Why 2025 Started Strong for Stocks And What Could Go Wrong

Global markets kicked off 2025 with solid gains, but will Trump's trade policies derail momentum? See the key trends in equities, bonds, and South African markets this month.

• Developed market equities rose 3.6%, led by European stocks (+6.9%) and a 3.0% gain in U.S. markets. However, Trump’s trade threats are a growing concern.
• A new Chinese AI startup, DeepSeek, is undercutting U.S. tech with lower prices, causing concern for big tech investors.
• The JSE gained 2.2%, with resource stocks soaring 17.9%, but Trump’s decision to withdraw aid from South Africa and the Expropriation Act have dampened sentiment.
  

Global Markets
2025 got off to a good start for investors.  Developed market equities ended the month up 3.6% in USD. US equities ended the month up 3.0%, benefitting from President Donald Trump’s “America First” policies. For now, markets are not concerned about Trump’s threats to impose tariffs on imports from China, Canada and Mexico, Russia, Columbia and the BRICS nations. However, the possibility of escalation into trade wars remains a key market risk for 2025. US markets were dragged down by the tech sector, after China released DeepSeek, an AI startup with a cost advantage, operating on less-advanced chips. While it is unlikely that DeepSeek will impact US tech earnings in the near future, DeepSeek is the China’s first step towards rivalling the US tech giants. 

Chart 1: Deepseek upsets AI market with low prices (Source: Statista)


 

European markets were the best performing equity markets in January – up 6.9% in USD. Europe’s outperformance can be attributed to positive surprises in the Q42024 earnings season. However, this strong performance came off a low base. European equities delivered -2.4% in 2024, compared to the developed markets composite return of 19.2%. Europe underperformance is becoming structural as a result of poor growth, poor fiscal positions, increasing unfunded liabilities and, more recently, political turmoil. High quality companies are increasingly moving to the US.

Chart 2: Europe has consistently underperformed global indices (Source: MSCI)


Bond yields remained under pressure in January, with 10-year Treasury yields climbing 10 basis points, as Trumps “de-globalisation” policies and tax-cuts renewed fears of inflation and increased government debt. Chart 3 below decomposes the 10-year US treasury yield into its real yield component, which compensates investors for their investment, and expected inflation, which compensates investors for the effects of inflation. Both components have increased.

Chart 3: Disaggregation of US 10-Year Treasury Yield (source: Internal)
Chart 4: US bond yields more than stocks for the first time since 2002 (Source: Reuters)


Local Markets
Local equities gained 2.2% ZAR. Resource counter were the start performers – up 17.9% on the back of a higher metal prices. Industrials stocks ended the month up 1.1% and Financials ended the month down 2.7%. Sentiment towards South Africa is once again on the decline after Trump issued an executive order to withdraw aid from South Africa in response to the Expropriation Act which came into effect in January 2025. This comes after Trump threatened to impose 100% tariffs on the BRICS nations if they were to create a rival currency to the US dollar.

The South African Reserve Bank cut interest rates by 0.25% in January – a third consecutive cut. This is in line with Global interest rate movements.

Chart 5: SA interest rate vs US interest rates (Source: Trading Economics)

 
Chief Investment Officer, Duane Gilbert’s Commentary
Our market outlook for 2025 remains bullish. Fed rate cuts amid a non-recessionary environment is an unambiguously bullish configuration for equities. The US remains our destination of choice – growth stocks and small caps in particular. Growth rates in Europe, China and Japan continue to disappoint.

Emerging markets, South Africa in particular, have been the flavour of the day for the past few months but this trend is reversing. Global bonds are pricing in higher growth and inflation; however, informal inflation measures and a strong dollar suggest that inflation could surprise to the downside in the coming months.

We expect the rand to remain under pressure as our government continues to accumulate debt.  Furthermore, the dollar should remain strong with Trumps US focused policies and superior US Growth. South African equities are particularly cheap but vulnerable to global sentiment. One needs to carefully pick companies that can grow their earnings in a low growth environment. We maintain a low exposure to South African government bonds. We prefer exposure to high-quality secured credit. We maintain a modest cash position, which gives us the dry powder we need to take advantage of bargains that may arise from any market sell-off. 

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