Weekly multi-asset update | Insight Investment

Winners & losers: Chinese and MSCI emerging market equities performed well, while the USD was generally weak following a strong run. 

Over the past week, several things caught our eye:

• The German election was in focus, due to the potential impact of the results on European fiscal policy and increased defence spending. However, the process of forming a coalition for government could take several months and we are unlikely to receive clarity over policy direction for some time.
• The US and Ukraine are in talks for a deal on access to Ukraine’s mineral deposits, with the US demanding a share of revenue from Ukraine’s mineral deposits in exchange for investments and potential security guarantees for Ukraine. The US and Russia have also been discussing a potential ceasefire in the war between Russia and Ukraine. A ceasefire would greatly reduce geopolitical uncertainty in the region and would likely improve risk sentiment.
• US equities continued their decline amid fears of deteriorating growth in the US. The Conference Board’s Consumer Confidence Index came out lower than expected and initial jobless claims surprised to the upside. Furthermore, despite positive earnings results from Nvidia, the market showed scepticism over the sustainability of AI-fuelled earnings growth.  

Asset allocation observation

FX moves have moderated since Trump’s inauguration

Source: Insight and Bloomberg as at 27 February 2025. 

• Since Trump was elected in November 2024, the FX market had begun to price in impacts from his potential policies. The dollar rallied between the election and Trump’s inauguration in January 2025 but has weakened since. Currencies such as the Mexican peso and euro have depreciated between the election and the inauguration, but have moderated since then.
• The moderation witnessed in FX markets since Trump’s inauguration probably results from the consistency of his tariff announcements with his previous comments, meaning announcements are largely in line with market expectations. Furthermore, some recent US growth data has negatively surprised participants.
• Within our portfolios, we have long USD exposure but remain wary of the possibility that fears around Trump policies such as tariffs have largely been priced in since his election in November. 

Winners & losers: Chinese and MSCI emerging market equities performed well, while the USD was generally weak following a strong run. 

Over the past week, several things caught our eye:

• Chinese equities extended their recent rally, driven largely by optimism in the technology sector. Alibaba, which is one of the largest Chinese stocks, reported better-than-expected revenue on Thursday and announced increased AI development. This boosted its stock price by 9%.
• Also on Thursday, US retail sales data showed a sharp contraction, making the largest monthly decline since March 2023. This, coupled with a weaker-than-expected forecast from Walmart, raised some concerns about US consumer spending. As a result, US equities softened but remain close to all-time highs.
• The German election is taking place this weekend. According to Politico’s polling data, the conservative CDU/CSU block is leading with 30%, while the far right AfD holds 21% and the central left SPD stands at 16%. The outcome is in focus as Germany is likely to change its policy on its ‘debt brake’ to fund any increased spending on defence.

Asset allocation observation

China and Europe lead 2025 equity returns 

Source: Insight and Bloomberg as at 21 February 2025. 

• Europe and China, two largely under owned markets coming into 2025, have enjoyed an incredibly strong start to the year. Chinese equities have been given an AI-related boost with H Shares up 20% since the release of DeepSeek R1. In Europe, the bounce can be largely attributed to the likely end of conflict in Ukraine and a lack of concrete tariff action, but market technicals had left these indices ripe for a squeeze higher.
• Within our portfolios, we have added tactical upside positions to both these markets. While the longer-term outlook remains challenged, years of underperformance relative to the US could provide further support as investors reallocate.

Winners & losers: European and Chinese equities had strong performances, while the USD weakened against other developed market currencies 

Over the past week, several things caught our eye:

• US CPI surprised to the upside relative to expectations (3.0% YoY actual vs 2.9% YoY expected) – this led the market to price push out cuts from the Fed until the end of 2025
• Chinese equities rallied strongly, driven largely by optimism in Chinese AI technology companies
• US retail sales surprised negatively, the largest monthly decline in two years, in part due to recent wildfires and storms in the US. This has led to US yields and USD falling amid concerns around continued growth in the US.

