January has been a volatile month for global and SA equities. Stock markets experienced a “Trump bump” after his inauguration on January 20, driven by expectations of market-friendly policies. However, equities retreated to end the month with modest gains as investors weighed tariff uncertainties, shifting interest rate expectations, and growing concerns about the sustainability of the technology sector’s remarkable run.
So, what can investors expect?
Tariffs: The wild card
While none of the 20 executive orders signed on Inauguration Day addressed trade tariffs, they remain a potent tool in Trump’s arsenal, with potentially far-reaching implications for the global economy and financial markets.
UBS Global Wealth Management’s base case scenario envisions China’s effective tariff rate rising from 11% to 30%, alongside measures to protect technological interests and new tariffs on European automobiles. The administration’s threats of 25% tariffs on Canada and Mexico are primarily viewed as negotiating tactics in an “escalate to de-escalate” strategy.
Under this scenario, UBS projects the 10-year Treasury yield would decline to 4.0%, while US and Asia ex-Japan equities could rally approximately 10%. However, a more aggressive tariff policy could trigger severe market reactions, potentially pushing the 10-year Treasury yield to 5.0% and causing US equities to decline by 15%, with European and emerging market stocks falling by as much as 20%.
Interest rates: A delicate balance
Strong US economic indicators and the potential inflationary impact of tariffs are likely to result in fewer Federal Reserve interest rate cuts than initially anticipated. Current market pricing suggests only two 25-basis-point reductions this year. As US rates traditionally set the global benchmark for fixed-interest investments, these decisions will influence central banks worldwide, including the SA Reserve Bank. While Trump has signalled his intent to pressure the Fed for rate cuts, he will struggle to do so given the central bank’s legal independence.
Technology sector: New competitive threats
The vulnerability of the US technology sector’s market dominance was highlighted in the last days of January when Chinese AI company DeepSeek emerged as a serious competitor, triggering the Nasdaq’s most significant single-day decline since September 2022.
Investor concerns about the sustainability of the AI-tech rally have been gaining ground despite the Magnificent 7s impressive 63% share price performance in 2024 after surging 75% in 2023. Questions persist about how these companies will turn their massive AI investments into concrete profits.
DeepSeek’s recent success in capturing US market share is particularly notable given that it spent just $5.6 million on its base model and has achieved overwhelmingly positive Silicon Valley reviews. This despite using less sophisticated technology due to US restrictions on China’s access to advanced semiconductor chips.
The bottom line: A bumpy road ahead
Though many of Trump’s economic policies are seen to be market-friendly, the first month of the year has shown that it is going to be more complicated than that. Investors would be wise to maintain diversified portfolios that can withstand potential geopolitical developments, particularly in US-China relations and their impact on global trade and technology leadership.
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