Q4 2025 Market Commentary

CIO Stephen Dowds and Investment Director Charles Armitage discuss key events of the final quarter of 2025 and the outlook ahead.

Market Review

The final quarter of 2025 rounded off a positive year for investors in terms of returns if not in terms of frayed nerves. Despite the lack of information on important US economic numbers as a result of the US government shutdown, investors appeared to take the view that the US Federal Reserve was becoming more inclined to cut rates into 2026 in the face of a potentially weaker labour market, even if they erred on the side of caution until those figures became available.  This, combined with relatively supportive monetary environment in other parts of the world, allowed most bond markets (particularly corporates) to generate positive, if unspectacular, returns. It also allowed equity investors to focus on the generally robust corporate profits being reported, and the excitement fuelled by the potential opportunities being created by the growth in artificial intelligence. Overall, this helped equity markets to produce modest positive returns over the period with the strongest performances coming from Emerging Markets and Asia. The most notable weakness during the quarter came from digital assets such as Bitcoin which saw a sharp correction from its highs at the beginning of the quarter, falling to just under $88,000 at the end of the year.

One of the common features in global government bond markets during 2025 was the steepening of yield curves. This continued in Q4, particularly in the US where the cutting of official rates by the Fed in October and then again in December brought down yields by 0.5% at the short end. However, concerns over the stickiness of inflation kept longer term rates above 4.1%.

In the UK the major factor for gilts was Labour Government’s second budget. After all sorts of scare stories and shenanigans both in the run-up to the event and on the day itself, the budget proved a bit of a non-event in terms of the gilt market. Chancellor Reeves placated the bond market by increasing the so-called "headroom" around her target to balance the budget by 2029/30. To do this, while funding the increase in welfare payments, she announced tax rises of £26 billion from a combination of increased personal taxation (£15bn) and a "smorgasbord" of other tax rises (£11bn).  Importantly, however, while the increase in spending is generally "front-loaded", the vast majority of the announced tax rises will not take effect until after April 2028. This means that government borrowing will be higher in the intervening years. Nonetheless, because of the timing of cash flows and the revised starting situation, the Debt Management Office's need to issue gilts over the next few years will probably fall: another factor that reassured the gilt market which was among the best performing government bond markets in Q4.

Elsewhere, the German and Japanese bond markets were both held back by the announcement of significant fiscal spending packages designed to be good for growth, but which also caused bond investors to push yields higher, particularly at the long end. Overall, the best performing government bonds were in the Emerging Markets which benefitted from both falling rates and currency strength. A notable feature in many markets was the pick-up in both IPO issuance and in M&A activity, with the standout deal being the taking private of US Games company, Electronic Arts (EA) in the largest ever leveraged buyout.

Though they didn’t enjoy a traditional “Santa Rally” equity markets remained upbeat, generating modest positive returns over the quarter, led by Japan and the UK. Japan benefitted from optimism about the outlook for higher growth rates. A higher representation in the commodity and financials segments and a general sigh of relief that the budget was not as calamitous as some had feared, helped the UK.

As mentioned above, Emerging Market equities were among the strongest performers driven by a mix of exposure to technology (particularly memory for AI) in the likes of Korea and Taiwan and to commodities (Chile and South Africa).

Looking more closely at commodities, the most powerful gains came from precious metals. Gold and silver were both very strong though the latter was boosted more by its potential for use in solar, EV and AI related technologies. Copper was among the strongest of the industrial metals, whereas oil struggled to make gains given short-term supply overhangs as both non-OPEC and OPEC countries increased output.

Outlook

As we enter 2026, the economic outlook appears a little more predictable than at this time last year. Trade tensions appear to have calmed somewhat and with Germany and Japan joining the US firmly in fiscal spending mode, growth seems to be well supported. Add to that the apparent boom in capex spending to support investments in artificial intelligence infrastructure and the fact that central banks are generally adopting an expansionary or neutral policy stance, it seems unlikely that it won’t be a good year for global growth. Indeed, if anything, it suggests that inflationary pressures will probably build as the year progresses, unless labour markets take a dramatic lurch downwards or consumer confidence collapses.

