Global equity markets diverged sharply in Q1 2025 as regional dynamics and policy responses shaped performance. The US market struggled, weighed down by renewed trade tensions, inflation concerns and the unwinding of big tech dominance. The S&P 500 posted its worst quarterly return in three years, while investor sentiment shifted toward more traditional sectors. In contrast, European equities delivered strong returns, buoyed by a structural shift in fiscal policy towards higher defence spending and relative economic resilience. UK equities followed suit, supported by large-cap banks and defence firms. South African markets stood out globally, fuelled by a powerful rally in precious metals and a robust resources sector. Meanwhile, Chinese equities rebounded on the back of economic stabilisation, stimulus measures and AI-driven tech optimism, despite persistent structural concerns. Emerging markets broadly outperformed their developed counterparts, with positive momentum driven by policy tailwinds, commodity strength and improved sentiment in key regions such as China, Brazil and Central Europe.

Source: Bloomberg as at 31 March 2025.

Trump, tariffs, and trade tensions—the three Ts that pretty much sum up what drove US markets this quarter, and not always in the best way.

Equities struggled under the weight of political unpredictability and economic anxiety, with the S&P 500 down 4.4% - its worst quarterly performance in three years. The straw that broke the camel’s back in an already volatile quarter was President Trump’s announcement of sweeping new tariffs — the so-called ‘Liberation Day’ duties — which added to an already long list of protectionist measures and rattled markets. With cars, pharmaceuticals and other imports in the firing line, fears of a global trade war and the inflationary fallout mounted. The US Federal Reserve, meanwhile, kept rates on hold at 4.5%, offering little comfort to investors already spooked by economic data. A hotter-than-expected February inflation reading and fresh weakness in US consumer confidence data capped off a turbulent three months.

Not all the market action was driven by macro noise. After a blockbuster run, the dominance of the so-called Magnificent 7 began to unravel, with the Nasdaq Composite sliding 10.3% over the quarter. This followed the release of Chinese firm DeepSeek’s new AI model, which added to the pressure, sparking questions over the sustainability of US big tech valuations. Investors began rotating out of the mega-cap growth names that had led the market since late 2022, shifting toward a broader mix of sectors and styles. Tesla was the standout laggard—dragged down by weak delivery expectations and CEO Elon Musk’s increasingly polarising political forays—but industry leaders like Nvidia and Alphabet also saw double-digit declines.

It was not all bad news though: Old-economy names in healthcare, consumer and defence found favour, with CVS Health, Philip Morris, Vertex Pharmaceuticals and GE Aerospace posting strong gains. Berkshire Hathaway also rose close to record highs on the back of a rebound in earnings.

Tariff-exposed sectors like autos and industrials were hit hardest, but the unease rippled more broadly as confidence indicators slipped and questions around policy direction mounted. The initial post-election optimism has given way to growing concern—not just about what is being announced but also about how predictable the path ahead may prove to be.

South African equities delivered a standout performance in Q1 2025, with the All Share Index gaining 9.0%, outpacing the MSCI World (-1.8%) and MSCI Emerging Markets (+2.9%) in US dollar terms. The rally was underpinned by a significantly stronger resources sector, fuelled by a surge in precious metal prices. Gold was the standout performer, as investors sought safe-haven assets amid growing geopolitical uncertainty and the implementation of global tariffs by US President Trump. China’s latest stimulus measures added further support for commodity prices. Domestically, the South African Reserve Bank held the repo rate at 7.50% in March, maintaining a cautious stance after cutting rates in January. Political risks resurfaced following President Trump’s announcement to freeze all US aid to South Africa over unverified land confiscation claims, while fiscal uncertainty intensified with the postponement of the national budget speech due to coalition tensions over a proposed VAT hike. Despite weak manufacturing and mining output, GDP increased by 0.6% in Q4 2024, allowing the economy to narrowly avoid a technical recession. In other news, inflation remained steady at 3.2% in February, while retail sales grew by 7% year-on-year in January, up from 3.2% a month earlier.

Source: Bloomberg as at 31 March 2025.

Chinese equities had a volatile but positive first quarter in 2025, outperforming US and global indices due to shifting sentiment around geopolitical developments, economic recovery signals, and domestic policy support.

January began cautiously with market jitters from weak manufacturing data and renewed trade rhetoric from the Trump administration, including adding more Chinese firms to the trade restriction list. However, sentiment improved mid-month with strong industrial production and retail sales data, and optimism grew following a government-backed trade-in programme to boost consumer demand. Markets were further lifted by the surprise release of China’s low-cost AI model, DeepSeek, which narrowed the tech gap with the US and sparked a tech-driven rally.

