2025: Q1 Macro Review

Macro Review – Q1 CY 2025

Global Markets

Q1 2025 saw sharp divergence in global equities. US markets faltered due to trade tensions, inflation worries, and tech sector shifts, posting their worst quarter in three years as investors favored traditional sectors. Conversely, European and UK equities thrived, supported by increased defense spending and economic stability. South Africa led globally on precious metals and resources. China rebounded with stabilization, stimulus, and AI optimism, despite structural issues. Overall, emerging markets outperformed developed markets, boosted by policy, commodities, and improved sentiment in regions like China, Brazil, and Central Europe.

United States

After two consecutive years of robust gains exceeding 20%, the stock market experienced a downturn in the first quarter. The S&P 500 initially surged to a new all-time high in mid-February, but this momentum reversed later primarily driven by President Trump’s tariffs and trade policies, creating significant political and economic uncertainty. This resulted in the S&P 500’s worst quarterly decline in three years (4.6%) as new tariffs fueled trade war and inflation fears.

The ‘Magnificent 7’s’ leadership faltered, with the Nasdaq dropping 10.4% following a Chinese firm DeepSeek’s new AI model release that challenged US tech valuations, prompting a rotation to other sectors. Tesla saw significant losses, while even Nvidia and Alphabet declined. Auto and industrial sectors most exposed to tariffs were hit hard, but broader market sentiment soured due to policy uncertainty. The initial post-election optimism has faded, replaced by growing concerns about the direction and predictability of future policies. In contrast, traditional sectors like healthcare, consumer staples, and defense performed well. In 2025, market leadership so far has changed from Magnificent 7’s, serving as a reminder to investors about the importance of diversification.

Nine of eleven S&P 500 sectors outperformed the index (seven with gains, two flat), a stark contrast to last year’s narrow leadership. This year, former top performers Technology and Consumer Discretionary (most exposed to the Magnificent 7) are now the worst, mirroring the S&P 500’s decline. Conversely, 2024’s laggards are now leading, with the S&P 500 down -4.6% while the average stock within it is down -1%.

The Federal Reserve held rates steady amidst worrying inflation and consumer confidence data. In March, the Fed cut its US growth forecast for 2025 to 1.7% from 2.1%. The Fed also lifted its inflation outlook to 2.7% from 2.5%.

Inflation eased in March, according to the CPI report. Core CPI rose a lower-than-expected 0.1% MoM (2.8% YoY, the lowest since 2021), while Headline CPI increased by 0.1% MoM (2.6% YoY). This slowing trend seems linked to declining energy prices and a moderation in the growth of shelter and other service costs.

The 10-Year Treasury yield finished the quarter at 4.21%, down approximately 36 basis points (bps). The main drivers were a weakening of global investor sentiment and a more uncertain outlook for the US economy. This decrease drove a +2.8% return for the Bloomberg US Aggregate Bond index (Agg), a benchmark for intermediate-term investment-grade bonds.

Forward View: With the expectation of a near-term resolution, global markets are factoring in the likely negative consequences of these blanket tariffs, such as elevated global inflation, a deceleration of worldwide economic growth, and diminished corporate profitability across international markets.

A core tenet of investment philosophy is the importance of a long-term perspective, especially given the short-term volatility inherent in markets. Periods of enthusiasm often lead to recalibration. The S&P 500’s performance over the highly volatile six years period (2018-2023) underscores this point. Despite an impressive total gain of nearly +98% (or +12.1% annualized), this period included significant volatility, featuring two bear markets (declines of -20% or more) and a -19% drop. Historically, market corrections are normal, with the S&P 500 averaging around one -10% decline annually since 1928.

Europe

European equities significantly outperformed global peers in Q1, primarily driven by a major fiscal shift towards increased defense spending. This quarter saw the largest performance gap between the Stoxx 600 (+5.2%) and the S&P 500 (-4.6%) in a decade. In response to weaker economic data and the challenges posed by Trump’s Tariffs, the European Central Bank implemented three rate cuts in 2025, setting the rate at 2.25%. Inflation in the euro area cooled to 2.2% in March.

Politically, the German election in late March resulted in the conservative CDU/CSU bloc initiating coalition talks with the center-left SPD, largely aligning with pre-election polls.

UK equities also experienced gains in Q1 (FTSE 100 +5%), with large-cap banks and defense companies leading the way. However, sentiment towards UK small and mid-sized companies remained weak due to ongoing concerns about the domestic economic outlook, negatively impacting consumer-facing sectors. Responding to heightened European security concerns, Prime Minister Starmer announced a rise in defense spending to 2.5% of GDP by 2027, raising fiscal concerns. Chancellor Rachel Reeves attempted to address these concerns by announcing new spending cuts to adhere to government fiscal rules. On the monetary policy front, the Bank of England cut interest rates by 25bps to 4.5% in February, marking their third rate cut since the cutting cycle began last August.

The IMF projects the UK will have the highest inflation (3.1%) among advanced economies in 2025, driven by high utility bills. Despite this, the IMF believes the Bank of England could still cut rates three more times this year and has lowered its UK growth forecast for 2025 to 1.1% (from 1.6%) due to US trade tariff fallout.

China

Chinese equities saw a volatile but positive Q1 2025, outperforming US and global indices due to shifting geopolitical sentiment, economic recovery signs, and domestic policy support.

January started cautiously due to weak manufacturing data and renewed US trade rhetoric, but improved mid-month with strong industrial production and retail sales, boosted by a trade-in program. The surprise launch of China’s DeepSeek AI model further fueled a tech rally.

February saw the MSCI All China Index surge 8.1% as manufacturing recovered (PMI > 50). Despite new US tariffs, markets focused on positive signals from Beijing, including a symposium with tech leaders suggesting easing regulatory pressure.

