SMF January 2025 Update

Top 3 investment trends 

1. Bond market turbulence 

Bond markets had a turbulent start to the year, with yields reaching new recent highs in January. 20-year US yields breached the key 5% milestone, which has only happened on one other occasion since the Global Financial Crisis. In the UK, 30-year gilt yields reached levels last seen in 1998 (5.2%). US volatility was driven by the potential inflationary impact of Trump's trade policies, alongside several data releases. The US job market continues to look buoyant, with January non-farm payrolls surprising to the upside with 256,000 new jobs created. The Institute of Supply Management (ISM) services print, which is a key measure of economic health in the US service industry, indicated the highest level of economic expansion in nearly two years. In combination, these factors led markets to reduce interest rate cut expectations from the Federal Reserve as well as the Bank of England for 2025, contributing to a global bond sell off. In the UK, the impact was magnified, largely due to the increased spending and borrowing announced in the Autumn Budget. Since a peak in mid-January, bond yields have fallen following softer inflation data in the UK and the US. In the second half of January, this led to new speculation around continued central bank cuts. 

2. Trump 2.0: orders from Day 1 

President Trump was inaugurated this month for his second term, vowing for a new 'golden age for America'. On his first day in office, he announced immediate overhauls of domestic and foreign policy to be implemented through over 100 executive orders. In his first two weeks, as many as 50 of these were signed. These orders include declaring a national emergency at the US-Mexico border due to fears over immigration and drug smuggling, and declaring a national energy emergency in a bid to boost domestic energy production. On his inauguration day, markets were particularly sensitive to tariff policies, although a slight delay in the imposition provided some initial relief. However, by the end of the month, the White House confirmed tariffs would be imposed on Canada, Mexico and China. In response, the US Dollar surged, while in turn, the Canadian Dollar was the worst-performing G10 currency in January, weakening -1.1% against the US Dollar. 

3. DeepSeek sends market shockwaves 

Chinese startup DeepSeek sent shockwaves throughout the market this month. This was triggered by the company’s development of a sophisticated AI model at a fraction of the cost of its US rivals. In particular, it achieved this without using Nvidia’s market-leading chips, which have been a mainstay for AI development. Whilst there were some losers following the news, such as the NASDAQ (a key indicator of the performance of technology and growth companies) which fell -3% and Nvidia which dropped -17% on the day, Apple and Meta's stocks rose as markets speculated that they could develop AI-capable devices more easily and at a lower cost. DeepSeek was the obvious winner, as it became the most downloaded app on the day on numerous app stores, marking a meteoric rise despite being relatively unknown a few days prior. Although, this aggressive sell-off was short-lived and ultimately, the Magnificent Seven ended the month up about 2.5%.

January 2025 Market performance (GBP terms)                                                                                                                   

Past performance is not a reliable indicator for future performance.

Source: Morningstar as at 31 January 2025. All equity and commodity returns are in GBP and fixed income is GBP hedged.

How did SMF perform?

Growth assets

Global equities have had a strong start to 2025 with all key equity regions posting positive returns in January, led by European equities. The Stoxx 600 hit new record highs this month, driven by strong earnings reports in technology and healthcare stocks and continued easing by the ECB, which overshadowed weakness in the region’s macro data releases. Given this, our European equity holding was the top performing fund within the Growth assets sleeve. Whilst the S&P 500 also set a new record in January, DeepSeek’s entry into the AI market towards the end of the month led to volatility in the US, which primarily impacted tech stocks. Trump’s announcement of tariffs on Canada, Mexico & China also had a negative impact, although tariffs on the former two have been paused subject to negotiations. In terms of our active positions, our overweight position in North American equities was additive to returns, including our allocation to US financials following a strong earnings season. 

