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The first quarter of 2025 provided a mixed picture across global markets. While the quarter began positively, growing concerns around trade tariffs and economic policy shifts, particularly related to the US, led to increased volatility. Here is our investment team’s quarterly summary.
Asia and Emerging Markets:
Chinese equities staged a strong comeback thanks to tech sector recovery and AI optimism, while India and Japan lagged behind.
UK:
UK equities rallied despite ongoing economic headwinds and rising inflation, delivering their best quarterly return since 2022.
US:
Mega-cap tech faltered as AI competition from China and tariff concerns dampened sentiment across US markets.
Europe:
Strong equity returns were fuelled by fiscal stimulus, though bond market volatility spiked in response to Germany’s debt brake reform.
Alternatives:
Commodities performed well in Q1, with gold and natural gas leading the way as investors sought safe havens and inflation hedges.
Sustainability:
The debate around what counts as sustainable continued, as ESG funds faced scrutiny over defence and fossil fuel exposure.
Performance:
Portfolios experienced volatility in March, but diversification, particularly exposure to Europe and China, helped to dampen some of the negative returns.
Asia and Emerging Markets
Chinese equities performed well in Q1 in a stark reversal of fortunes for the region. This was driven in large part thanks to heavyweight tech stocks such as Alibaba and Tencent, the likes of which have suffered a torrid few years off the back of dwindling Chinese consumer demand and a regulatory crackdown that seemed destined to continue.
The arrival of DeepSeek, a Chinese-made large language model (LLM) (or AI ‘chatbot’) that was said to be made at a fraction of the cost of US counterparts – put global investors on notice and started a rally that has continued through the quarter.1 Later on, a flurry of new AI tools, coupled with the government indicating it is willing to increase co-operation with big tech firms again after several years of clamping down,2 meant the Hang Seng Index returned 15.3% 3 over the quarter. Sentiment was also buoyed slightly by the smaller-than-expected impact of initial tariffs. Emerging market equities outperformed their developed counterparts overall.
Indian equities struggled, in part due to concerns of being captured in Trump’s expected tariff rollout. However, there were signs of green shoots in the economy with improving growth outlooks and waning inflation.4 Japanese equities too struggled in the face of a strong Yen and rising interest rates.5
UK
UK equities fared well in Q1, achieving their best quarterly return since 2022. Contributing factors included corporate results exceeding expectations, particularly in the financial sector, which has benefited from low default rates among consumers. UK stocks continue to trade at significant discounts to their US counterparts, as they have broadly since the global financial crisis. This is despite strong year-on-year earnings growth.6
Economic woes did little to halt the market rally, which may also have benefitted from worsened sentiment in US stock markets compared to 2024. Despite revised (down) growth forecasts (OBR) and stubborn inflation, which still sits above the target rate of 2% (ONS), along with the imminent implementation of sweeping tax hikes and minimum wage increases outlined in October’s budget, the FTSE All Share returned 4.5% over the quarter.7 This disconnect can be attributed in part to overseas earnings but also to continued strong earnings despite perceived economic headwinds.8
Bond markets recovered somewhat from a deep selloff in January 9 which was caused by fears regarding the state of the macroeconomy and the fiscal policy direction by Labour. This selloff was further deepened by a global-scale adjustment triggered by Trump’s re-election and its possible effects on the global economy. Yields retreated slightly after reaching highs not seen since 2008,10 but they remain above year-end levels.
US
The dominance of US equities seen in the year prior could not be replicated in Q1. The announcement of DeepSeek referenced earlier sent the ‘Magnificent 7’ mega-cap tech stocks tumbling, as word spread that DeepSeek’s LLM had been produced at a fraction of the cost of US counterparts,11 despite restrictive US policy designed to suppress China’s AI push. There has been a re-evaluation in markets on the back of this about the sustainability of the US’s AI industry dominance.
On top of this, the looming threat of further trade tariffs, this time expected to reach far beyond the primary targets of Mexico, China and Canada, has sparked concerns of ever-increasing pressure on the US consumer,12 which in turn could be harmful to future earnings. Further dampening sentiment is the fact that US companies themselves can expect to be caught up in the coming salvo where production occurs overseas.13 One example of this would be Apple, who produce phones in China before shipping them to the US, leaving them liable to tariffs designed to reduce Chinese imports.
Europe
It was a very strong start to the year for European equities, with the Euro Stoxx 50 delivering 7.66%.14 Proposals for large fiscal stimulus supported equity returns in Q1, with Germany amending their constitution and scrapping their ‘debt brake’ rule, unleashing a €500 billion investment plan aimed at transforming infrastructure, defence, and growth.15 While this announcement boosted equity returns, particularly for defence stocks as Europe pushes for strategic independence, this did cause some large bouts of volatility in fixed income markets. The 10-Year Bund had its worst day since the fall of the Berlin Wall,16 and contagion spread to other Eurozone member states, seeing their borrowing costs increase. While stickier inflation may be more of a concern for other countries, the European Central Bank cut interest rates twice in the first quarter, which should help support growth as the year continues.