March brought modest gains as markets digested stabilizing economic data (improving PMIs) and reaffirmed policy goals (5% GDP target, modest fiscal support). However, real estate challenges and renewed global trade tensions (US/EU tariffs on EVs/solar) dampened confidence. Beijing’s plans to boost consumption (wage growth, childcare subsidies, unlocking homeowner earnings) were well-received.

Emerging Markets

Emerging market equities rose 3%, beating US indices but not MSCI Europe. Supportive factors for EM in a quarter characterized by trade issues and US policy uncertainty included a falling US 10-Y Treasury yield.

• Asia: Asia ex-China, India, Japan saw modest Q1 2025 growth but faced US tariff uncertainty, hitting markets like South Korea – GDP contracted by 0.2%. Equity performance was mixed, with Taiwan underperforming (-13%). Inflation and monetary policy varied regionally. Tech and exports were vulnerable to trade disruptions.
• India: Markets saw a modest pullback, with NIFTY 50 and MSCI India down 5% and 4% respectively in Q1 2025. This correction followed a strong multi-year performance and was attributed to elevated valuations, weaker-than- expected GDP growth, and muted corporate earnings, leading to some foreign investor profit-taking. CPI inflation drops to 3.34% in March, lowest since August 2019 and wholesale inflation slowed to a four-month low of 2.05% in March (Feb: 2.38%). RBI cut repo rate by 25 bps, bringing it down to 6%.
• EMEA: OPEC+ faced falling oil prices (~$65/bbl Brent in early April) amid US trade tensions and some unwinding production cuts. Saudi Arabia (-0.1% ) projects 3.0% GDP growth and 2.0% inflation in 2025, focusing on non-oil sector. South Africa’s equities returned 8.7% (USD) driven by resources (gold and PGMs), However, the overall economic outlook remains cautious with 2025 GDP growth estimated below 1.5%. Inflation rose to 3.2% in February. UAE forecasts strong 4.0% GDP growth in 2025, with non-oil trade exceeding USD 354 billion in 2024. Inflation is expected to remain low at 2.0%.
• Latin America: Brazilian equities were among the top performers, with the MSCI Brazil Index up approximately 15% in USD This was fueled by improving fiscal signals from the government and a supportive commodity backdrop, particularly strong demand from China. Peru projects moderate ~3% growth in 2025 with stable ~2.5% inflation and a strengthening Sol, backed by strong external buffers. Mexico faces near-zero growth forecasts due to US trade uncertainty, despite Banxico easing rates (9% in March) and inflation around 4%.

Pacific Basin

• Australia (-3.9%): Inflation moderated (underlying at 2% annually, monthly at 2.5% YoY). The RBA cut rates by 25 bps to 4.1% in February, with markets expecting further easing, though the RBA is cautious due to sticky services inflation. Economic growth slowed (Leading Index down), but full-year forecasts remain positive (around 1.6 – 2.1%). Q4 2024 saw 0.6% QoQ growth, ending the per capita recession.
• Japan (-10.7%): Japanese equities fell sharply in Q1 (Nikkei 225 -10.7%) amid tariff uncertainty and a stronger Real GDP grew for the third consecutive quarter in Oct-Dec 2024 (+0.7% QoQ annualized). Forecasts for FY2025 anticipate growth around 1.3%. The BOJ raised rates for the first time since July (from 0.25% to 0.50%). Annual inflation eased slightly to 3.6% in March. However, core inflation (excluding fresh food and energy) rose to 3.2%.
• Hong Kong (+15.3%): Inflation remained low at 1.4% y-o-y in March, while the unemployment rate stayed at a two-year high of 3.2%. Moderate GDP growth is expected (around 2-3% for the year), supported by mainland China’s economic policies and recovering inbound tourism. However, external trade uncertainties and changing local consumption patterns continue to challenge the economy.
• Singapore (+5.0%): CPI-All Items inflation remained steady at 9% YoY in March, while MAS Core Inflation eased to 0.5% YoY, a four-year low. Q1 2025 GDP grew by 3.8% YoY, but contracted by 0.8% QoQ. The full-year 2025 GDP growth forecast has been downgraded to 0.0-2.0% from 1.0-3.0% due to global trade uncertainties.
• New Zealand (-6.0%): Annual CPI inflation rose to 2.5% in March 2025, up from 2.2% in December 2024, remaining within the RBNZ’s 1-3% target band for the third consecutive quarter.

Commodities

Precious metals led the gains, with Gold exhibiting the highest return at 19.0%, closely followed by Silver at 18.4%. The energy sector showed mixed performance. US Natural Gas demonstrated a strong return of 13.4%, while crude oil benchmarks, Brent Crude Oil and WTI Oil, experienced slight negative returns of -0.1% and -0.3%, respectively.

Industrial metals presented a varied picture. Platinum Spot and Copper delivered robust positive returns of 12.9% and 10.7%. Palladium also showed a significant gain of 10.0%. However, Nickel and Iron Ore recorded more modest positive returns of 3.8% and 1.6%. On the negative side, Aluminium saw a minor decline of -0.7%, while Zinc experienced the most substantial loss among the commodities shown, with a negative return of -4.2%.

Currencies

The US Dollar Index declined by -3.94% in Q1, reversing earlier strength. This was driven by concerns over trade tariffs impacting the US economy, unexpectedly weak US consumer data fueling slowdown fears, and expectations of stronger German/Eurozone growth due to potential fiscal stimulus.

Conversely, the Euro gained +4.45% against the USD in Q1, boosted by the improved German economic outlook post debt-break reforms and portfolio adjustments favoring Eurozone equities. The GBP also rose by +3.23%, and the Japanese Yen appreciated by +4.89% against the USD. Indian Rupee appreciated by 0.1% against USD.