However, though the economic outlook may appear a little more settled, there remain a number of risks, particularly stemming from politics, both domestic and international. Domestic politics remains a source of change in many developed markets, with a general election expected soon in Japan; France’s government still mired in budget squabbles, and the UK in the process of a significant deterioration in the hegemony of the two-party system which has prevailed for decades. Internationally, in addition to the long-running conflicts in Ukraine and Gaza, new areas of tension have surfaced over the past few weeks. President Trump has rattled his enemies and allies alike by his increasingly pugnacious actions and comments, most notably over Venezuela and Greenland, renewing concerns that the US will continue to threaten to weaponize trade in order to bully its partners into giving it what it wants. Added to all that, almost unnoticed, we saw a flashpoint between Saudi Arabia and the UAE over their activities in Yemen.

Perhaps, however the most significant of the domestic political drivers of uncertainty that will affect markets are the “Mid-term” elections in the US. Trump is desperate to do well in those hoping it will allow him to go unchecked in the remainder of his second term and force through more radical changes (possibly even to the US constitution). To do that he needs his supporters to see “victories” that they believe indicate progress. His actions in Venezuela are an example and came with the double advantage of distracting attention from the “Epstein Files”, an issue on which he appears to feel both uncomfortable and weak. Another area in which he is seeking a victory is in gaining more control over the policy of the Federal Reserve. As we have remarked previously, this could have significant ramifications for confidence in the independence of the Fed and the anti-inflation element of US monetary policy.

With this background, despite the likelihood of further cuts by some central banks, including the Fed, it would seem that government bonds are likely to see yield curves steepen as investors reflect concerns about the outlook for inflation and the build-up of government debt.

Strategy

Therefore, it remains our view that fixed income markets are unlikely to generate much capital growth but offer reasonable yields and diversification benefits justifying our increased weighting. We prefer shorter duration to longer and prefer credit risk to rate risk, albeit that within credit, our preference has been and remains for Investment Grade over high yield. However, the recent rally in sovereigns and the tightening of spreads leaves us feeling that this is not the time to buy more fixed income.

Though their sensitivity to tariff-related risks remains, a stronger growth background is generally helpful for equities, even if it is accompanied by sticky inflation. Consensus expectations for US corporate profits in 2026 are for another year of double-digit growth, though supported more by growth outside the technology sector. One should caution, however, that these forecasts imply a further rise in profit margins, thus, given that US tech margins are at record levels, it might be wise not to bank on that.

Elsewhere, earnings growth is also expected to be higher than in 2025 and given the lower levels of valuation on offer, along with more muted expectations and the opportunity for positive surprises in margins, non-US equities continue to look attractive relative to their US peers.

Finally, we believe that the Alternatives portion of a balanced portfolio will perform an important role in mitigating some of the risks that we may face in the coming year. Our approach remains one of emphasizing diversification benefits as well as seeking returns. We have for some time held a significant exposure to gold and other commodities and though we have taken profits along the way, this area continues to be one we favour. Elsewhere we hold several other strategies less correlated to the general movement in equities and bonds.

In summary, the outlook 2026 is one in which we expect the economic background to remain supportive. Nonetheless, markets may well have to suffer bouts of politically inspired disruption as the rise of less tolerant, more nationalistic, voters and politicians continues.

Commentary as of 19th January 2026.

This communication does not constitute advice or a personal recommendation or take into account the particular investment objectives, financial situations or needs of individual clients.

Clients are advised to contact their investment advisor as to the suitability of each recommendation, for their own circumstances, before taking any action. The investor is in particular recommended to check that the information provided is in line with his/her own circumstances with regard to any legal, regulatory, tax or other consequences, if necessary, with the help of a professional advisor.

The value of securities and the income from them may fall and you may get back less than you invested. No responsibility is taken for any losses, including, without limitation, any consequential loss, which may be incurred by clients acting upon such information and views contained within this report.