February continued this momentum, with the MSCI All China Index surging 8.1% in US dollar terms. Manufacturing data showed recovery, with the official PMI climbing above the expansionary 50 mark. Despite new US tariffs on Chinese imports, markets focused on encouraging signals from Beijing, particularly a symposium led by President Xi with key tech business leaders, including Jack Ma, suggesting a thawing of regulatory pressure on the private sector.

March saw more modest gains as markets digested economic data pointing to stabilisation. Both manufacturing and services PMIs improved, and policy signals from the National People’s Congress reaffirmed a 5% GDP growth target and modest fiscal support. However, structural challenges, especially in real estate, and revived global trade tensions, including new tariffs on EVs and solar products from the US and EU, weighed on investor confidence. Beijing announced plans to boost consumption, including promoting wage growth, subsidies for childcare, and unlocking earnings potential for homeowners, which were well received by the market.

Emerging market equities delivered a cautious but positive return of +3.0% in US dollar terms amid a challenging global backdrop defined by escalating trade tensions, rising stagflation concerns, and heightened geopolitical risk. EMs broadly outperformed developed markets, particularly the US, as investors rotated toward relatively insulated economies and risk assets with commodity and policy tailwinds. China remained pivotal. Despite early volatility from renewed tariff threats and a subdued start to the year, the market found support from ongoing fiscal and monetary easing and a renewed strategic pivot toward AI and tech development. Investor sentiment was further bolstered by high-level engagement between the government and major tech leaders, suggesting policy support would be enduring. India’s equity market, while down in January and February due to foreign outflows and rupee weakness, reversed course sharply in March, driven by a bounce in consumption, a partial recovery in the rupee and better-than-expected earnings in consumer and financials—but this was not enough to catapult the bourse to a positive Q1 innings. South Korea experienced acute volatility amid a tragic aviation incident and political instability, although earnings surprises offered some relief, which helped close the quarter on solid ground.

Elsewhere, Latin America enjoyed a steady recovery in Q1, particularly in March, driven by resurgent commodity prices and improving investor sentiment in Brazil. Central and East European markets were standout performers in the EM space, buoyed by broad-based European equity strength and dovish domestic policy stances.

European equities outperformed global peers thanks to a huge fiscal regime shift towards higher defence spending. The first quarter marked the biggest quarterly performance gap between the Stoxx 600 and the S&P 500 in a decade. Against a backdrop of more stagnant economic data, the European Central Bank cut rates in January and March by 25 basis points, with a further 60bps of cuts priced by markets through the end of the year. Banks were particularly strong, as were defence stocks, given the anticipated uptick in domestic production. On the political front, the German election took place in the latter part of the month. The result was broadly in line with opinion polls beforehand, and the conservative CDU/CSU bloc opened talks with the centre-left SPD to form a new government.

UK equities also rose over the quarter, with large cap banks and defence names prominent. Sentiment towards UK small and mid-sized companies was weaker, with this largely down to ongoing concerns around the domestic economic outlook, hampering consumer-facing sectors. In response to the growing European security threat, Prime Minister Starmer announced an increase in defence spending to 2.5% of GDP by 2027, raising concerns about the UK’s fiscal outlook. UK Chancellor Rachel Reeves sought to alleviate this by announcing new spending cuts to comply with the government’s fiscal rules. On the monetary front, the Bank of England cut rates by 25bps in February.

US Treasury market yields ended a volatile quarter lower, with the 10-year yield falling 36bps to 4.2%. The main drivers were a weakening of global investor sentiment and a more uncertain outlook for the US economy; by quarter end, the market was pricing in c.75bps of interest rate cuts for 2025 – some 30bps higher than forecasts at the start of the quarter. The US Federal Reserve kept rates unchanged, with the ‘dot plots’ continuing to forecast two rate cuts in 2025. On the inflation front, there was a sharp rise in forecasts in March, with the University of Michigan survey showing the highest long-term outlook in over three decades. Global trade tensions escalated, with new tariffs imposed on China, Mexico, and Canada.

Elevated volatility was a key characteristic of European bond markets in the first quarter. Despite the European Central Bank cutting rates by 25bps in January and in March, bond yields rose significantly across the continent in response to a shift in fiscal dynamics, reflecting a rise in spending on defence. The spike in bond yields was most prominent in Germany; government moves to loosen fiscal rules drove up yields in all but the shortest-dated bunds, with the 10-year yield experiencing its largest daily rise since 1990. 

