International
In the second quarter of 2025, global markets proved resilient in the face of significant volatility. Markets were rattled early in the quarter by escalating trade-war worries and a brief outbreak of direct hostilities between Iran and Israel, yet many risk assets still finished higher by quarter-end.
The US market led the rebound after a weak Q1, buoyed by encouraging economic data and a resurgence of some “Big Tech” stocks, which challenged the narrative of a major rotation away from U.S. equities. Emerging markets also performed well, aided by policy support, stronger commodities, and a weaker US dollar. The MSCI Emerging Markets Index posted a 12.0% gain during Q2, slightly outpacing developed markets at 11.5%. By sector, information technology was the standout performer globally with the tech-heavy Nasdaq soaring 18.0%, while energy stocks lagged as oil prices declined nearly 10% over the quarter. In the US, inflation remained relatively subdued. The headline CPI rose at a 2.4% annual rate in May, up slightly from 2.3% in April and below what many had expected. Core inflation held around 2.8% year-on-year, the lowest core rate in over two years. These softer price readings bolstered hopes that inflation was on a sustainable downward path, even as long-run inflation expectations stayed elevated.
The Federal Reserve kept interest rates unchanged throughout Q2, emphasizing it would wait for clearer evidence that inflation is moving toward the 2.0% target. Economic growth showed signs of strain with retail sales declining 0.9% in May and industrial production contracting. The economy shrank at a 0.5% annualized rate in Q1 2025 – the first quarterly GDP decline in three years. Fed officials attributed some of this weakness to uncertainty around Trump administration trade policies. Nonetheless, the labour market and consumer spending remained fairly resilient, preventing a sharper downturn.
European markets managed to grind higher in Q2, though they trailed the U.S. upswing. After an April wobble caused by new U.S. tariff announcements, European equities recovered in May and June amid optimism about peaking inflation and potential fiscal stimulus. The pan-European Euro Stoxx 600 Index eked out a 2.9% gain for the quarter. Germany’s DAX rose 7.9%, while France’s CAC 40 notched a modest 0.3% gain, consolidating their strong Q1 advance. Investor sentiment in Europe was supported by rising infrastructure and defence spending (which continued to benefit industrial and defence stocks), as well as easing anxiety over U.S. import tariffs on key European industries. European banks remained robust performers thanks to higher interest margins and renewed confidence in the economy.
Inflation in the eurozone fell below the ECB’s target during the quarter, giving policymakers room to loosen policy. Headline CPI for May eased to 1.9% year-on-year, down from 2.2% in March, driven by falling energy costs and an unexpectedly sharp drop in services prices. Core inflation (ex-food and energy) also decelerated significantly to 2.3% in May from 2.7% in April. In response to these broader disinflationary trends, the European Central Bank cut interest rates twice, in April and again in June, bringing its deposit rate down by a total of 50 basis points to 2.0%. ECB officials indicated that the end of the easing cycle may be near, though their own forecasts still show inflation slightly undershooting the target in 2026. The prospect of lower rates and continued dovish guidance helped European bond yields fall and supported equity valuations. However, policymakers must balance the near-term slide in prices against longer-term risks like trade war fallout, defence-related spending, and supply-chain realignments that could push inflation up in future. The ECB again trimmed its growth outlook for the euro area (now projecting under 1.0% GDP growth for 2025) amid these uncertainties.
UK markets extended their gains into Q2. The FTSE 100 Index hit fresh all-time highs, returning approximately 3.2% for the quarter. Large-cap British banks and telecom companies were among the top performers, and defensive sectors benefited from improved sentiment across Europe. However, the UK’s heavy weighting in energy and healthcare stocks, the only two global sectors that declined this quarter, kept its gains more muted relative to the U.S. surge. Meanwhile, UK mid- and small-cap equities continued to lag, hampered by a subdued domestic economic outlook and soft consumer spending. On the policy front, Prime Minister Starmer’s pledge to boost defence spending to 2.5% of GDP by 2027 remained a talking point, while supportive of certain industries, it has also renewed debate about long-term fiscal sustainability. To maintain investor confidence, the government stuck to fiscal discipline measures outlined earlier in the year (such as welfare spending cuts and anti-tax-avoidance efforts). The Bank of England, having cut rates by 25 bps in February, left its benchmark rate unchanged at 4.25% in the June meeting. With UK inflation easing to 3.4% in May from 3.5% in April, a minority of BoE policymakers argued for further rate reductions, but the majority preferred to pause and monitor inflation’s trajectory.