Alternatives
Commodities emerged as one of the best-performing sectors in Q1, with the Bloomberg commodity index returning 5.63% in Sterling terms over the period.17 Both precious and industrial metals stood out amongst the index, with gold continuing its strong performance amid ongoing periods of uncertainty. The precious metal returned nearly 20% in the first quarter, helped by its safe haven status. When looking at energy, natural gas remains the standout performer, while oil continues to be under pressure due to concerns and uncertainty around tariffs and global growth.
Sustainability
Can/should defence stocks be considered ‘sustainable’? Is there space for Oil and Gas in ESG funds? In an ever-changing world, we may begin to see opinions and exclusions associated with sustainable investing change with it. A group of nonprofits recently found that almost 5,000 European funds marketing themselves as ESG (targeting environment, social, and governance goals) had exposure to companies in the fossil fuel industry. Together, this equates to an amount of over $134 billion invested in companies that are involved in the production of oil, gas and coal.18
The UK’s financial services regulator, the FCA, have recently stated that ‘There is nothing in our rules, including those related to sustainability, that prevents investment or finance for defence companies.’19 This comment follows concerns that ESG investing and surrounding regulation is negatively impacting investment into areas seen as critical, particularly as the continent is looking to ramp up defence investment following the Russian invasion of Ukraine. The discussions around sustainable investing and its exclusions are welcomed, however, the defence industry is very difficult to support in this regard. While national security and defending against aggressors can be seen in a good light, it is difficult to track and control where weapons and munitions produced end up.
Performance
After a positive start to the year, tariff-related headlines caused problems for markets and our portfolios in the month of March. All returns made in January and February were given back in the following month, with our Income model being the only one to finish the quarter in the green, partly due to its tilt towards more income-generating, defensive stocks. Having been huge drivers of performance in 2024, US and Growth stocks dragged portfolios down in the first quarter.
The model changes we made in January have helped to dampen some of the negative returns, particularly through the equally weighted S&P index in our conventional models. Increasing our European equity exposure, and adding a dedicated line to China has helped, with both regions returning well over the quarter. It was, however, a difficult quarter, and with tariff negotiations set to unfold over Q2, it may not be the end of the volatility. We take a more global approach to our allocation and believe this will help us as the world begins to look increasingly fragmented.
1 https://www.bloomberg.com/news/articles/2025-03-07/china-tech-s-outperformance-to-mag-seven-seen-far-from-over?sref=1LVTCemH
2 https://www.bloomberg.com/news/articles/2025-03-06/china-steps-up-support-for-tech-sector-as-ai-enthusiasm-soars?sref=1LVTCemH
3 Morningstar HSI PR HKD (01/01/2025 – 31/03/2025)
4 https://privatebank.barclays.com/insights/2025/march/market-perspectives-march-2025/indian-equities-light-at-the-end-of-the-tunnel/
5 https://www.hl.co.uk/news/japan-stock-market-and-funds-review-4-things-that-could-drive-japans-market-higher
6 https://www.wrensterling.com/news/q1-2025-market-commentary/#:~:text=On%20a%20positive%20note%2C%20the,in%20well%20over%20a%20year.
7 Morningstar FSTE All Share TR GBP (01/01/2025 – 31/03/2025)
8 https://www.wrensterling.com/news/q1-2025-market-commentary/#:~:text=On%20a%20positive%20note%2C%20the,in%20well%20over%20a%20year.
9 https://www.morningstar.co.uk/uk/news/262873/are-uk-government-bond-yields-attractive-right-now.aspx
10 https://www.goldmansachs.com/insights/articles/uk-gilt-yields-are-forecast-to-decline-in-2025-despite-recent-su
11 https://www.schroders.com/en-gb/uk/institutional/insights/quarterly-market-review—q1-2025/
12 https://www.schroders.com/en-gb/uk/institutional/insights/quarterly-market-review—q1-2025/
13 https://www.investors.com/news/trump-tariffs-what-they-mean-us-economy-stock-market/
14 Morningstar Euro Stoxx 50 EUR (01/01/2025 – 31/03/2025)
15 https://www.bloomberg.com/news/articles/2025-03-05/germany-embarks-on-massive-fiscal-reform-push-what-to-watch?sref=1LVTCemH
16 https://www.bloomberg.com/news/articles/2025-03-05/german-bond-yields-spike-on-nation-s-historical-fiscal-recharge?sref=1LVTCemH
17 Morningstar Bloomberg Commodity Index GBP (01/01/2025 – 31/03/2025)
18 https://www.bloomberg.com/news/articles/2025-03-19/close-to-5-000-esg-funds-in-europe-now-hold-oil-gas-and-coal?srnd=phx-green-esg-investing&sref=1LVTCemH
19 https://www.fca.org.uk/news/statements/our-position-sustainability-regulations-and-uk-defence
