Funds and sectors Q1 2025 update

The first quarter of 2025 was shaped in large part by President Trump’s reprise as US President with the new administration sending ripples around the world both geopolitically and in markets.

Initially it created a wave of optimism as investors viewed an agenda of tax cuts, deregulation, and championing domestic businesses as positive. However, the more mercantilist policies of tariffs and the widespread reshoring of industrial activity became uppermost in investors’ minds. Increasingly, it became evident that the Trump is less concerned about the level of the stock market than he is his wider agenda.

Uncertainty abounds

It is often said that market abhor uncertainty, and suddenly we now seem to have that in spades with erratic policy decisions around trade and other matters. As well as the disruption tariffs could cause to various industries and individual companies, who are increasingly minded to pause hiring and investment, they are widely thought to be inflationary. This brought renewed pressure to bond markets as interest rate cuts could be fewer and shallower. However, if the consequences for growth turn out to be so dire that it puts the US economy on a recessionary path, bonds could benefit as interest rates are cut more quickly.

With this backdrop US markets put in a subdued performance as weakness in large technology stocks continued. The broad S&P 500 index fell into correction territory – a fall of 10% or more. Major US technology shares were also volatile surrounding the news that Chinese group DeepSeek had developed a powerful artificial intelligence (AI) system cheaper than those developed in the West.

After AI companies saw their valuations swell in 2024 on optimism over prospects for the nascent technology, concerns mounted that businesses were overspending. However, major companies such as Amazon, Facebook-owner Meta and Google-owner Alphabet remain committed to investing in AI infrastructure.

US and global funds with a large US component therefore struggled over the period alongside the specialist technology vehicles. US smaller companies were also a poor area having initially rallied as Trump’s America-first policies were thought to largely benefit them and the notion of tariffs were dismissed as mostly a negotiating tactic. However, it has become increasingly clear that Trump is willing to endure some economic pain in re-aligning the economy.

Market rotation

While the market pendulum swung against US markets – following a long period of dominance – it moved in favour of other areas, proving that investors should never abandon geographic diversification. European equities were in demand as a shift in international relations and increased defence spending is poised to boost demand for domestic businesses. European funds benefited the most from this but some global funds investing a significant portion of their portfolio on the continent for reasons of income or value enjoyed a lift too.

There was also a swing in emerging markets where Indian shares endured a sell off, but Chinese equities rallied. Chinese Internet share prices enjoyed a boost on the back of the news of highly cost-efficient AI advances in China while President Xi signalled a more accommodative stance towards the tech industry. A positive backdrop was further cemented by stimulus and economic support aimed at boosting consumption, though unsteady relations with the US over trade still cast a shadow. India’s downturn is less easy to explain but as an expensively rated higher-growth market it has perhaps been a victim of investors’ renewed interest in China and cheaper areas more generally.

In the UK, the FTSE 100 hit another new all-time high at the end of February, boosted by some solid earnings reports, a stronger dollar and takeover talk. The UK’s mix of resources, and defence stocks proved resilient. Yet for UK smaller companies and more domestically exposed businesses it was a much weaker picture with the economy looking increasingly vulnerable in the face of additional National Insurance costs loaded onto businesses and still-elevated borrowing costs.

Finally in commodities, the notable event was gold conquering the key $3,000 an ounce level amid geopolitical uncertainty and the threat of stubborn global inflation. Central banks in the emerging world remain a source of demand as they look to bolster their reserves with a hard asset that cannot be debased. Although they have lagged the bullion price as it has forged deeper into bull market territory gold equities have been a star performer so far this year and specialist funds investing in them among the top performers.

Top performing funds and sectors