U.S. equities staged a dramatic turnaround after a difficult first quarter. The S&P 500 logged its best quarter in years, rising 10.9%, and the Dow Jones Industrial Average gained 5.3%. The quarter’s turbulent start marked by President Trump’s surprise announcement on April 2 of sweeping new import tariffs (“Liberation Day” duties) initially sent markets into a tailspin. The S&P 500 plunged nearly 12% in the days following the announcement and the spike in trade tensions, briefly approaching bear market territory. However, by mid-quarter the White House moved to soften its stance: it suspended the most punitive tariffs for 90 days and opened talks toward a trade deal with China. This reversal allayed investors’ worst fears and sparked a powerful relief rally. Mega-cap tech stocks, which had been hardest hit in Q1, roared back to life. The so-called “Magnificent 7” surged 18.6% in Q2, outperforming the rest of the S&P 500 by a wide margin. The tech-heavy Nasdaq Composite jumped 18.0% for the quarter, leading all major indices. Investors were encouraged by strong Q1 earnings reports from many companies and the sense that the trade war might not escalate further for now. By the end of June, the S&P 500 had climbed to a new all-time high, a stunning recovery after the April selloff. Volatility remained elevated and geopolitical headlines continued to inject uncertainty, but overall market sentiment improved markedly compared to the prior quarter. Even so, market observers cautioned that risks linger, given the unpredictable direction of U.S. trade policy and historically high equity valuations in some sectors.
Global bond markets rallied in Q2 as well, supported by cooling inflation and a cautious shift by central banks. The Bloomberg Global Aggregate Bond Index advanced by 4.5% during the quarter (on top of Q1’s gains). U.S. Treasuries traded in a volatile range with the 10-year Treasury yield briefly spiking in early April amid the trade turmoil, then drifted back down and ultimately finished the quarter roughly unchanged around 4.2%. Short-term U.S. yields remained anchored by the Fed’s on-hold stance, while longer-term yields ticked up slightly due to growing U.S. fiscal concerns. Notably, the 30-year Treasury yield rose about 20 basis points after the administration’s large-scale spending bill (the “One Big Beautiful Bill Act”) fuelled worries over future debt levels.
In contrast, European bonds performed very well: the ECB’s rate cuts pushed eurozone yields down by 17 bps on average in Q2, and bond prices rose accordingly. Italian government bonds were standout performers, returning nearly 3.0% for the quarter as yield spreads narrowed on improved risk sentiment. UK gilts also delivered positive returns as British yields stabilized following the BoE’s February rate cut. Corporate credit markets recovered from the spring volatility – global investment-grade spreads, which had widened after the tariff scare, tightened by 9 bps by quarter-end. Global investment-grade credit returned about 4.4% in Q2, and emerging-market USD bonds got a boost from the weaker dollar. Inflation-linked bonds globally outpaced nominal bonds, benefiting from the decline in real yields; the global inflation-linked index gained roughly 4–5%. Overall, with central banks stepping back from tightening and the dollar’s retreat, fixed income assets provided solid gains and diversification during the quarter.
Japan’s stock market rebounded strongly in Q2. After a sharp decline in the first quarter, the Nikkei 225 rallied 13.9% over the second quarter, supported by a combination of domestic and external factors. A key driver was the revival of global technology and electronic stocks, to which Japanese indices have significant exposure. Additionally, a more stable yen in Q2 – after its big surge earlier in the year – helped lift exporters’ earnings prospects. The Bank of Japan maintained its new tighter stance: having raised its policy rate to 0.5% in January, the BOJ held rates steady this quarter but continued signalling a readiness to further normalize policy as needed. Japan’s latest data showed the economy extending its recovery: revised figures confirmed GDP grew an annualized 2.2% in Q4 2024, and indicators point to modest growth in the first half of 2025. Importantly, wage growth has picked up, bolstering consumer income and spending. Headline CPI in Japan remained near 3.0% – well above the deflationary levels of the past – suggesting that the BOJ’s shift away from ultra-loose policy is justified. Japanese investors are increasingly optimistic that the economy can withstand gradually higher interest rates. For international investors, the yen’s slight appreciation against the dollar in Q2 meant that dollar-based returns from Japanese equities were even higher than local returns, in contrast to Q1 when currency effects had been a drag.
