The first quarter of 2025 has certainly been one for the history books. Global markets continued where they left off in 2024 as the MSCI World Index gained 3.6% (USD)
in January. However, these gains were later reversed dramatically in February and March as President Trump took office and announced sweeping policy changes. Markets
navigated heightened uncertainty, driven by escalating tariff discussions and policy ambiguity. These factors led to a more cautious approach among investors, shaping
market sentiment in the latter part of the quarter.
As we have continuously stated in previous quarters, we continue to believe that it is prudent for balanced investors to allocate capital into a well-diversified portfolio
that provides access to multiple asset classes and geographies. Within our balanced fund, our approach to diversification has once again proven to be a sound strategy,
helping mitigate the recent drawdowns seen in the U.S. markets over the quarter. By maintaining broad exposure across different regions and asset classes, we aim to
provide resilience amid ongoing market volatility.
While U.S. equity markets have been correcting their strong gains from the previous two years, many overseas economies are showing signs of recovery, aided by fiscal
and monetary stimulus.
Looking back at the start of the year, expectations were shaped by a strong performance in U.S. equities in 2024 and optimism that a new Republican administration
would further bolster U.S. economic strength. At the same time, a shift towards “America First” policies was anticipated to create challenges for other regions. However,
the narrative has evolved differently. The uncertainty surrounding U.S. trade policy has dampened growth expectations, while European fiscal policy has been more
aggressive than initially expected. Emerging market equities have outperformed developed markets, with Chinese and Korean stocks leading the way. Value stocks have
outpaced growth stocks, while smaller companies have faced more headwinds, with the Russell 2000 Index declining by 3.6% (USD) month to date as trade and inflation
concerns weighed on growth. Commodities, notably gold, have been the standout asset class, rising by 19% in March
UNITED STATES
U.S. equity markets experienced a challenging first quarter of 2025, with all three major indices posting notable declines and significant monthly losses. The S&P 500 was down 5.8% month to date and 4.6% year to date, while the Dow Jones Industrial Average fell by 4.2% month to date and 1.3% year to date. The Nasdaq, dominated by tech stocks, suffered the most, ending the quarter 8.2% lower month to date and 10.4% down year to date.
The volatility in U.S. markets has largely been driven by trade-related developments. The imposition of new tariffs on imports from Mexico, Canada, and China in February, followed by additional tariffs on steel, aluminum, and automobiles in March, created uncertainty surrounding economic growth. Surveys revealed declining business investment intentions, adding to the uncertainty.
The Federal Reserve adopted a cautious stance, keeping interest rates unchanged during the quarter. Fed Chair Jerome Powell indicated that the central bank is more focused on downside growth risks rather than inflation, leaving the door open for potential rate cuts. The 10-year U.S. Treasury yield ended the quarter at 4.2%, a decrease of 36 basis points from January, signaling reduced expectations for long-term interest rates.
Despite a strong 57.8% total return in 2023 and 2024, the S&P 500 corrected by more than 10% in the latter part of Q1 2025, resulting in its worst quarterly performance (-4.3%) since the peak of the hiking cycle in Q3 2022. The correction, combined with a rotation of selling pressure in mid-February, has left the major equity indices (S&P 500, Dow Jones Industrial Average, Russell 2000, and S&P MidCap 400), each down at least 10% from their recent highs. Furthermore, all these indices have fallen below their respective 200-day simple moving averages, a signal of a more cautious market.
EMERGING MARKETS
Emerging markets have generally fared better than their developed market counterparts. The MSCI Emerging Markets Index gained 0.5% (USD) month to date in March. Chinese stocks, in particular, showed strong recovery, supported by policy measures from the Chinese government. The Hang Seng China Enterprises Index rose 1.2% (CNY) month to date, and Indian equities also performed well, with the Nifty 50 Index gaining 6.3% (INR) month to date. Brazilian stocks, as measured by the Bovespa Index, rose 6.1% (BRL) month to date, contributing to the overall positive performance of emerging market equities.
SOUTH AFRICA
In South Africa, a flight to safety during the first quarter saw mining stocks, particularly gold and platinum, outperform. The FTSE JSE All Share Index rose 3.1% (ZAR) month to date.
On the flip side, property stocks experienced declines, with the Listed Property Index falling 1.2% (ZAR) month to date and 3.8% (ZAR) year to date. Industrial stocks also underperformed, with the Indi-25 Index down 0.6% (ZAR) month to date, although it still managed to post a 3.7% (ZAR) gain year-to-date. Financials also lagged, with the Fini-15 Index gaining just 0.2% (ZAR) month to date, but down 1.7% (ZAR) year to date.
South Africa’s economy exhibited modest growth in Q4 2024, with GDP expanding by 0.6% quarter on quarter, following a slight contraction of 0.1% in Q3 2024. February inflation remained stable at 3.2%, while core inflation eased slightly to 3.4% from 3.5% in January.
As always, we continue to monitor the macro environment to ensure that our portfolio is positioned to benefit in the future. We actively make changes that we believe will be advantageous for our investors.
When looking at our balanced Sierra Global Fund, one of our key strategic decisions has been maintaining a solid bond allocation, which has proven beneficial this year. Our holdings in the iShares 1-3 Year Treasury Bond ETF and the iShares 7-10 Year Treasury Bond ETF have returned 1.31% (USD) and 3.58% (USD), respectively.
While we continue to hold the majority of our equity assets in the US, we have been diversifying our exposure across different investment styles and geographies. This has been a rewarding strategy, with our increased allocation to China returning 3.51% (USD) and our exposure to emerging markets delivering 3.03% (USD) year-to-date. Additionally, we have raised our gold allocation to 4.73%, which has served as a strong diversifier, returning 35.56% for the year.
Due to our diversified approach, we have navigated the quarterly market drawdown with significantly lower volatility than many others. Looking ahead, we remain vigilant in assessing our portfolio and making adjustments as necessary. On writing this report, markets are experiencing dramatic drawdowns driven by unprecedented announcements on Trade and Tariffs. This position has now increased the chance of a US recession to over 50% and is creating an extremely volatile position for all economies and asset classes. Our best case outcome is for a rollback in tariffs and negotiations to be positive for the long-term outcome.
While the current volatility is driven by tariff-related uncertainty, the US and global economy remain relatively strong, with company earnings continuing to grow, unemployment at record lows, and GDP expanding. The recent market decline is politically driven, rather than based on fundamental corporate or economic factors. As such, we see this as a potentially compelling entry point for long-term investors, particularly in markets that were perceived as overvalued last year.