Defensive assets

Fixed income markets struggled at the start of the month, as strong US macro data triggered a global bond sell-off. A resilient ISM release and a significant upside surprise in non-farm payrolls drove 20y US Treasury yields to new recent highs, negatively impacting bond prices. This trend was mirrored across global bond markets, particularly in the case of UK Gilts. However, by the end of the month, this trend had reversed, with fixed income assets posting overall positive returns for January. Softer inflation data out of the UK and US, paired with a dovish ECB, saw bond yields trend lower as investors increased their expectations for rate cuts. Consequently, our Global Corporate bond holding was the best performing fund within the Defensive sleeve. Given this backdrop, our overweight position in Gilts was additive, as was our underweight position in Japanese government bonds as the Bank of Japan continued their hiking cycle. 

Alternative assets

Alternative assets also posted positive performance in January. Both our property holding and AIMS performed well, with the latter benefitting from exposure to gold mining. 

Key active management themes in January 2025

• Added new relative value equity trades to the portfolios
  • Overweight US financials (vs the broader US market)
    The US financial sector is well-positioned to benefit from a resilient US economy, keeping debt defaults at bay, and higher interest rates which are supportive of banks’ profitability. Trump’s drive for deregulation is also seen as a tailwind for the sector. 
• Overweight US equities v underweight EM equities 
  • We have reinitiated our overweight US v underweight EM position. Due to continued macro resilience, and good earnings growth in the US, we expect US equities to outperform EM equities, especially given aggressive US trade policy against China. 
• Rotated some duration exposure into an overweight German Bunds position
  • We have diversified our overweight fixed income position, by rotating some exposure into German Bunds. Persistently weak growth within the Euro Area is supportive of continued rate cutting by the ECB, in contrast to the US where fiscal, and inflationary, concerns remain salient. 
• Opened an FX trade – long US dollar and underweight Pound Sterling
  • We maintain our view that weaker macro prospects in the UK may prompt the BoE to cut more aggressively, putting downwards pressure on the Pound. In contrast, inflationary concerns (driven by Trump’s fiscal and tariff policy) are likely to provide support for the US Dollar. 

SMF Strategic Asset Allocation

Source: Aviva Investors. This diagram is for illustrative purposes only, asset allocations are subject to change. The reference fund is SMF, based on its strategic asset allocation as at 30 June 2024.

Top 10 Equity holdings

Source: Aladdin, as at 29 January 2025. The reference fund is SMF.

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in January 2025.

Market outlook and positioning: what do we believe happens next?

From an active asset allocation perspective, we maintain a long position in equities, with a preference for focused exposure within the US market. We continue to see the current macro environment of resilient growth as favourable for equities, supporting corporate profitability. Regarding global fixed income, the potentially inflationary effects of the proposed Trump 2.0 policies present a risk to central bank easing biases, most notably in the US. However, we believe Europe, including the UK, is more insulated from this effect, where the continued focus on growth risks are likely to place a ceiling on bond yields. We now also have an FX position in which we are overweight USD v underweight GBP (an additional expression of our growth concerns within the UK relative to US’ strong macro backdrop).

In terms of equity regions, we have a focused overweight position in US equities, which is diversified through our sector position in US financials. Going forward, US companies are expected to benefit from a combination of corporate tax cuts, deregulation policies and fiscal stimulus in the US. Earnings have also continued to be robust, as shown throughout 2024, helping to stabilise valuations. In terms of US financials, the sector is well-placed in an environment of potentially higher rates which is supportive of banks’ profitability.

Regarding our fixed-income allocation, we are short Japanese government bonds with overweight positions in UK Gilts and German Bunds. We believe that Japan is still in a hiking cycle given their domestic inflationary pressures, with another 0.25% rate hike delivered in January by the BoJ. In Europe, evidence of stagnation continues to mount, painting a weaker macro picture relative to other developed economies. Given this, we believe our overweight German Bunds and Gilt position could benefit from continued central bank easing, particularly in the case of the UK where we see potential for greater rate cuts than market expectations. 

Any companies, or markets, mentioned are for illustrative purposes only, not intended to be an investment recommendation.

