Following a turbulent end to 2024, investor hopes for a calm start to 2025 were dashed by heightened tariff uncertainty and a re-rating of inflationary risks in the US and UK, resulting in another volatile month in financial markets.
After a sharp rise in bond yields as investors contemplated the potential impact of Donald Trump’s tariff policy in the lead up to his inauguration, cooler than expected economic data releases on both sides of the Atlantic provided some much-needed respite to investors, with a lower-than-expected inflation reading in the UK allowing Gilts to recover their losses and end the month in positive territory. Whilst US equities have delivered positive returns over the month, corporate earnings announcements from key tech names have been mixed, whilst Chinese AI start-up DeepSeek drove a sharp sell-off across the tech sector as the emergence of the low-cost model threatened the outlook for current AI leaders such as Nvidia.
Despite the elevated levels of volatility, a broad recovery in global government bond markets alongside an outperformance in European and UK large caps against their US counterparts allowed the OBI Volatility Managed and Long Hold portfolios to deliver positive returns over the month. Key drivers of performance included the long-dated Gilt exposure which benefitted from a rapid shift in interest rate expectations towards the end of the month, as well as the actively managed European and UK equity funds which were able to deliver strong returns as sentiment towards the US equity market softened somewhat.
Further Interest Rate Cuts in the UK
Despite markets moving rapidly in the early weeks of the year to reduce their expectations for the Bank of England to cut interest rates over 2025, it remained our view that the economic data was supportive of a more active approach from the Monetary Policy Committee.
Today we saw the Bank of England cut interest rates by a further 0.25%, bringing the UK interest rate down to 4.5% as all 9 members of the MPC voted in favour of a reduction in the bank rate. The decision from Catherine Mann, who is widely seen as one of the most hawkish members of the committee, to vote for a 50bps cut today highlights the weakening growth backdrop currently facing the BoE as core price pressures continue to fade.
This vote split delivered a distinctly dovish note on the outlook for future interest rate cuts as the central bank halved its forecast for economic growth in 2025, whilst also lifting its forecast for unemployment, offering further room for Gilt yields to fall as markets price in a lower UK terminal rate. We expect a backdrop of weak economic growth and moderating underlying price pressures to feed into a more supportive environment for the current asset allocation across the OBI Volatility Managed portfolios, with the long-dated Gilt holdings in particular possessing strong upside potential on a value at risk basis.
Ongoing Trade Uncertainty
Ahead of Donald Trump’s inauguration on January 20th, investors were faced with the potential implementation of trade tariffs on key US trading partners over the month, as the President-Elect announced a flurry of presidential orders as he took office for the second time. Given rising concerns as to how a global trade war would impact the outlook for inflation across key developed economies, government bond markets sold off sharply, with investors taking a more cautious approach regarding the potential for central banks to cut interest rates at the pace markets had priced in.
However, despite signing over 50 executive orders since being sworn in as president, the promise of tariffs on key global trade partners has yet to be fulfilled, with only China facing an additional 10% tariff which took effect on Monday. However, the unpredictable manner in which the US President has threatened and then retracted tariffs, as seen with Mexico and Canada has fed into an increasingly uncertain geopolitical backdrop.
Given the rapid swings in sentiment being seen across financial markets as a result of the lack of clarity surrounding fiscal and trade policies, we remain cautious regarding the outlook for global risk assets, which are heavily correlated in sentiment towards North America.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment. OCM Wealth Management Limited is authorised and regulated by the Financial Conduct Authority (FCA Registration No: 418826) OCM Asset Management is a trading name of OCM Wealth Management Limited
