Luna Perspective – Q1 Market Commentary 2025

“There are decades where nothing happens; and there are weeks where decades happen”, Vladimir Ilyich Lenin.

It has been an eventful first quarter of 2025. This has been reflected in portfolios which recorded strong gains in January before coming under pressure from early February. We saw interest rates cut, inflation picking up, threats of tariffs and initial steps to end the conflicts in Ukraine and the Middle East.

As Donald Trump took office, he issued a number of executive orders spanning many areas, but perhaps the main driver for markets was the announcement that the US would implement new tariffs against Canada and Mexico and an additional tariff on China. At the time of writing, there is also talk of tariffs being introduced on individual commodities, such as steel, and countries that buy Venezuelan oil. This has raised concerns over global supply chains, trade wars, and a resurgence of inflation. This has led to business confidence in the US being hit and economic growth being revised lower for 2025 by around 1%.

Away from politics, markets also were digesting the emergence of Deep Seek, the Chinese competitor to ChatGPT. What grabbed the headlines was the fact that Deep Seek was developed with a much lower initial investment and lower energy costs, which led to concerns around earnings forecasts of US technology stocks. The Nasdaq 100 ended the quarter down over 10%*. It is still early to understand the impact but one positive to take from this is that it means Artificial Intelligence costs are likely to come down and the energy demand will be lower. This is a positive for both companies and governments and should drive broader adoption of the new technology.

There seems to be a global will for the war in Ukraine to end with numerous meetings held during the quarter. This should be broadly positive for the people of Ukraine and would also certainly be well received in Europe. The initial market response when Russia invaded Ukraine was a spike in commodity prices, notably in energy markets. Therefore, an end to the conflict could also see a reverse in energy prices. This would be welcomed by governments because it would provide some relief on inflation, which is above target in many countries. Lower energy prices would benefit European corporates from lower input costs and improved profitability. European equities were up over 7%* during the quarter.

In the UK, the Bank of England cut interest rates from 4.75% to 4.5%; the lowest base rate since June 2023. This was despite recent inflation figures showing that the Consumer Price Index (CPI) has increased to almost 3% and above the 2% central bank target. The commentary around inflation from the central bank is also that inflation will continue to pick up over the coming months due to price increases coming through in April, whether that be water, energy, wages and price increases following on from the budget.

The Ukraine developments, coupled with relatively low valuations seems to be propelling UK and European equities in 2025. US stocks were weaker during the quarter, a reflection of uncertainty caused by one leg of Trump’s economic policies and high valuations. As we enter the second quarter, the markets hope to see progress on US corporate tax cuts and deregulation that could drive stronger growth into the remainder of 2025.

* Source: Morningstar Direct (01/01/2025 to 31/03/2025)