Following an excellent 2024, where the MSCI World Index rose by 17%, 2025 got off to a solid start with 3.16% growth despite concerns over potential volatility.
US stocks led the way again, gaining over 20%, mainly from mega cap tech stocks and the heightened interest in AI. An early drop was seen by most as a buying opportunity. Therefore, there was no sustained decline following the initial worries over the Chinese AI chatbot DeepSeek potentially upending the AI rally of last year. The market now appears to consider a weekly 2% drop as severe enough to “buy the dip” when it does not represent a large drop in historical terms. Could this be a new normal?
During last year’s election cycle, Donald Trump appeared on “The Joe Rogan Experience” podcast and described ‘tariff’ as his favourite word in the dictionary. It is no surprise, then, that with his inauguration taking place on 21st January, that word cast a shadow over the market outlook for 2025. Trump sees tariffs as a foreign policy weapon to get his way and believes that increasing them will stop America from being treated unfairly on trade, as well as bring in additional revenue to the federal government. Most economists assert that increasing tariffs will actually increase costs for Americans and, therefore, cause inflation to remain high or even rise further.
Trump signed a raft of executive orders on his first day in office, but there were no tariff announcements among them, despite it being one of his day-one promises. Trump has set his sights on Canada, Mexico, the EU, and China. Everyone remembers the trade tensions between the US and China during Trump’s last term, but his position this time around is less clear. He wants to target China with blanket tariffs but has also opened the door to talks with Xi Jinping and has reversed his stance on banning TikTok in the US. But it is also true that it is no longer just Trumpian to target China from the White House – in its final days in office, the Biden administration targeted China further, adding CATL, the world’s biggest maker of electric car batteries, and Tencent to a list of companies that it alleges may have links to the Chinese military. Sanctions and tariffs did not disappear under Biden, so investors are carefully watching how US-China relations unfold over the coming months and years.
Expectations of raised tariffs led to a surge in Chinese exports in the fourth quarter, resulting in China’s economy growing 5% in 2024. China’s annual trade surplus with the rest of the world also increased by 21% to $992 billion. One-third of this trade surplus is with the US, highlighting how, despite the tensions of the last several years, the two countries remain crucial trading partners.
The biggest news out of China in January was the start-up company DeepSeek catching everyone’s attention with its Large Language Model AI, using open-source software and existing technology to create its LLM. The cost of building this was just $5.6 million, which is tiny compared to the $180 billion spent by the three cloud-computing giants and Meta in the US.
Some have argued that part of the reason for DeepSeek’s success was the continued export restrictions of Western technology to China, which may be forcing Chinese companies to innovate more and find cheaper ways to keep pace with the advantages the West has in semiconductor capacity. Whilst DeepSeek has been around for a few months, when it finally caught the market’s attention, it rocked some of the big AI names, with Nvidia, last year’s stock market darling, losing a market record $600 billion in value in just one day.
During the first weekend of February, the US imposed a 25% tariff on imports from Canada and Mexico and an additional 10% tariff from China, effective 4th February. Canada retaliated with a 25% tariff on targeted American goods, including alcohol, and Canadian people booed the US national anthem at sporting events in response to Trump suggesting their country become the 51st state of the USA. Some of these tariffs were suspended as countries announced measures, which they were bringing in anyway, that appeased Trump and allowed time for trade talks. We will cover this fallout in the next market update for February.
2025 will remain a year where interest rates are sharply in focus as markets wait for them to come down. Inflation will be a key metric for central banks, which is why the impact of tariffs will play a part in decision making.
The Fed in the US held rates steady between 4.25% and 4.5%, with US inflation steadily rising since September and a strong labour market giving the bank pause to cut further.
The ECB made a further 25 basis point cut to bring rates down to 2.75% after the eurozone saw its economy unexpectedly have zero growth in Q4 compared to Q3, and Germany had a 0.2% contraction in GDP.
The Bank of Japan raised rates again for the third time since ending its zero rate policy in March, although this was the first such rise since July. The base rate on the Japanese yen now stands at 0.5%, its highest for 17 years. In a good sign for an economy that has struggled with deflation for decades, the BoJ also raised its core inflation outlook.
The Chinese central bank left rates unchanged for a third month in a row as it looks to stabilise the yuan, which has weakened and could do so further if the US increases tariffs. The authorities in China continue to try and stimulate the economy, although markets have fallen 15% since the spike in October from the wave of stimulus measures announced.
Indonesia formally joined the BRICS group.
Argentina’s annual inflation fell further in December to 117.8%, following its peak in April of 289%.
Oil prices rose to their highest since August after further US sanctions on Russian oil producers Gazprom Neft and Surgutneftegas, traders, and government officials, including 183 ships that deliver Russian fuel. The sanctions increased concerns over supply disruption.
The owner of Damac Properties in the UAE, Hussain Sajwani, pledged $20 billion to the construction of new data centres in the US.
LVMH overtook Novo Nordisk as the most valuable company in European stock markets after the Medicare programme in the US added the healthcare companies’ diabetes and weight-loss treatments to a list of drugs subject to price negotiation.
India’s coalition government announced its first full-year budget, raising the tax exemption limit for earnings to 1.2 million rupees (approximately $13,800).
