A look back at markets in Q1 when US stocks fell on tariffs fears, while Europe outperformed as Germany announced spending plans. Gold soared amid the volatility elsewhere.
Please note, any past performance mentioned is not a guide to future performance and may not be repeated. The sectors, securities, regions, and countries shown are for illustrative purposes only and are not to be considered a recommendation to buy or sell.
US
US shares fell in Q1 with the information technology and consumer discretionary sectors posting steep declines. However, most other sectors performed better, with energy and healthcare the top gainers.
News that China’s DeepSeek had developed an AI model comparable to market leaders, but at a fraction of the cost, caused investors to reassess expectations around AI, US leadership in the field, and returns on investment. The AI theme has powered stock markets in recent years, contributing to the outperformance of the “Magnificent Seven” group of stocks, and so the news put pressure on some of the largest stocks in the index.
Trade tariffs were another key theme of the quarter. President Trump announced tariffs on certain countries (notably Mexico and Canada) and on some goods (cars, steel, aluminium). As the quarter came to a close, investors were awaiting 2 April, dubbed “Liberation Day” by Trump, and the announcement of a broader swathe of tariffs.
Investors feared that trade tariffs, plus public sector jobs cuts planned by the new Department of Government Efficiency (DOGE), could put pressure on US consumers. The University of Michigan’s consumer sentiment index for March came in at 57.0, well below February’s 64.7 reading.
In March, the US Federal Reserve (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%. The Fed kept interest rates on hold at 4.25-4.50% during the quarter.
Eurozone
Eurozone shares gained sharply in Q1. In January, news about DeepSeek caused investors to reassess concentrated positioning in US large caps and rotate elsewhere. February brought the German elections and optimism that the new administration led by Friedrich Merz would pursue a pro-growth agenda. However, gains were capped with markets pulling back in March amid worries over the US imposing tariffs on imports, starting with the automotive sector.
The top-performing sector for the quarter was financials. Banks in particular had a strong quarter amid some robust earnings updates. Banks are also relatively insulated from trade tariff concerns. Other top-gaining sectors included industrials, energy, communication services and utilities. Underperforming sectors in the quarter included consumer discretionary, information technology and real estate.
The German elections took place in February, with Friedrich Merz’s Christian Democrats (CDU) emerging as the largest party. Merz signalled an intention to form a government by Easter (20 April). However, he was able to push through plans to loosen Germany’s strict borrowing limits before the new parliamentary session began. Extra money is expected to be spent on defence and infrastructure.
Following the election, sentiment among companies in Germany brightened. The Ifo business climate index, which is based on a survey of businesses, rose to 86.7 points, up from 85.3 in February. In the eurozone, the HCOB flash purchasing managers’ index for March rose to a seven-month high with manufacturing production returning to growth for the first time in two years.
The European Central Bank cut interest rates in January and in March. Annual inflation in the eurozone eased to 2.3% in February from 2.5% in January, according to data from Eurostat.
UK
UK equities rose over the quarter, driven by a strong performance from larger companies, although sentiment towards UK small and mid-sized companies remained fragile. Large-cap financials, energy and healthcare sectors benefited in line with European equities more broadly as global investors rotated away from richly valued US technology stocks.
UK small and mid-sized companies suffered amid ongoing concerns around the UK economic outlook. News that the country had narrowly avoided a technical recession at the end of 2024 provided little respite. Meanwhile, spending cuts in the Spring Statement served to prompt questions around the state of the UK economy. While the Office for Budget Responsibility said the UK fiscal outlook remained stable, it warned that risks from upward pressure on defence spending and a tightening of the global trade environment might mean another round of tax hikes is required in the autumn.
The challenging domestic economic outlook drove a poor performance from a number of consumer-facing sectors such as housebuilders, retailers and travel and leisure. As a result, the consumer discretionary sector was one of the largest drags on market performance over the period, with technology and basic materials other notable detractors. Sterling stabilised after a very weak January.
Japan
The Japanese equity market declined in Q1, ending the quarter with a negative return of -3.4% for the TOPIX Total Return index in yen terms. The Nikkei 225 underperformed the TOPIX due to weak performance in larger stocks, particularly in the technology and exporter sectors.
The Japanese equity market faced selling pressure, driven by uncertainty surrounding tariff policies under the Trump administration, as well as rising concerns about the risk of a US recession. These fears were exacerbated by an announcement towards the end of March that the Trump administration would impose 25% tariffs on imported cars. As a result, exporters and technology-related stocks were among the most heavily affected.
On the other hand, several Japan-specific positives supported share prices in certain sectors such as financials. These included: rising Japanese government bond yields, driven by positive inflation and wage growth data; an announcement by Berkshire Hathaway that it is increasing its stakes in Japanese trading houses; and increased defence spending by the Japanese government. The Bank of Japan raised its policy rate in late January, a widely expected move that supported financial stocks, particularly banks.
Additionally, ongoing activity related to corporate governance reform continued to provide some support for Japanese equities. This includes, but is not limited to, disclosures of activist investor stakes in major Japanese companies, and an uptick in management buyout activity.
