Quarterly Market Update

Market Review as at 31 July 2025

The second quarter of 2025 was shaped by tariff shocks and geopolitical uncertainty, yet most major asset classes finished the period with solid gains. Markets sold off sharply in early April after the US announced sweeping “Liberation Day” tariffs, with the S&P 500 falling 12% in a week and Treasury yields rising 50 bps. Sentiment turned quickly as tariffs were suspended for 90 days and trade talks with China advanced, allowing equities and credit markets to recover strongly. Developed market equities ended Q2 up 11.6%.

Technology and growth stocks led performance. The “Magnificent Seven” mega-cap tech names rebounded 18.6% in Q2, driving global growth equities to a 17.7% gain. Emerging markets also posted strong returns of 12.2% in USD terms, helped by easing trade tensions and a weaker dollar (DXY –7.1%). Asia was the standout, with Korea and Taiwan benefiting from continued enthusiasm around artificial intelligence and strong local currency appreciation.

Commodities underperformed other risk assets. Oil was volatile, briefly spiking to $80 per barrel on Middle East tensions before ending the quarter at $68 following an OPEC production increase. Precious metals provided some support, but the broad commodities index fell 3.1%.

Regionally, US equities returned 10.57% in local terms, led by technology and communication services, while Japan gained 13.67% on robust earnings guidance and governance reforms. Europe underperformed its US counterpart amid the ongoing trade tension during the quarter. Over the quarter, the European markets delivered only 1.05% in local currency. The European Central Bank supported markets with two rate cuts over the quarter, but this was insufficient to lift broader sentiment. The UK lagged as well, with the FTSE 100 up by 2.08%, reflecting its heavier exposure to energy and healthcare.

Bond markets came under pressure from higher yields and fiscal concerns following the passage of the “One Big Beautiful Bill Act.” Moody’s downgraded the US sovereign rating to Aa1, and the 30-year Treasury yield rose 20 bps. Credit proved resilient, with spreads widening sharply in April but retracing by quarter-end, leaving high yield as the best-performing segment.

In July, trade policy developments remained in focus. The US struck agreements with Vietnam, Japan, and the EU, leaving tariffs above pre-2017 levels but easing fears of escalation. Equities advanced further, with developed markets reaching new all-time highs and emerging markets outperforming, led by Greater China and Korea. Commodities delivered mixed results, while bond markets weakened as yields rose further on expectations of continued fiscal expansion.

Source: Investing.com & Mauritius Commercial Bank Ltd

Macroeconomic Outlook

Macroeconomic projections are looking quite encouraging.

GDP Growth:

GDP growth is expected to improve in 2026 compared to 2025 across the major regions, except for US, China and Japan on the back of greater visibility on tariffs and easing geopolitical tension.

The same trend continues for 2027, where GDP is expected to grow at a faster pace than in 2026 across major economies with the exception of Japan (same pace).

Real GDP growth forecasts (% change, yoy)

Source: IMF

Annual real GDP growth rates of six major economies (India, China, the US, the UK, Germany, and Japan) from 1980 to projected values in 2030.

From 1980 through the early 2000s, China experienced rapid and sustained growth, often exceeding 10%, reflecting its economic transformation and industrial expansion. However, its growth rate gradually declined in the 2010s and is projected to stabilize below 5% by 2030.

India shows a similar upward trajectory, with notable acceleration in the 2000s and 2010s. Although more volatile than China, India's growth remains strong and is projected to be among the highest by 2030.

In contrast, developed economies like the US, UK, Germany, and Japan exhibit more modest and stable growth rates, generally fluctuating between -2% and 4%. Japan, in particular, shows periods of stagnation and even negative growth, reflecting long-term economic challenges.

Overall, the graph highlights the shift in global economic momentum toward emerging markets, particularly India and China, while mature economies maintain slower but steadier growth.

Inflation Expectations:

Inflation for the 2nd half of 2025 is expected to moderate across the major economies, except for the US due to tariffs.

For 1H 2026, the same trend can be seen with inflation expected to ease across all major regions.

Inflation Expectations (%)

Source: Trading Economics

Inflation trends across four regions (US, EU, UK, and Japan) over the period 2021 to 2025.

In 2022, all regions experienced a noticeable spike in inflation, with the US and UK reaching rates close to 8%, reflecting the global economic disruptions following the COVID-19 pandemic and supply chain issues. The EU also saw elevated inflation, though slightly lower than the US and UK.

Japan, in contrast, maintained a much lower inflation rate throughout the period, staying below 2%, consistent with its historically low inflation environment.

By 2025, inflation rates across all regions show a downward trend, indicating stabilization efforts and monetary policy interventions. The US, EU, and UK converge toward more moderate levels, while Japan remains relatively unchanged.

Interest Rate Expectations:

Interest rates are expected to fall across the major economies, except Japan, in the 2nd half of 2025 on the back of lower inflation expectations.

For the 1st half of 2026, interest rates are expected to continue their downward trend across major regions, with the exception of the EU, China and Japan.

Interest Rate Expectations (%)

Source: Trading Economics

Inflation trends across four regions (US, EU, UK, and Japan) over the period 2021 to 2025.

In 2021, all regions maintained low and stable interest rates, close to 0%, reflecting ongoing recovery efforts from the COVID-19 pandemic. However, starting in late 2022, the US, UK, and EU began raising rates in response to rising inflation.

The US led with the most aggressive hikes, peaking at around 4.75% in early 2023, followed by a gradual decline through 2025. UK followed a similar trajectory, peaking near 4%, while the EU peaked slightly lower at around 3%.

Japan, in contrast, maintained its traditionally low-interest rate policy, with minimal changes throughout the period, staying close to 0%.

This divergence highlights differing monetary policy approaches, with Western economies tightening to combat inflation, while Japan continued its accommodative stance.

To summarize: Upward revision in GDP forward for 2027 and downward shift in inflation expectations for 1H26.