Heavy Lifting.
In our outlook piece at the start of January, we suggested that earnings would need to do the heavy lifting to support equity prices, most notably in the US, in the face of challenging valuations. That would appear to be happening: out of 179 companies reporting to date, 78% of them beat estimates. Of course, much of last year’s outstanding US equity market performance was a result of the multiple expansion (higher valuations) placed on the ‘Magnificent Seven’ (Mag 7) companies plus Broadcom Inc.
Equities had a good month although not without most indices undergoing some volatility; mostly Trump inspired. The cheapness of some non-US markets enabled US equity markets to be outshone by European equities with the Euro Stoxx 50 index up over 8% in January. Within the US equity market, the equal-weighted US S&P 500 equity index was up 3.5% ahead of the unweighted version (where the Mag 7 dominates) which was up 2.8%.
Fears of excessive borrowing to fund government spending caused UK and US government bond yields to rise (prices fell) in the first half of January before the opposite happened in the second half of the month, as relative calm returned to government bond markets.
Still Waters Run Deep
A week after the incoming President Trump’s inauguration on the 20th of January, markets were greeted by the news that a Chinese start-up had produced a cheaper, less energy-consuming, open source artificial intelligence (AI) model that uses both fewer and lower-cost semiconductor chips. DeepSeek-R1 is the latest of AI models developed from Hangzhou-based DeepSeek, founded in 2023. DeepSeek’s team is made up of graduates from China’s top universities. The latest R1 version is free to end users unlike most of the incumbents. In what has been described as a ‘Sputnik’ moment*, it was a wake-up call for semiconductor chip manufacturers like Nvidia and existing subscription-based AI models such as Open AI’s ChatGPT.
[*Sputnik moment refers to the Russian launch of Sputnik 1 whereby the Russians beat the US into space.]
Picks & Shovels
What might not be good for semiconductor chip manufacturers and incumbent providers of AI models, is potentially good news for companies and individuals seeking to benefit from the efficiencies of large-scale data processing at a lower cost. The example of the financial benefits for those who provided the picks and shovels during the gold rush springs to mind.
Carrot & Stick
Financial markets were understandably unnerved in January by the threat of swingeing tariff threats by US President Trump on near neighbours Canada and Mexico, as well as China and the EU, essentially countries with whom the US has a large trade deficit – the US imports significantly more than it exports to those countries. This has the appearance of Trump’s prior methodology that uses a sledgehammer approach to gain concessions, which then results in last minute postponements of the tariffs previously voiced.
The following chart from NS Partners illustrates the deficits the US has with the four countries/regions that are the focus of Trump’s ire as a percentage of US GDP (Gross Domestic Product -the size of a country’s economy).
Bad Breadth
In previous commentaries we referenced the narrowness of the US equity market by looking at the combined value of the seven largest US companies. In a global context versus other countries, the seven largest US companies by value outstrip the combined value of the companies of seven countries of varying sizes as measured by MSCI World Equity Index. Can that continue? Possibly, but probably too few eggs in one basket (or seven!) looking forward.
Higher and Lower
There were central bank meetings in January but they had little impact on markets. The Bank of Japan raised its rate to 0.5%, low but the highest in seventeen years. The European Central Bank lowered its rate by 0.25% to 2.75%. US Federal Reserve left rates unchanged at 4.50%. The Bank of England’s Monetary Policy Committee meets on Thursday, February 6th and has room to lower rates from 4.75%, but will it?
Inflation improvement has occurred across the key developed market economies, as the following chart from NS Partners illustrates, with only Japan rising from a low level, hence the rise in rates there.
Your Money
It was a good month for all Pier portfolios with equity markets rising and bond markets calming down in the second half of January to deliver a positive outcome. Here are the provisional performance numbers for Pier Portfolios in January. The final numbers will be on the respective factsheets published in the next few days.
Please remember that past performance does not predict future performance and it should not be the main reason for making an investment decision. The value of investments and income from them can fall as well as rise.