Emerging markets
The MSCI Emerging Markets (EM) index gained over Q1 2025, ahead of US indices although behind the MSCI Europe. In a quarter dominated by trade tariffs and US policy uncertainty, a falling US 10-year Treasury yield and a weaker dollar were supportive for EM overall.
Some of the emerging European markets, including Poland, Greece, the Czech Republic, and Hungary, posted particularly strong returns, supported by an improved outlook for the eurozone following Germany’s fiscal policy changes. China’s performance also contributed to the index’s advance. The market has benefited from optimism about its AI capabilities following the initial release of DeepSeek’s lower-cost open-source AI model in January. A rise in sentiment was also seen towards the end of the quarter by the announcement of a number of stimulus measures aimed at supporting domestic consumption.
Brazil outperformed with the real stronger against the dollar over the quarter. Given inflation remains above the central bank’s target, the policy rate has been raised three times since the start of the year and now sits at 14.25% as of early April. South Africa was ahead of the broader EM index too, although in contrast to Brazil, its central bank cut interest rates at the end of January. Mexico outperformed as the imposition of some US trade tariffs were temporarily postponed.
The Korean market gained, led by a rebound in performance from DRAM chip producers, who benefited from an improving pricing environment. The UAE and Saudi Arabia also posted positive returns although the latter’s performance was behind the broader index. India declined, primarily because of growth concerns. The Reserve Bank of India lowered the repo rate for the first time in almost five years in February, to 6.25%, maintaining a neutral stance to provide a supportive backdrop for growth (the repo rate is the rate at which the central bank lends to commercial banks when there is a shortage of funds). Indonesia and Thailand posted double-digit losses in US dollar terms, with growth concerns also weighing on these markets. Taiwan also returned double-digit negative returns, as uncertainty relating to US trade tariffs weighed on technology stocks.
Asia (ex-Japan)
Asia ex-Japan equities achieved modest gains in the first quarter. Mainland China, Singapore, and South Korea were the best-performing markets in the MSCI AC Asia ex-Japan Index. Thailand, Taiwan, and Indonesia were the worst-performing markets in the quarter.
Shares in Mainland China were sharply higher in the quarter after government stimulus measures, such as interest rate cuts, support for the country’s property sector, and liquidity injections, helped to stabilise the economy and restore investor confidence. Advances in AI by Chinese companies have also led investors to reevaluate China as a leader in the technology sector with strong growth potential.
Hong Kong shares also advanced in the quarter, albeit more modestly. Shares in Taiwan experienced sharp declines in the first quarter amid investor fears over tariffs imposed by Donald Trump on semiconductor exports to the US and concerns over a potential slowdown in AI investments by some of the large US technology companies.
Share prices in India were also weaker in the quarter amid investor fears over a potential trade conflict with the US and signs of a slowdown in the Indian economy.
Global bonds
There was a notable shift in the global macroeconomic landscape during the first quarter of 2025. US exceptionalism was challenged as heightened policy uncertainty led to a sharp fall in sentiment and raised recession concerns. In comparison, Germany’s fiscal regime change prompted a significantly improved outlook across Europe, catalysing a marked divergence in fixed income markets.
In March, Germany’s parliament approved plans by incoming Chancellor Friedrich Merz to loosen borrowing limits, exempting spending on defence and security from the country’s strict debt rules. This also facilitated the creation of a €500 billion infrastructure fund to run over the next 12 years. Consequently, German Bunds bore the brunt of the ensuing sell-off across the eurozone, with yields recording their largest daily jump since reunification in 1990 following the announcement (yields move inversely to price). There was a partial reversal of the market weakness towards the end of the quarter as focus turned to the impact from tariffs ahead of US “Liberation Day”.
US Treasuries outperformed this quarter, with yields falling (and prices rising) in response to weaker economic activity data. Canada also faced tariff uncertainties, leading to falling yields, although its performance lagged behind the US.
Divergence was evident in corporate bond markets. US dollar denominated bonds outperformed euro bonds on both investment-grade and high-yield markets. Investment-grade bonds are the highest quality bonds as determined by a credit rating agency. High-yield bonds are more speculative, with a credit rating below investment grade.
In the UK, a stagflationary outlook and a vulnerable fiscal position, underscored by the government’s Spring Statement, influenced asset performance. Gilt yields ended slightly higher.
In Asia, Japanese government bonds underperformed all major markets, with rising yields amid strong Q4 GDP growth of 2.2% and rising inflation, signalling potential rate hikes by the Bank of Japan. Conversely, in China, a largely deflationary outlook stemmed a rise in yields.
Commodities
The S&P GSCI Index gained in the first quarter. Precious metals were the best-performing component, with strong price gains achieved by gold and silver. Worries over tariffs and their potential impact on economic growth saw investors turn to assets perceived as safe havens, such as gold.
Agriculture was the worst-performing component of the index, driven lower by a sharp fall in the price of cocoa. Declines in the price of wheat, cotton and corn were more modest, while coffee and sugar prices gained in the quarter. Within energy, all sub-components gained in the quarter, with natural gas achieving the biggest price rise. In industrial metals, the price of copper was sharply higher, while lead and nickel achieved more modest gains. Zinc prices fell in the quarter.
Please note
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
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