Written by Chris Ayton
Last week was generally a weak one for equity markets with the MSCI All Country World Index down -1.2% in GBP terms. The FTSE All Share Index was down -0.7%, S&P 500 Index down -1.8% and MSCI Europe ex-UK down -0.3%, all in GBP terms. MSCI Japan was also down in local currency but strength in the Yen meant the market was still up +0.8% when translated into Sterling terms. The other bright spot over the week was Emerging Markets which rose +1.8%, boosted by continued strength in MSCI China which was up +3.7% over the week in GBP terms.
You may recall as we entered the year, the conventional wisdom was that the arrival of Donald Trump in the White House brought with it the prospect of widespread tariffs, lower US taxes, higher government spending, a stronger US Dollar and that as a result US equities, and in particular tech stocks, would continue to drive markets higher. Europe and China were expected to be particularly hard hit by Trump’s attempts to reassert US dominance in global trade. We are inherently cautious about conventional wisdom in markets as it has a terrible track record.
Despite the announcement of tariffs that will impact exports from Europe and China, these have been two of the strongest stock markets year-to-date. Despite weak economic data and relatively mediocre earnings growth, MSCI Europe ex-UK is up +10.6% so far this year, partially driven by hopes of a resolution in Ukraine. The German Dax Index is enjoying its second-best start to a year since German reunification. MSCI China is up +16.9% in 2025 so far, as supportive government policy and milder-than-expected tariffs have boosted investor sentiment. Conversely, despite a robust economy in the US, the S&P 500 Index is only up +1.5% in 2025. Despite the UK’s ongoing economic challenges, even the FTSE All-Share Index is up +5.4% year-to-date and Sterling has appreciated against the US Dollar. This reliable divergence between conventional wisdom and actual stock market returns is why we continue to avoid making bold market calls based on politics and retain significant global diversification in all of our portfolios at all times.
In domestic news, there was a positive surprise as UK retail sales grew 1.7% in January, significantly higher than the 0.3% growth expected by economists, with the data boosted by a rebound in spending at food retailers. However, it was not all good news as, despite record income tax and capital gains receipts, the UK’s public finances delivered a lower-than-expected surplus in January. It was still the largest budget surplus since 1993 but means the UK Chancellor is increasingly at risk of breaching her rules on budget responsibility. With other data releases last week showing annual wage growth accelerating to 5.9% and inflation rising to a 10-month high of 3%, the market interpreted this as meaning an increasingly gradual approach to cutting UK interest rates. As a result, UK gilts as measured by the Bloomberg Sterling Aggregate Index were down -0.6% last week. Our own bond portfolios have no dedicated UK bond exposure but remain more globally oriented, with distinct allocations to attractive pockets of opportunity like Emerging Market bonds that have performed well in 2025 so far.
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