The Month in a Minute
📰 Overall: January was a strong start to the year for share and bonds markets. As Donald Trump takes office, investors now shift their focus to his upcoming polices and their potential impact on inflation.
💪 Benchmark Performance: Wealthify's higher risk Original Plans and Ethical Plans outperformed their benchmark, whereas lower risk Plans slightly underperformed.
📈 Market Movers: UK (+5.0%), Europe (5.7%), US (+2.9%).
🗒️ Plan Summary: Original and Ethical Plans with a higher allocation to shares, performed better than those with a higher allocation to bonds.
🌍 Original Plans: Shares (+4.2%) and bonds (+0.7%) both increased.
🌱 Ethical Plans: Shares (+3.5%) and bonds (+0.7%) both increased.
🕰️ Going Forward: Shares outperformed bonds this month. Despite this, we remain confident in our relatively cautious positioning. We’re optimistic that the diverse set of opportunities we’ve selected will continue to have a positive effect on Plans as we go into 2025, providing protection if economic conditions deteriorate.
An eventful start to the year saw European shares dominate US, as the tech sector struggles — and AI faces new competition.
January was a strong month for global shares and bonds, picking up after a slightly sour end to 2024. And, in a change to the norm, we saw UK and European shares outperform their US counterparts.
With the S&P 500 and tech-heavy Nasdaq struggling to break last December’s highs, European markets (namely the FSTE 100 and German DAX) reached all-time highs. After initially struggling, US markets improved in the run-up to Donald Trump’s inauguration. As expected, his ‘America First’ policy agenda proved supportive for US equities.
The positivity, however, was short-lived, with the emergence of a Chinese artificial intelligence (AI) company called DeepSeek. An end-of-month surprise, DeepSeek’s emergence challenged the USA’s standing as the global superpower of AI.
Much is still unknown about this company’s capabilities, but its claims of being able to run a much cheaper, more power-effective rival to ChatGPT shook markets.
The tech sector – particularly Nvidia – felt the worst of this, as DeepSeek's apparent advances raised questions over the computing power needed to develop AI systems (a key driver for AI stocks).
Thankfully, markets rebounded before month-end, but reactions to unexpected news like this show how quicky investor sentiment can change — and the fragility of AI stocks at current valuations. Investors have very high expectations of the earnings of companies connected to AI and, going forward, any disruption to this narrative
Shortly after the announcement of DeepSeek, we saw an interest rate decision from the Federal Reserve (Fed).
Whilst interest rates remaining unchanged was widely anticipated by the market, all eyes were on Fed Chair, Jerome Powell. His press conference in December sent markets into a tailspin after the dialling back of interest rate expectations — despite announcing a cut at the same meeting.
Investors breathed a sigh of relief, however, as Powell confirmed the Fed was in ‘wait and see’ mode to assess the impact of new polices from the incoming administration. Many worry that these could be inflationary, and with the latest US inflation figures in January holding steady, this will be front and centre in the minds of investors as we move into 2025.
Markets
European markets were the strongest performers of the month with a return of 5.6% supported by strong returns from the financials and consumer discretionary sectors given the improving economic data. UK markets also performed well, with the FTSE 100 up 5.0%, boosted by rising commodity prices (such as gold and oil) due to threat of Trump tariffs.
Three quarters of this index’s revenues come from abroad, meaning January’s sharp decline in sterling added momentum to these profits.
Despite setbacks, US markets pulled through, finishing +2.9%. The US economy continues to show signs of strength, with solid jobs numbers, Gross Domestic Product (GDP) growth, and Trump’s promise of deregulation and tax cuts fuelling further optimism.
The worst performer for the month was Japan, finishing +0.1% due to its heavy exposure to the tech sector, which underperformed this month.
The Bank of Japan did deliver an interest rate hike as confidence improved, but the increasing yen caused a headwind for many of its export-oriented companies.
Currency
It was a tough month for sterling, which declined against most major currencies: most notably against the yen by -2.3%, euro by -1.0%, and US dollar by -1.0%.
Whilst this currency depreciation helped internationally-driven companies, there are concerns it could hinder the Bank of England’s monetary policy freedom.
Investment type performance breakdown
This strong month for the markets was reflected in Wealthify Plans, with higher risk Plans outperforming their respective benchmarks, and lower risk Plans slightly underperforming theirs by 0.2-0.3%. Shares outperformed bonds, finishing positive for our Original (+4.2%) and Ethical (+3.5%) Plans. Bonds also delivered a positive for both Original (+0.7%) and Ethical (+0.7%) Plans.
Our recent upweighting of European shares helped Plans take advantage of the improving economic condition, as our European fund delivered the strongest returns for Original and Ethical Plans. With the upcoming threat of tariffs from President Trump, there are still challenges ahead. But at current valuations, we believe there is great potential for growth.
The money market continues to benefit from high interest rates, providing positive returns for both Ethical (+0.4%) and Original Plans (+0.4%).
Summary with Plan details
Despite this strong month for markets, we’re still cautious, as questions remain about aspects of the US economy and tech company valuations. January highlighted some of these risks, including ambitious earnings expectations and the concentration of the US market — as well as confirming the need for regional diversification.
Should the soft landing scenario happen (a slowdown in economic growth that avoids a recession) we’re well positioned to take advantage of this — with appropriate protection thanks to our allocation to bonds. With yields where they currently are, we see bonds as providing good long-term value in terms of income and capital appreciation.
Our Investment Team continues to actively monitor the financial markets and their impact on Plans — and are always ready to act in your best interest as events unfold. We’re constantly evaluating new market information and key drivers, to help keep your Investment Plan on track.
It’s important to remember that it’s normal for markets to go up and down, with periods of volatility to be expected when you invest.
As always, we continue to look for opportunities to best position your investments, with the goal of protecting your money and achieving your long-term objectives.
With investing, your capital is at risk. Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Your tax treatment will depend on your individual circumstances, and it may be subject to change in the future.
