03 April 2025

​
Q1 2025 Macro and Markets Quarterly Review ​

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As President Trump began issuing a wave of executive orders, the global economic outlook
quickly became more complex. Governments around the world were compelled to respond to
a series of challenges sparked by what is shaping up to be a transformational set of
policies—policies that may well herald a new world order. To be fair, some of these initiatives
appear well-intentioned. However, the administration’s erratic stance on trade negotiations
has introduced a level of uncertainty and anxiety in the global economy that might have been
avoidable.

By the end of the quarter, the prevailing consensus among economists was clear: the world is
facing heightened uncertainty, slower growth, and rising inflation.

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The global economy lost a fair amount of momentum through the first quarter, with the U.S.
economy being a notable disappointment. At one point, some indicators even suggested the
U.S. might have slipped into recession, though those signals were ultimately overstated. Two
key themes provided some support to the U.S. economy: first, businesses ramped up inventory
levels ahead of expected tariffs in April; second, the services sector remained relatively
resilient.

One of the quarter’s surprises was the uptick in European growth. This was partly driven by
U.S. pressure on NATO allies to increase defense spending—a call to which Germany, in
particular, responded. In a significant move, the German government secured a supermajority
in the Bundestag to authorize defense expenditures beyond the usual fiscal constraints

Chart 1: Global Economic Surprise Indices – Inflation and Growth​

Index

Source: Bloomberg

As we head into the second quarter, the key unknown looming over the global economy is
the potential inflationary impact of the latest tariff changes. The concern is not just
hypothetical—price pressures are proving to be far more stubborn than many had hoped.
Central banks, particularly the Federal Reserve, remain cautious and are showing little
inclination to signal imminent rate cuts, despite mounting calls from parts of the market.

The G4 inflation surprise index continued to climb throughout the quarter, reflecting the
persistence of upside inflation surprises across the major economies. By quarter-end,
consensus expectations for U.S. inflation were being revised upward, with some forecasters
now warning that core inflation could breach the 5% mark in the coming quarters. The culprit?
The likely pass-through effects of U.S. trade tariffs, which threaten to push input costs higher
and ripple through supply chains just as central banks are trying to regain control over inflation
expectations.

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 Chart 2: G4 Inflation Surprise Index

Source: Bloomberg

China’s economy showed unexpected resilience in the first quarter of 2025, with solid retail
sales and industrial output helping asset markets deliver a strong performance. Despite
lingering challenges, the data suggested a stabilizing backdrop.

However, renewed trade tensions with the United States clouded the outlook. In February,
President Trump imposed a 10% tariff on all Chinese imports, prompting swift retaliation from
Beijing, including tariffs on U.S. coal and liquefied natural gas. The standoff escalated further in
March, with both sides expanding the scope of tariffs, heightening global economic
uncertainty.

In response to these external pressures, Chinese authorities introduced measures to spur

domestic demand. These included incentives for automobile and appliance trade-ins, efforts
to boost household incomes, and policies aimed at stabilizing the struggling property sector.
The government reaffirmed its 5% growth target for 2025, underpinned by increased fiscal
spending.

Still, the property market remains a significant drag on recovery. Real estate investment
declined nearly 10% in early 2025, underscoring the sector’s continued weakness and its
dampening effect on consumer sentiment.

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 Chart 3: China Economic Surprise Index at Neutral

Source: Bloomberg

In Japan, trends remained largely consistent, with steady economic growth and growing
confidence that inflation is now firmly embedded in the economy. Ironically, the country is
experiencing slightly more inflation than anticipated. In February, service-sector inflation rose
to 3.0%, driven by solid wage increases and reinforcing expectations of continued rate hikes by
the Bank of Japan (BOJ). Earlier in the quarter, in January, the BOJ raised its short-term policy
interest rate to 0.5%—the highest level in 17 years. The decision, passed with an 8-1 vote,
underscores the BOJ's confidence in achieving stable inflation near its 2% target, supported by
rising wages. Governor Kazuo Ueda signalled that further rate increases could follow,
depending on economic conditions.

Chart 4: Japanese Wage Growth Inching Higher (% change year-on-year)

Source: Bloomberg

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In the first quarter of 2025, the Australian government implemented pro-growth policies
aimed at stimulating economic activity and providing cost-of-living relief. Key measures
included unexpected tax cuts and increased spending on healthcare, education, and defence,
designed to bolster economic resilience amid global uncertainties. Concurrently, the Reserve
Bank of Australia (RBA) maintained the cash rate at 4.35%, with expectations of potential rate
cuts later in the year, contingent upon economic conditions and inflation trends. These
combined fiscal and monetary strategies reflect a coordinated effort to support sustainable
growth and address inflationary pressures within the Australian economy.

Markets

Equities

Although the global equity index ended the first quarter of 2025 down just under 2%, this
headline masked a significant divergence in regional performance—most notably, the sharp
underperformance of the U.S. equity market relative to the rest of the world. The so-called
“Magnificent 7,” which had powered much of the market’s gains in 2023 and 2024, led the
losses, with the technology sector bearing the brunt of a correction largely driven by retail
investor selling – Nasdaq down over 10% in the quarter. After an extended period of
outperformance, valuations appeared stretched, prompting a rotation into more reasonably
priced markets and sectors.

