January Performance Update

Starting with the positives, inflation data both sides of the Atlantic, surprised to the downside this month, showing yet more signs that price pressures continue to abate. At the same time, economic data remains ‘ok’. Slow, but no recession, isn’t going to make any headlines, however it provides a nice backdrop where interest rates can progressively come down, without risking a post-Covid boom type environment.

The challenge for all investors is that things can change very quickly. Just take President Trump’s tariff announcements on Monday this week, with 25% border charges for Canada and Mexico, and 10% for China. If implemented, early estimates suggest US inflation would increase by 0.6-0.7% as a result. That could easily be the difference between 2% inflation at the end of this year and 3%, which would then be the difference between 2-3 interest rate reductions, and none. Each of those scenarios has very different investment implications, so we must be aware that although the fundamentals at this stage look good, things can change quickly.

Another market-moving event of the last month was the release and adoption of ‘DeepSeek’s’ new Artificial Intelligence (AI) model. Although not necessarily better than the best models developed by the Silicon Valley tech names, it surprised everyone with its efficiency. DeepSeek appear to have harnessed several techniques, which significantly reduce the cost of running its models, making them more usable at a lower cost. In turn this reopened a number of questions about the benefits of the huge A.I. spend in the US, which in our view is one of the most important factors for equity returns this year.

Considering the news flow and the volatility, it may be a little surprising that the return outcomes for the portfolios were good in January – between 1.26% (Very Low Risk) and 4.24% (High Risk) depending on the risk profile selected.

Highlights were positive trends for European and UK equities, which don’t have the same technology dependency, and benefitted from the growing chance of a peace deal in Ukraine. At the same time, the increased uncertainty and more positive inflation data helped to bring bond yields lower, boosting prices. As a reminder, our bond bucket continues to provide a strong income yield of around 0.5% per month, so when yields come in on top of this, returns are enhanced further. This month this bucket produced just over 1%, in particular supporting the lower risk portfolios.

How are we approaching things from here? Well, it may not surprise you to know that we have been incredibly active in January, making 3-4 portfolio tweaks across the first month. It is a well repeated phrase that “investors don’t like uncertainty”. In some respects it is true, as it is easier when things are simple. But uncertainty breeds opportunity, and we aim to take advantage of the short-term opportunities that markets create.

Our base case is that the economic fundamentals are sufficient to avoid recession, and low growth should help underpin portfolio growth for clients.  Interest rates should continue to gradually come down, reducing the chance of a recession. The unknown risks are AI disappointment and political changes. On the latter we continue to expect this will be just the first chapter of the tariff story. That said, in reality tariffs are really being used as a negotiating tool to support other political objectives (such as border control between US and Mexico), so we doubt they will have significant longevity. Either way we need to be vigilant, accepting that things can shift on a sixpence.