It’s a couple of weeks into president Donald Trump’s administration and there has been a lot to talk about in the US but the news that has had the most impact on markets came from China, where Deepseek’s new artificial intelligence product has spooked investors.
The company has developed an advanced AI model named DeepSeek-V3, which activates only the necessary computing resources for each task, making it more efficient and cost-effective than competitors such as OpenAI’s ChatGPT and Anthropic’s Claude.
This was followed by less than stellar results for tech giant Microsoft on Wednesday, which reported slower than expected growth for its Azure cloud computing business. Shares were down some 6.2% in trading yesterday.
All this means the S&P 500 has had a sluggish start to the year, with the main American index up 3.7% in January. The tech-heavy Nasdaq has been even slower, up just 2.4%.
So what has overtaken the US powerhouse at the beginning of 2025? The little-loved areas of European and UK equities.
The EuroSTOXX index is up 8.5%, far and above the next-best major market, the FTSE All Share with its 5.2% gain.
Yesterday, Henderson European Trust manager Jamie Ross told Emma Wallis the continental market is being ramped up by its large-caps, which have been less dominant than their US peers.
If so, investors might think they made good decisions when it came to European allocations last year. A report on fund flows in Europe earlier this week shows investors overwhelmingly backed passive strategies (which are weighted to the largest companies in the market) and shunned active managers.
But Ross was not so sure. A revival amongst the index’s largest names, he argued, might encourage investors to choose passive strategies, but market concentration is less severe in Europe where the top five companies account for about 10% of the benchmark.
As such, active managers can easily overweight some of these companies that are driving the market without taking on exceptional concentration risk, as is the case in the US.
The key question for investors is what the rest of the year looks like. After all, a month is an incredibly short timeframe.
Some have predicted a down year for the US market (this writer included) and if this is the case then diversifying into unloved areas could reap rewards.
Yet not all areas of the market are soaring in the same way. The worst place to be invested in January has been Japan, where the Bank of Japan hiked interest rates last week. The market has been stagnant all month, up 0.6% in January, but has spent much of the month in the red as investors feared of trade tariffs imposed by the US. Emerging markets, my pick to have a strong year, are up just 2.4%.
Investors need to remember that diversifying does not mean you will capture every winner and miss every loser – quite the opposite. By spreading their money, they increase their chances of hitting winners and holding defensive assets when times get tough. It is a mitigation strategy rather than a get-rich-quick scheme.
But the month of January has shown that it remains as important as ever. Few would have predicted Europe to be leading the charge in the first month of the year. Fewer still would have suggested the much-maligned UK would be in a heady second place.
Broadening out portfolios and owning a bit of everything means investors do not have to make these predictions, they just get to benefit from these market shifts occurring.