31 January 2025 Weekly Market Recap

1. This week, the global financial markets exhibited mixed performance. Among developed markets, Europe experience positive gains, while the United States and Japan experienced decline.
    
2. Across Asia, market performance was mixed. India posted the largest gains, while Thailand experienced the largest decline. In Malaysia, the FBMKLCI closed slightly negative, driven by the cautious sentiment in the regional market.
    
3. In the bond market, the US 10-year Treasury yield edged closer to the 4.5% range as investors accessed the tariff announcement from White House against Mexico, Canada and China. Investors also closely monitoring the latest inflation reading. (It's worth noting that bond prices move in the opposite direction of bond yields.)

1. In the U.S., the Federal Reserve kept the fed funds rate unchanged in the 4.25%-4.5% range during its January 2025 meeting, in line with expectations. The Fed indicates that they are not in a hurry to lower interest rates and will continue to maintain a data-dependent approach to monitor further progress on inflation. The headline annual PCE inflation edged up to 2.6% in December 2024 from 2.4% in November. Core PCE rose by 0.2% from the previous month in December of 2024, picking up slightly from the six-month low of 0.1% in the earlier month. The US economy expanded at an annualized 2.3% in Q4 2024, down from 3.1% in Q3 and forecasts of 2.6%, according to the advance estimate.²
    
2. In Europe, the economy unexpectedly stalled in Q4 2024, marking its weakest performance of the year, following a 0.4% growth in Q3 and an anticipated 0.1% expansion, according to preliminary estimates. The ECB lowered its key interest rates by 25 basis points in January 2025, as expected, reducing the deposit facility rate to 2.75%, the main refinancing rate to 2.90%, and the marginal lending rate to 3.15%. This move reflects the ECB’s updated inflation outlook, with price pressures easing in line with projections. The unemployment rate ticked up to 6.3% in December 2024, compared to a revised record low of 6.2% in November.³
    
3. In China, the official NBS Manufacturing PMI unexpectedly fell to 49.1 in January 2025, missing both estimates and December's reading of 50.1. This marked the first contraction in the manufacturing sector since September and the steepest decline in five months, amid sluggish factory activity ahead of the Lunar New Year festival.⁴
    
4. In Malaysia, the producer prices index climbed 0.5% year-on-year in December 2024, rebounding from a 0.4% decline in the previous month.⁵

The market continues to react to concerns of tariff threats and asset volatility. Still, recent data highlight ongoing economic growth, bolstered by continued Federal Reserve rate cuts and a positive US macro backdrop. As specific policy plans emerge, investors should brace for market fluctuations and consider using significant changes to enhance their long-term portfolios. We slightly prefer equities over fixed income. Key themes for 2025 include: i) the impact of policy shifts on China's recovery; ii) the U.S. economic outlook regarding a soft landing; and iii) the influence of geopolitical risks on asset prices.

1. Equities: We favour quality, dividend-paying stocks for their defensive nature amid macroeconomic uncertainties. Our focus is on Asia, targeting: a) idiosyncratic ideas where company earnings are primarily influenced by domestic economic factors; b) selective Chinese domestic consumption which appeared deeply discounted; c) technology (beneficiaries of AI and internet platforms); d) industrial names with exposure to grid capex; e) strong consumer and banking franchises in Southeast Asia; and f) selective Indian companies that are reasonably valued with growth potential. Additionally, we note Malaysia's positive outlook due to political stability and initiatives like the New Energy Transition Roadmap.
    
2. Fixed Income: We adopt active approach in anticipation of market volatility by targeting various maturities along the yield curve that could add value. Maintain preference on credit with disciplined profit taking activities once valuation turns expensive and replaced with new primary issuances or tactical position in government bonds. We maintain our overweight duration bias relative to the benchmark as the current market conditions still remains favorable.
    
3. Diversification: We recommend a diversified approach to navigate volatility from geopolitical tensions, central bank rate cuts, and market adjustments following the U.S. election.