
Market review Q1 2025
During the first quarter of 2025, the FTSE All World, a representative global equity index, declined 4.1% in sterling terms and 2.0% in local currency terms. Sterling strengthened against the US dollar over the period. Within equities, Europe and the UK were the strongest regional markets. Emerging markets and Asia Pacific also gained ground in local currency terms. Meanwhile, Japan and the US fell back. Growth stocks were outpaced by value stocks over the quarter. In a period that saw Donald Trump inaugurated as US president for the second time, US equities declined as a result of trade tariff worries and an increase in negative sentiment towards the technology sector. Indeed, just after quarter end the US announced a broad range of trade tariffs which led to initial falls in equities markets globally, weakness in the US dollar and a fall in government bond yields in the US and elsewhere. In bonds, during a volatile quarter, the ICE BofA Global Government Index saw a marginal decline of 0.1% in sterling terms but gained 0.8% in local currency terms.
Crude oil price futures declined slightly over the quarter. After rising in the first few weeks of 2025, prices then faded on issues such as larger-than-expected US stockpiles and demand fears, in part due to trade tariff uncertainty. Meanwhile, European natural gas futures also rose in January before weakening and finishing the quarter lower overall amid EU discussions on alternative gas sources and a slowdown in stockpile depletion.
UK equities
The FTSE 100 Index, a commonly used representative benchmark of the largest UK-listed stocks, was up 6.1%. Meanwhile, the FTSE All Share Index, which also includes mid- and small-cap stocks, rose 4.5%. All members of the Bank of England’s (BoE) Monetary Policy Committee (MPC) voted to cut the UK’s bank rate by 25-basis points (bps) at its policy meeting in February. The BoE then held rates steady at 4.5% during its meeting in March. Looking forward, the MPC said a cautious stance was warranted amid global economic uncertainty and given inflation was above its 2.0% medium-term target. The UK’s annual inflation rate jumped to 3.0% in January from 2.5% in December, as motor fuel, air fares and food prices stepped higher. It then slowed to 2.8% in February, helped by a drop in clothing prices. Quarter-on-quarter (q/q) gross domestic product (GDP) growth came in at a better-than-expected 0.1% expansion for the fourth quarter, compared with 0.0% in the previous period. The UK manufacturing Purchase Managers’ Index (PMI) figure remained in contraction over the quarter, with March’s preliminary estimate hitting 44.6, from a revised 46.9 in February. However, the UK services sector PMI remained in expansionary territory over the three-month period. (Note that a PMI figure under 50 indicates contraction.)
…Within equities, Europe and the UK were the strongest regional markets…
US equities
Sentiment towards US equities was negatively influenced by factors including emerging Chinese competition in artificial intelligence (AI), as well as valuation levels in the technology sector. Additionally, there was negative sentiment on the potential for US government imposed trade tariffs to push up domestic prices and hinder economic growth. Tariff announcements from the new government included levies on steel and autos. The FTSE North America Index dropped 7.0% in sterling terms and 4.2% in local terms. The technology- and growth-focused Nasdaq Composite Index fell 12.9% in sterling terms. The Federal Reserve (Fed) kept interest rates steady over the quarter, as Fed Chair Jerome Powell said that inflation required further monitoring before any potential new rate cuts could be made. Annual inflation stepped higher, reaching 3.0% by January before softening somewhat to 2.8% in February. Annualised GDP for the fourth quarter of 2024 came in at 2.4% growth, down on the previous quarter’s 3.1%, as imports declined slightly. The closely monitored non-farm payrolls figure finished the period with a reading of 151K job additions for February, compared with forecasts of 160K and a January figure of 125K, as the healthcare sector continued to hire. The US manufacturing PMI dipped into contractionary territory with a preliminary reading of 49.8 for March, following February’s 52.7. However, the flash services PMI jumped to 54.3 in March, from 51 in February, despite weak export figures.
Europe equities
The FTSE Developed Europe ex UK Index gained 7.6% in sterling terms, amid hopes for improved growth in Germany. There was also strength in defence stocks, on expectations that Europe would increase military budgets. There was also a German agreement to bypass its self-imposed debt ceiling in order to increase defence and infrastructure spending. Germany, Switzerland and France all gained ground in local-currency terms. In the German election, the CDU came through as the largest party and commenced coalition negotiations. The European Central Bank (ECB) reduced its key interest rates by 25 bps in both January and March, its fifth and sixth reductions of the current cycle. The ECB reiterated that it does not have a preset rate path and will continue to monitor inflation. Meanwhile, annual inflation edged slightly higher in December and January, hitting 2.4% and 2.5%, respectively, before softening back to 2.3% in February. The ECB’s target level is 2% annual inflation. The eurozone’s fourth-quarter GDP growth stagnated, with 0% q/q expansion, compared with 0.4% in the third quarter of 2024. At the country level, GDP in Germany and France contracted slightly, while Spain and Portugal grew. Preliminary figures for March’s manufacturing PMI in the eurozone remained in contraction but this was the fourth consecutive month of improvement. The flash services PMI figure for March remained in expansionary territory but hit a four-month low.
