Equity markets remained resilient in January, building on their strong run into year-end. Bond yields moved higher as investors dialled back expectations for rate cuts this quarter. Despite rising geopolitical concerns, notably the continuation of attacks against commercial shipping in the Red Sea and retaliatory airstrikes in Yemen, US and European equities posted their third consecutive month of gains. Oil prices rose c.5.7% after three months of declines, and freight container costs soared c.150%. The equity rally remained very narrow, as was the case in 2023, with positive performance attributed to only a small subset of US names.

Dominant US stocks, notably the ‘magnificent seven’, continued to lead the market during January. Resilient earnings and excitement around the potential of artificial intelligence (AI) have helped to support lofty valuations here; however, the ‘bar’ to impress investors is set relatively high. While only a third of companies have reported thus far, initial results suggest the ‘magnificent seven’ account for most of fourth-quarter earnings growth. Microsoft reported a c.33% rise in profits, with sales from its Azure cloud platform – a major growth driver for Microsoft – rising c.30% quarter-on-quarter, 6% of which was attributable to Azure AI and other AI services (up from 3% last quarter). Similarly, Google-parent Alphabet reported double-digit revenue growth in the fourth quarter. While results for both Microsoft and Alphabet were generally above or in line with estimates, the shares traded lower into month-end as investors sought more reassurance that costly AI investments are translating into financial gains. In contrast, January was a challenging month for companies within the basic materials sector. China’s sluggish economic recovery continued to weigh on mining stocks and base metals markets more broadly. Aggregate results (thus far) for the basic materials sector suggest earnings contracted c.20% in the fourth quarter, driven by high interest rates, weak global manufacturing activity and a prolonged downturn in China’s property market.

Across regions, Japan (+4.3%) outperformed in January, with the Nikkei rising to a 33-year high and testing the all-time high of 1990. Yen depreciation, corporate reforms to maximise shareholder value, and ultra-loose monetary policy remain supportive here. The US market (+1.7%), with its high technology weighting, also delivered strong returns in January, while European (0.0%) and UK (-1.2%) shares were weaker. China (-10.3%) was a notable laggard during January after manufacturing activity in the region contracted for the fourth consecutive month. Poor equity market performance in China follows lacklustre policy support from Beijing to sustain the country’s economic recovery. In the absence of more meaningful government intervention, investors remain concerned that the country is staring at several years of stagnation (low growth usually coupled with higher unemployment) to come. Geopolitical concerns, including the upcoming US presidential election, also remain a headwind for Chinese equities.

Vertiv Holdings (+17.4%) was the Trust’s top contributor to relative returns in January. Revenues and earnings for the digital infrastructure provider have consistently beat analyst estimates, while management continues to successfully execute its strategy to improve margins and deliver operational improvements, including greater free cash flow conversion. As a leading supplier of cooling equipment and technology to data centres, the company is well positioned to benefit from secular demand in data centres arising from the need for faster AI computing. The Trust’s underweight position in Tesla Motors (-24.5%) was another key contributor to relative returns this month. Tesla has been the notable laggard within the ‘magnificent seven’ group of stocks this year after missing market estimates for quarterly profits and revenues. Elon Musk has failed to allay investor concerns over falling demand, shrinking margins, and persistent price cuts to its vehicle line-up; furthermore, the company is facing intensifying competition from Chinese electric-vehicle manufacturers. NVIDIA (+24.4%) was a strong performer during the month as positive analyst earnings projections and heightened optimism around AI propelled the stock higher. The announcement of expanded AI-related offerings, including new desktop graphics processors and advancements in AI-related components and software, continue to reinforce the company’s dominant position in the market for advanced AI chips.

We ended the month at a discount of 6.3%, widening from a discount of 5.9% at the end of December.