Asset allocation observation

Europe, Mexico, Canada in the crosshairs

Source: Insight and Bloomberg as at 14 February 2025.

• Trump has so far focused on tariffs for Mexico, Canada and China, but likely will announce tariffs on the European Union. Trade as a percentage of GDP for these countries is relatively high, and the Trump administration perceives tariffs as one way to ‘level the playing field’ in favour of the US.
• The exact impact on growth and inflation both in the US and other countries will depend on the magnitude of tariffs and the type of implementation. However, the direction of travel (toward more protectionist policies) remains clear.
• European equities continued their strong start to the year, as the announced tariff measures have generally aligned with expectations. The portfolio holds tactical positions that should benefit from a continued bounce in European assets.

Winners & losers: European equities continued their strong start to the year while the US dollar weakened following tariff postponements.

Over the past week, several things caught our eye:

• The US economy added 143k jobs in January, below estimates of 175k. Most importantly for the market average hourly earnings rose +0.5% month on month, moving the year-on-year number up from 3.9% to 4.1%.
• Two more of the Magnificent 7 reported this week, but the price reaction to both Alphabet and Amazon was negative. Alphabet traded down 7% following a miss on revenue and a revision higher to Capex expectations. Meanwhile, Amazon delivered solid Q4 earnings weaker Q1 guidance left the stock down 4% after hours.
• The Bank of England cut its deposit rate by 25bp to 4.5%, although it was changes to its economic forecasts that grabbed headlines. Its growth forecast for 2025 was halved to 0.75%, while inflation expectations were revised higher from 2.8% to 3.7%.

Asset allocation observation

ISM manufacturing PMI continues rebound

Source: Insight and Bloomberg as at 07 February 2025. 

• The US manufacturing ISM moved into expansion territory in January for the first time since October 2022 and the 4-point jump in the index on a 3-month view is the sharpest rise of all of the countries we monitor. The underlying mix was positive with the rise being driven by an increase in the new orders and production diffusion indices. The ratio of new orders to inventories, which can be a useful forward-looking indicator, had been signalling a recovery since September.
• Viewed through the lens of our macro regime framework, we see global growth data remains consistent with a ‘stabilising’ growth regime. The change in global manufacturing PMI is positive on a 3-month view, and most country/regional PMIs are improving over the same period.

 

Winners & losers: European equities performed well on the week, while markets with a heavy link to semiconductors and AI, such as the Nasdaq, struggled.

Over the past week, several things caught our eye:

• The AI narrative was thrown a curveball this week, as the release of DeepSeek R1 has led many to question both Nvidia’s competitive moat and the current levels of CapEx from the Megacap tech stocks. Nvidia lost a record $589bn in market cap (-17%) on Monday but has since stabilised.
• The Federal Open Market Committee (FOMC) and European Central Bank (ECB) held meetings this week, with both events passing without incident. The FOMC kept rates unchanged, maintaining its stance that the economy remains in a good place, but policy is still in restrictive territory. The ECB opted for a 25bp cut, bringing the overall rate to 2.75%.
• The Euro Stoxx 50 is on track for an 8.5% return in January which would mark its second-best start to a year ever. This can likely be attributed to low positioning and the focus of US tariffs currently being directed towards other markets (namely Mexico and Canada).

Asset allocation observation

Technology is still being rewarded on earnings

Source: Insight and Bloomberg as at 31 January 2025.

• While the Deepseek developments caused some of the largest moves for technology stocks, earnings reports this week were also an important driver. Almost 50% of S&P 500 companies have now reported, and generally earnings have been strong, with the percentage of companies beating expectations now at 80% and the EPS growth rate looking like it could push through double digits.
• Our chart this week shows that it is still technology names that are being rewarded the most in terms of share price reaction. The average share price reaction for technology sector and communication services sector (containing internet names like Meta) was above 2%. Financials have also had a strong earnings season, while staples and industrials have lagged thus far.