the US 10-year borrowing rate to 4.8%. However, the latest inflation print revealed that inflation was falling faster than expected which guided the borrowing rate back to 4.5% by the end of the month. Despite the lower-than-expected inflation print, the FED decided to hold rates steady and maintain a conservative approach.
- European equity rotation
According to Bank of America, January marked the most significant rotation into UK equities from US stocks over the last 10 years, with investors allocating to European defensive stocks. Against this backdrop, Germany’s DAX climbed 9.2% MoM and the FTSE 100 index (+6.1% MoM) ended the month at a record high. The European Central Bank decided to cut rates in January for the 5th time, reducing the benchmark rate to 2.75% However, sticky inflation remains prevalent, evidenced by the Eurozone headline inflation rising for the third consecutive month and increasing to 2.4% YoY.
- A split SARB cuts rates
As expected, the South African Reserve Bank has decided to lower the repo rate by a further 25 bps to 7.5% at its meeting on the 30th of January, guiding the prime lending rate to +11.0%. Headline inflation averaged +4.4% over 2024, falling below the SARBs target range midpoint of +4.5%. Since the first rate cut in November, the Rand has weakened by c. 1.6% to the dollar while fuel prices and the cost of white maize have increased by 8% and 10%, respectively. Based on the increasing inflationary headwinds the SARB faces, it is unsurprising that 2 of the 6 MPC members voted to hold rates steady at 7.75% during the latest meeting.