China’s equity markets delivered further gains in the second quarter, albeit more modest than the previous quarter’s surge. The MSCI China Index and broader emerging Asia indexes benefited from improved risk appetite as U.S.–China trade tensions temporarily eased. Hong Kong’s Hang Seng Index climbed 5.7% in Q2, and the Shanghai Composite (SSE) rose 3.3%, reversing its small loss from Q1. Investor sentiment toward Chinese tech remained upbeat after the late-Q1 launch of China’s budget-friendly AI model, DeepSeek, and signs that Beijing’s regulatory crackdowns on the tech sector were waning. A high-profile symposium between President Xi and technology industry leaders early in the quarter underscored a more supportive tone toward private enterprise, which helped sustain the rally in internet and innovation stocks (though the gains were smaller than in Q1). On the economic front, China continued to wrestle with very low inflation. Headline consumer prices were negative 0.1% year-on-year in both April and May, extending the mild deflation observed in Q1. Core inflation stayed positive but muted, underlining the absence of demand-side price pressures. To spur growth, authorities maintained an accommodative stance with the People’s Bank of China leaving its benchmark loan prime rates unchanged (1-year at 3.1%, 5-year at 3.6%) and leaned on other tools like targeted credit easing and modest fiscal stimulus. At the National People’s Congress mid-year session, officials reiterated the 5.0% GDP growth target for 2025 and hinted at additional support if needed. Overall, China’s steady market performance in Q2, combined with the robust showings in other emerging markets, helped the MSCI Emerging Markets Index outperform for the second consecutive quarter.
Local
South African markets delivered another quarter of strong gains in Q2 2025. The FTSE/JSE All Share Index (ALSI) jumped 10.2% in Q2, outperforming most global markets. The rally was once again led by the resources sector, which continued to benefit from elevated precious metal prices and robust commodity demand from China. Although not as explosive as Q1’s surge, resource stocks added 9.8% in Q2 as gold maintained its safe-haven appeal amid geopolitical tensions. Industrial shares were another major driver, returning about 12.0% for the quarter. Market heavyweights like Naspers/Prosus which were buoyed by the global tech rebound and improving sentiment towards Chinese tech investments, posted strong gains, as did other rand-hedge industrials such as Richemont. The financial sector also rebounded: after a first-quarter decline, bank and insurance stocks rose 7.8% in Q2, helped by peaking interest rates and a stable domestic credit environment. Even the beleaguered property sector saw relief, with the FTSE/JSE All Property Index up 9.1% for the quarter as investors looked for bargains in oversold real estate names. By the end of June, South Africa’s equity market had gained 16.7% in the first half of the year – a performance underpinned by a handful of big names (especially in resources and tech) and by improved global risk appetite.
On the economic front, South Africa recorded an uptick in growth and a sharp decline in inflation, creating a more supportive backdrop for assets. GDP expanded by a tepid 0.1% quarter-on-quarter in Q1 2025, barely avoiding a recession after the previous quarter’s revised 0.4% rise. This sluggish growth, weighed down by manufacturing and mining weakness, prompted the South African Reserve Bank to resume monetary easing. In May, the SARB cut the repo interest rate by 25 basis points to 7.25% – its second cut of the year – citing well-contained inflation and a need to bolster the economy. Indeed, consumer inflation fell dramatically during Q2. Headline CPI dropped to 2.8% in April and 2.7% in May (year-on-year), plunging below the SARB’s 3–6% target range for the first time in years. Core inflation also eased, reflecting lower fuel prices and a moderation in food price increases. Policymakers noted that inflation was “below the central bank’s target range” and likely to remain subdued in the near term.
The SARB’s decision to cut rates was a split vote (one MPC member even preferred a larger 50 bps cut), and the Bank hinted that it finds a lower future inflation target (around 3.0%) attractive – a signal that it may keep policy looser for longer if price stability is maintained. The more dovish stance was welcomed by markets: the rand rallied to a five-month high around R17.8 per USD after the May rate cut, and bond yields fell. South Africa’s 2030 government bond yield declined about 12 bps on the day of the cut (to 8.6%) and continued to grind lower into June. The FTSE/JSE All Bond Index returned a robust 5.9% for the quarter, as the yield curve flattened with long-term rates coming down from their Q1 highs. Inflation-linked bonds similarly enjoyed price gains amid the softer inflation outlook.
Source: 2IP, I-Net Bridge, BER, RMB Global Markets, Bloomberg, Stanlib Asset Management, Schroders, Stats SA, M&G, Ninety-One