Chart 5: Global Equities See New Leadership

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The quarter began with a noticeable shift in investor preference toward better-value
regions, particularly outside the U.S., as investors looked to lock in gains from the prior year
and rebalance portfolios. European equities staged an impressive rebound (+10.7%), fuelled
by signals from European governments that they would delay aggressive fiscal tightening.
Instead, fiscal efforts shifted toward increased defence spending in response to heightened
geopolitical tensions. This policy pivot lifted GDP forecasts and created a compelling narrative
for investors seeking catalysts in undervalued markets. Remarkably, this surge in European
equities followed a period of poor sentiment in Q4 2024, underscoring the potential for sharp
share price reversals when macro policy and valuation dynamics align.

The Chinese equity market staged a remarkable recovery in the first quarter of 2025 (MSCI
China +15.4%), rebounding sharply from the deep pessimism that plagued much of 2024.
Boosted by a series of coordinated policy measures, including targeted fiscal stimulus,
regulatory easing in the property sector, and renewed support for private enterprises, investor
sentiment turned decisively more optimistic. The government’s commitment to stabilizing
growth—underscored by Premier Li Qiang’s pledge to prioritize economic momentum over
deleveraging—helped reignite confidence among domestic and international investors alike.
Key sectors such as technology, consumer discretionary, and green energy led the rally, with
inflows from foreign investors returning in force after months of outflows. The recovery not
only reversed much of the previous year’s losses but also repositioned China as a potential
viable destination for global capital in a landscape still marked by uncertainty elsewhere.

I​n the first quarter of 2025, China's equity markets enjoyed significant capital inflows from
both domestic and international investors. Notably, equity issuance in China doubled
compared to the same period in the previous year, reaching $16.8 billion. This surge was
largely driven by renewed investor interest, particularly in the technology sector, following the
government's reduced scrutiny on tech companies and the emergence of AI firms like
DeepSeek. ​

Mainland Chinese investors also contributed substantially, channeling a record-breaking

HK$435 billion (approximately $55.93 billion) into Hong Kong's stock market during this
quarter. This marks the highest influx since the inception of the Stock Connect scheme in 2014,
with major technology firms such as Alibaba and Tencent being primary beneficiaries. ​

Additionally, the Chinese government implemented measures to bolster domestic markets.

Regulators directed insurance companies and mutual funds to increase their investments in
domestic stocks. State insurers were required to invest at least 30% of new policy premiums
into local shares, while mutual funds were instructed to raise their shareholdings by 10%
annually over the next three years. These directives were anticipated to inject approximately
Rmb500 billion ($68 billion) into the market from major state-owned insurers alone. ​

Foreign investment also showed positive trends. In February 2025, Chinese equities attracted
$11.2 billion in inflows, indicating growing confidence among international investors.

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 Table 1: Equity Market returns in Q1 2025

Equity sector performance

Energy and consumer staples companies led the way in the firat quarter, with consumer
discretionary and technology shares lagging badly. The Mag 7 saw heavy profit taking with
Tesla in particular under downward pressure.

Table 2: Global equity sector returns in Q1 2025

Source: Bloomberg

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Bond markets

Bonds delivered stellar returns over the quarter, though not without bouts of volatility as
markets grappled with the potential impact of future tariffs on inflation and growth. The yield
on the US 10-year Treasury surged to a peak of 4.8% in mid-January, reflecting investor anxiety,
before retreating to end the quarter near its lows at around 4.2%. This rally in government
bonds provided a much-needed cushion for balanced portfolios, helping offset equity losses in
a traditional 50/50 allocation.

Across the fixed income spectrum, investment-grade corporate bonds also performed
strongly, buoyed by stable credit fundamentals and falling yields. High yield bonds posted
more modest gains, constrained somewhat by widening spreads and lingering concerns about
economic slowdown. Emerging market debt benefited from a weaker dollar and renewed
investor appetite for risk, while municipal bonds rallied alongside Treasuries, supported by
favorable supply-demand dynamics and strong investor demand for tax-exempt income.

Encouragingly, the negative correlation between bond and equity returns has reasserted itself
for now. However, investors remain cautious, eyeing a potentially more inflationary
environment ahead, driven by the specter of protectionist trade policies and renewed tariff
threats.

Chart 6: US 10-year Bond Yield with High Volatility

Source: Bloomberg

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 Table 3: Bond market returns In Q1 2025

Source: Bloomberg

FX and Precious metals

At the beginning of 2025, the dollar continued its upward trajectory from late 2024, bolstered
by the Federal Reserve's cautious approach to interest rate adjustments and anticipations
surrounding President Donald Trump's proposed tariffs on major trading partners. This initial
strength reflected investor confidence in the U.S. economy's resilience. ​

However, as the quarter progressed, the dollar's momentum waned. The announcement of
substantial tariffs on imports from Canada, Mexico, and China, set to commence on April 2,
raised concerns about escalating trade tensions and potential inflationary impacts. These
developments led to a decline in consumer and investor sentiment, contributing to the dollar's
depreciation.

Gold's Performance:

Gold emerged as a primary beneficiary amid the economic uncertainty, with prices soaring to
record highs. On March 31, 2025, gold surpassed $3,100 per ounce, marking its strongest
quarterly performance since 1986. This surge was driven by investor fears over inflation linked
to President Trump's tariff announcements and increased demand for safe-haven assets.
Major banks, including Goldman Sachs and Bank of America, raised their gold price forecasts,
anticipating continued gains fuelled by trade-war tensions and central bank demand.

Bitcoin's Performance:

Conversely, Bitcoin experienced a downturn during the same period. After reaching highs
above $100,000 in late 2024, Bitcoin's price declined by approximately 6.49% in Q1 2025,
marking its weakest start since 2020.

Table 4: Monthly performance of precious metals and currencies for Q1 2025

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 Source: Bloomberg

Gary Dugan
Chadi Farah
Mohammad Iravani
Bill O'Neill (Consultant)
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