In the UK, the Bank of England (BoE) cut its policy rate to 4.5% in February and held rates steady in March, citing a ’gradual and careful’ policy approach. Inflation remained a concern, with headline CPI peaking at 3% in January before easing to 2.8% in February, though services inflation stayed elevated. As at the end of March, the market is pricing in around 50bps of cuts by the end of 2025, down from the c.60bps expected at the start of the year. Lower than expected gilt issuance for the upcoming fiscal year helped to alleviate concerns around the fiscal outlook somewhat. Overall, the risk-off tone in markets and dovish messaging from the BoE supported short-dated gilts, but longer-dated bond yields rose.

Japanese bond yields trended higher over the quarter. The Bank of Japan (BoJ) hiked rates in January to 0.5%, while persistent above-target inflation, encouraging initial results from this year’s wage negotiations, and somewhat hawkish BoJ comments fuelled expectations of another rate hike later in the year. Yields peaked mid-quarter but stabilised in March along with other bond markets as US policy-induced growth concerns intensified.

Source: Bloomberg, as at 31 March 2025.

Global credit markets posted positive total returns, although there was significant dispersion across different areas of the market. In the US, investment-grade bonds saw their spreads widen, however, the fall in US Treasury yields boosted bond prices. In the US high-yield market, spreads ended the period wider, given the weaker US growth outlook, but the fall in Treasury yields offset this. Floating-rate assets (leveraged loans and CLOs) in the US performed well; despite spreads widening and risk-free rates falling (which lowers the floating coupon), total returns were positive, thanks to high levels of income (carry). In Europe, although investment-grade bond spreads tightened somewhat, the rise in sovereign bond yields led to a more muted overall total return. High-yield bond returns were also subdued in Europe, given credit-spread widening. Given the rise in European rates, floating assets performed well, led by CLOs and leveraged loans.

Despite a volatile start to the year in global financial markets, the emerging market (EM) fixed income asset class delivered positive returns over the quarter. Uncertainty around the timing and impact of trade tariffs, coupled with a fall in US Treasury yields, resulted in the US dollar weakening - this supported EM currencies.

The local currency debt market (JP Morgan GBI-EM) gained 4.3%, with local rate and currency-market moves both contributing to returns. EM currency (FX) performance was driven by Latin American currencies – notably the Brazilian real, which benefited from further interest rate hikes. In contrast, rate cuts continued in Mexico and this – together with a dovish central bank – helped the country’s bond market. Elsewhere, Turkey’s local bonds underperformed as a higher-than-expected inflation print added uncertainty around the central bank’s rate cutting cycle; political unrest led to further downward pressure on assets.

The EM hard currency sovereign debt index (JP Morgan EMBI) delivered a 2.2% gain. This was driven by investment-grade bonds, although high-yield markets also delivered positive returns. Distressed markets such as Venezuela and Lebanon were among the top performers, with Lebanon moving closer to an IMF deal. Hard currency bonds in Ecuador were notably weaker over the quarter after the opposition candidate performed better than expected in the first round of the presidential elections, increasing uncertainty over the fiscal outlook.

The EM corporate debt market (JP Morgan CEMBI) gained 2.4% over the quarter, helped by the US Treasury market rally. However, a widening of credit spreads in reflection of weaker investor sentiment had a dampening effect. Investment-grade issuers outperformed high-yield market segments, given the higher sensitivity to interest rates of the former. Issuers in Ukraine were the top performers in the index, with companies showing resilience amid the ongoing conflict. Turkish bonds lagged, but still delivered positive returns.

Source: Bloomberg as at 31 March 2025.

Oil was little changed in March, with the cost of a barrel of Brent crude rising less than 1% to about US$75. However, prices fluctuated, declining early in the month after the OPEC+ group of oil-producing countries unexpectedly said they would implement a plan to increase oil production from April. They recovered later in March partly as the prospect of new US sanctions on Iran, and potentially on Russia, threatened to squeeze supply. It was a stronger month for some industrial metals, with the price of copper rising to a new record high as the market began to anticipate that proposed tariffs on the commodity could be implemented sooner than expected, prompting buyers to accelerate their purchase plans. However, iron ore and aluminium both declined. Among precious metals, geopolitical uncertainty, inflationary concerns and strong central-bank buying continued to support gold in March, which touched a new record of more than US$3,000 per Troy ounce, a rise of about 8% over the month. The shares of gold-producing companies fared even better, with the NYSE Arca Gold Miners Index rising about 15%. The picture was mixed for agricultural commodities, with wheat declining partly on the prospect that a tentative ceasefire in the Black Sea between Russia and Ukraine could see exports from both countries rise. The risk that retaliatory tariffs could crimp demand for US wheat also weighed on prices.