Japan equities
The FTSE Japan Index slipped back 2.2% in sterling terms and 4.1% in yen terms. Over the quarter, the yen strengthened against the US dollar, weakening sentiment towards its export sectors. The Bank of Japan (BoJ) brought through its third interest rate increase of the current cycle, taking it up 25 bps to 0.5% in January. At the same time, the BoJ signalled that further increases were likely if the economy continued to develop as expected. However, it kept rates on hold in March as it analysed rising risks globally. Meanwhile inflation for January was reported at 4.0%, up from December’s 3.6% and November’s 2.9% as food and energy costs increased. It then softened slightly in February, reaching 3.7% as electricity prices slowed. The country’s GDP growth expanded 0.6% q/q in the final three months of 2024. This was a pickup from the 0.4% in the third quarter, helped in part by private consumption and government spending.
Emerging market equities
The FTSE Emerging Index dipped 0.9% in sterling terms but gained 2.2% in local currency terms. At the country level, China, South Africa and Brazil were among the markets to rise in local terms, while Taiwan and India declined. China partly benefited from increased optimism around the potential for its AI companies which helped to bolster sentiment for the market more broadly. China’s annual GDP grew 5.4% year-on-year (y/y) for the fourth quarter, compared with the pace of 4.6% y/y in the third quarter, as recent stimulus measures appeared to boost the economy somewhat. Its 2024 full-year GDP hit 5.0%, in line with its annual target but lower than the 5.2% achieved in 2023. Industrial production came in at 5.9% y/y growth for the combined January and February figure. This was above expectations but below December’s 6.2%. Export growth hit 2.3% y/y for the January-February period, down from 10.7% expansion in December, amid rising trade tensions. Imports, meanwhile, fell 8.4% over the January-February period, compared with 1% growth in December amid falling local demand. The Brazilian real strengthened against the US dollar. Brazil’s central bank lifted its benchmark rate by 200 bps during the quarter, as it aimed to pullback inflation, which edged higher over the quarter. Mexico’s central bank cut interest rates by 100 bps to 9.0% in two tranches during the period, amid a slowdown in inflation and concern about economic growth prospects. Indeed, GDP contracted 0.6% q/q in the fourth quarter of 2024 compared with growth of 0.9% q/q in the third quarter.
Asia Pacific equities
The FTSE Asia Pacific ex Japan Index was down 2.2% in sterling terms but rose 0.9% in local terms. China and Korea moved higher, while Taiwan, Malaysia and India decreased in local-currency terms. The Reserve Bank of India reduced its key interest rate by 25 bps to 6.25% amid a backdrop of concern about economic growth and trade tariffs. The rupee reached a new record low against the US dollar, in part because of the rate cut as well as reduced interest from foreign investors. India’s annual GDP growth ticked up slightly in the fourth quarter, reaching 6.2% y/y compared with 5.6% y/y in the third quarter. However, growth was down on the 9.5% reported in the fourth calendar quarter of 2023. February’s annual inflation softened for the fifth month in succession, with a reading of 3.61%, as food prices continued to slow. Indonesia’s interest rate was cut by 25 bps to 5.75% as the Bank of Indonesia aimed for rupiah stability and to maintain inflation within its target parameters. The Bank of Korea cut its interest rate for the third time in the current cycle, taking it from 3.0% to 2.75%. This rate cut was helped by a stabilisation in the country’s annual inflation that remained broadly steady around the 2% level.
Sentiment towards US equities was negatively influenced by factors including emerging Chinese competition in artificial intelligence (AI), as well as valuation levels in the technology sector.
Bonds
In fixed income markets, government bonds increased in sterling terms. In the US, the 10-year Treasury yield dropped from 4.57% to 4.21% over the quarter amid economic growth worries. In contrast, German 10-year bund yields stepped higher as the country moved towards an increased spending programme. After seesawing for much of the quarter, UK 10-year gilt yields settled slightly up over the quarter as a whole. Japanese government bond yields rose strongly amid robust domestic data and rhetoric from BoJ policymakers that led to expectations of further interest rate hikes. Meanwhile, emerging market debt benefited from a weakening of the US dollar. Despite the worries about global trade, credit broadly rose over the quarter in local terms.
Property
The FTSE EPRA Nareit Developed Index, a measure of the performance of Real Estate Investment Trusts (REITs), declined 1.4% in sterling terms. Note that REITs tend to be sensitive to interest rate expectations. During the three months to end-February – the latest period with available figures – the MSCI UK Monthly Property Index added 2.4%. The interest rate environment has generally improved sentiment in the UK commercial property market. Availability remains tight in the high-quality office segment, while industrial property demand has also been relatively robust.
* All index data are shown in total return sterling.
Source: FE Analytic