Written by Dominic Williams
Overall, markets enjoyed a positive week, with the MSCI World Index gaining +0.8% in GBP terms, boosted by value stocks, which outperformed their growth counterparts over the week. The main focus was on interest rate decisions from three major central banks, all of which delivered outcomes in line with market expectations.
The week began with the Bank of Japan, which voted to maintain interest rates at 0.5%, a 17-year high, meeting consensus forecasts. The central bank has been gradually raising rates over the past year in response to rising inflation, while also working to normalise monetary policy after decades of deflationary pressure. The decision to hold rates was largely driven by ongoing uncertainty around the US administration’s evolving trade policies, particularly concerning tariffs. As Japan is a heavily export-oriented economy, any tariff-related developments could have significant implications. Market reaction to the interest rate decision was muted. However, Japanese equities performed strongly, with the MSCI Japan Index rising +3.2%, supported by gains in value stocks, the MSCI Japan Value Index rose +4.2%, both in GBP terms.
Later that day, the US Federal Reserve (Fed) also opted to leave interest rates unchanged at 4.5%, again aligning with market expectations. However, attention quickly shifted to Fed Chair Jerome Powell’s comments and the updated economic projections. The Fed now expects US GDP growth in 2025 to be 1.7%, down from the previous forecast of 2.1%. Core inflation is projected to remain elevated at 2.8%, above the Fed’s 2% target. Much of this revision is attributed to the anticipated impact of new tariffs, which are expected to push inflation higher while dampening growth. However, as we’ve noted previously, the real-world effects of these tariffs remain highly uncertain.
Despite these cautious projections, US markets posted gains, with the S&P 500 rising +0.7% over the week. Notably, most of the gains were concentrated in value and smaller capitalisation stocks. The Russell 1000 Value Index increased by +1.2% while the Russell 2000 (small-cap index) rose by +0.8%, both in GBP terms.
On Thursday, the Bank of England also held its base rate steady at 4.5%, as widely expected. The Bank indicated it remains open to potential rate cuts later in the year, as it attempts to strike a delicate balance between curbing elevated inflation and supporting an economy showing signs of weakening. In line with the Fed, the Bank of England revised down its growth forecast for 2025 from 1.5% to 0.75%. Markets remained relatively neutral, with the FTSE All Share rising by a modest +0.1%. However, UK value stocks contributed most positively, with the MSCI UK Value Index rising +1.0%.
In continental Europe, Germany’s newly appointed Chancellor, Friedrich Merz, unveiled a significant €1 trillion investment package in defence and infrastructure. This ambitious programme will be funded by a relaxation of Germany’s traditionally strict fiscal rules, marking a notable policy shift. The initiative is expected to boost the country’s defence readiness, stimulate economic activity, and support job creation in Europe’s largest economy, which has suffered from sluggish or negative growth in recent years. However, the overall European market was little changed by this announcement, the MSCI Europe ex-UK Index rose +0.2% over the week in GBP terms.
China bucked the trend seen across most markets, with the MSCI China Index posting negative returns of -1.6% in GBP terms. This marks a reversal from the performance year to date, where China had been one of the stronger performers. Within Emerging Markets, India saw a turnaround in fortunes, with the MSCI India Index gaining +6.6%, in GBP terms following negative performance year to date.
These developments highlight the importance of maintaining a well-diversified portfolio across regions and investment styles. As different areas come in and out of favour, diversification remains key to capturing opportunities and mitigating risks in a changing macroeconomic environment.
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All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 24th March 2025.
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