January 2025 Commentary
Market Overview
In January, the U.S Federal Reserve decided to maintain the target range for the federal funds rate at the 4.25%-4.50%1 mark, citing expanding economic activity and a stable unemployment rate. The Manufacturing ISM Report on Business stated that U.S factory activity expanded for the first time in 27 months to 50.9%,2 driven by new orders, employment, deliveries and production. According to the IMF World Economic Outlook, global growth is projected at 3.3% for both 2025 and 2026, below the historical average of 3.7%3 GDP growth. For the advanced economies group, the U.S. leads at 2.7%, followed by Spain at 2.3% and Canada at 2.0%. Within emerging markets, India leads the GDP growth with an expected 6.5%, followed by China at 4.6% and Saudi Arabia at 3.3%. Mexico’s and Brazil’s economies are expected to contract in 2025 due to internal political tensions and U.S tariffs. Foreign direct investment (FDI) in developing economies fell by 2%4 in 2024, particularly in Asia (-7%) and Latin America (-9%), while Africa’s grew by 86%. FDI is expected to grow moderately in 2025. In the euro area, inflation rose to 2.5%5, up 0.1% from December 2024 due to services and food while unemployment ticked up to 6.3%6. Due to weak economic activity, the ECB lowered its benchmark rate by 0.25%, bringing the key interest rates for the euro area to 2.75%7 while further cuts are expected for March. The HSBC India Manufacturing PMI pointed to a strong start to 2025, growing to 57.78 and reflecting the highest international sales growth in the last 14 years.
Despite the looming threats of tariffs, hard currency emerging markets bonds kicked off the year on a positive note with all indices reporting gains. The Overall HY returned 1.45%, surpassing the Overall IG by 82 bps and the Overall by 53 bps. This month, the Liquid Sovg & Sub-Sovg led its benchmark (Sovg & Sub-Sovg) by 15 bps, largely driven by high yield bonds from Ecuador, Argentina and Egypt. Notably, the Sovg & Sub-Sovg HY outperformed all high yield indices, up 1.74%, which was 60 bps above Corporate HY and 51 bps above the Liquid Sovg & Sub-Sovg. One-year returns were highest for the high yield indices; the Sovg & Sub-Sovg HY returned 14.61% and the Corporates HY returned 10.26%, influenced mostly by bonds from countries such as Argentina, Chile and China.
Yields for the top 10 countries increased slightly when compared to December 2024. Most notable yield increases were seen for Mexico at 40 bps above last month and Brazil at 37 bps. The rise in Mexico’s bond yields and drop in monthly return (-19 bps when compared to December, but still positive at 0.62%) were likely affected by the risk of 25% U.S tariffs on all imported goods that came due for only one day in February before negotiations kicked in. In January, Brazil’s bonds had the highest one-month return when compared to peers at 1.64%.