Key risks

• Investment not guaranteed: The value of an investment is not guaranteed and can go down as well as up. You could get back less than you’ve paid in.
• Specialist funds : Some funds invest only in a specific or limited range of sectors. This will be set out in the fund’s aim. These funds may be riskier than funds that invest across a broader range of sectors.
• Suspend trading : Fund managers are often able to stop any trading in their funds in certain circumstances for as long as necessary. When this happens, cashing in or switching your investment in the fund will be delayed. You may not be able to access your money during this period.
• Derivatives: Derivatives are financial contracts whose value is based on the prices of other assets. Most funds can invest partly in derivatives so that the fund can be managed more efficiently or to reduce risk, but there’s a risk that the company that issues the derivative may default on its commitments, which could lead to losses. Some funds also use derivatives to increase potential returns – this is known as ‘speculation’ – and an additional risk warning applies to those funds.
• Foreign exchange risk: When a fund invests substantially in overseas assets, its value will go up and down in line with movements in exchange rates as well as the changes in value of the fund’s investments.
• Emerging Markets: Where a fund invests substantially in emerging markets, its value is more likely to move up and down by large amounts and more frequently than a fund that invests in developed markets. Emerging markets may not be as strictly regulated, and investments may be harder to buy and sell than in developed markets. Emerging markets may also be politically unstable which can make these funds riskier.
• Smaller Companies: Where a fund invests in substantially the shares of smaller companies, it’s more likely to move up and down by large amounts and more frequently than a fund that invests in the shares of larger companies. The shares can also be more difficult to buy and sell, so smaller-companies funds can be riskier.
• Fixed Interest: Where a fund invests substantially in fixed-interest assets, such as corporate or government bonds, changes in interest rates or inflation can contribute to the value of the fund going up or down. For example, if interest rates rise, the fund’s value is likely to fall.
• Derivatives: Some funds also invest in derivatives as part of their investment strategy, not just for managing the fund more efficiently. Under certain circumstances, derivatives can cause large movements up or down in the value of the fund, making it riskier compared with funds that only invest in, for example, company shares. There’s also a risk that the company that issues the derivative may default on its commitments, which could lead to losses.
• Cash/Money Market funds : These are different to cash deposit accounts, such as those held with high-street banks, and their value can fall. Also, when interest rates are low, the fund’s charges could be higher than the return from the investment, so you could get back less than you’ve paid in.
• Property Funds: When a fund invests substantially in property funds, property shares or directly in property, you should bear in mind that: · Property isn’t always easy to sell, so at times the fund may not be able to cash-in or switch part or all of its holdings. You may not be able to access your money during this time. Property valuations are made by independent valuers, but effectively they remain a matter of judgement and opinion. Property transaction costs are high due to legal costs, valuation costs and stamp duty, all of which affect the value of a fund.
• High Yield Bonds: These are issued by companies and governments that have a lower credit rating. When a fund invests substantially in high yield bonds, there’s a higher risk that the bond issuer might not be able to pay interest or return the capital that was invested. The value of these bonds is also more greatly affected by economic conditions and interest rate movements. There may be times when it’s not easy to buy or sell these bonds, so cashing-in or switching your investment in the fund may be delayed. You may not be able to access your money during this period.
• Reinsured Funds: Where a fund invests in a fund that’s operated by another insurance company, you could lose some or all of the value of your investment in the fund if the other insurance company became insolvent.
• Long-Term Asset Funds: The fund invests partly in one or more long-term asset funds (LTAFs), giving access to sectors such as infrastructure, venture capital, private equity and debt investments. LTAFs add diversity to the fund, but it takes longer to move money out of them than from many types of asset. This could mean that in exceptional circumstances cashing-in or switching your investment in the fund may need to be delayed. To reduce this risk, we set strict limits on how much of the fund can be invested in LTAFs and monitor this closely.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited ("Aviva Investors"). Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.

Issued by Aviva Investors UK Fund Services Limited. Registered in England No 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: 80 Fenchurch Street, London, EC3M 4AE. An Aviva company.