January Report

Market Review 

Global equity markets bounced back in January, following the pull-back at the end of last year. This reflected falling inflation, enabling central banks in the Eurozone, Canada and Sweden to ease interest rates by a further 0.25%. This raised hopes of further interest rate cuts and a soft landing this year.

The US economy remained robust as unexpectedly strong job growth helped push December unemployment down to just 4.1%. Meanwhile, retail sales, existing home sales and industrial production all strengthened. Moreover, share prices were further boosted when the US December quarter corporate earnings season got off to a reasonably good start.

However, tech-heavy US markets underperformed global equities in January upon news of the DeepSeek artificial intelligence (AI) model. This appeared to have been created much faster and more cheaply than comparable western models. This challenged investors’ assumptions about the demand growth for advanced computing capacity and, hence, the fastest semiconductors. This led to AI infrastructure and semiconductor stocks underperforming following DeepSeek’s release in late January.

Information Technology accounts for over 30% of the US market, but less than 14% of the global investment universe, leading to the US market underperforming in January.

The prospect of higher US import tariffs and the possibility of an escalation into a trade war added to equity market volatility. Auto makers (none held in the Portfolio) were especially impacted.

Greater efficiency in the training of AI models risks reducing the growth rate of demand for computing power, the pace of investment in AI infrastructure and the demand for advanced semiconductors. However, the history of technological advances shows that better performance and lower costs typically lead to wider adoption and faster volume growth over time.

Among the likely beneficiaries of cheaper, more efficient AI are the software providers building applications using these models. Increased demand for AI-powered software also helps the cloud service companies that provide computing power and data storage. However, the commoditisation of large language models may negatively affect the creators of these models, particularly those that have eschewed open-source technology.

The AI ecosystem is still evolving, and further advances in the technology are expected. Innovation is always disruptive, but DeepSeek’s breakthrough seems to be positive for the AI industry overall.

Portfolio Commentary

The Portfolio returned 3.4% in January, while the benchmark delivered 2.8%. Strong stock performance in information technology (IT) and communications services and an overweight position in communications services drove relative returns. This was partially offset by weaker stock performance and the underweight position in the financial sector.

The strong stock performance in IT was driven by the underweight to semiconductor and technology hardware industries, which underperformed. The overweight holding in software underperformed, but by less than the other IT sub-sectors.

The largest contributor to relative returns in January was the overweight position in the US-based multinational technology group and Facebook-owner Meta Platforms. It outperformed after announcing stronger than expected December quarter revenue, earnings and user numbers. This reflects its previous investment in AI, which has brought improved user engagement and early monetisation.

The Portfolio’s holding in US-based biopharmaceutical group Vertex Pharmaceuticals also outperformed. This followed reports that the US Food and Drug Administration had approved the company’s non-opioid (and importantly, non-addictive) pain relief drug, Journavx.

The Portfolio’s holding in US-based Tradeweb, which builds and operates electronic over-the-counter (OTC) marketplaces for institutional, wholesale and retail investors, underperformed in January. This was because of concerns that the growth of its fixed income business might be slowing over the near-term.

India-based bank HDFC also underperformed, as liquidity in India’s banking system remains constrained. This has increased competition for customer deposits and led to concerns that margins are narrowing.

The Portfolio established a new position in the US-based industrial group AMETEK, which holds a portfolio of high-quality, niche businesses that generate strong cash flows. The company has two main business units: electronic instruments (e.g. analytical instruments, aerospace, and power and industrials) and electromechanical devices (e.g. motors and systems, and engineered materials). AMTEK has improved its board and executive leadership diversity, upgraded its sustainability monitoring and disclosures, reduced its greenhouse gas emissions, cut water use in its operations and made good progress towards eliminating workplace accidents. Harding Loevner is confident that the company can continue to deliver growth and profitability over the long term through acquisitions, international expansion and a shift in manufacturing to low-cost regions.