2025 in review and our 2026 outlook

Equities have recovered strongly from the tariff shock earlier in the year. Dollar weakness vs Sterling has weighed on the relative performance of US equities; however, this was a step-change and there are concerns for Sterling too.  Gold has continued to perform very strongly on the “debasement trade” and Central Bank buying.  Within Bonds, Emerging Markets are in better shape than Developed Markets, in our view.

2025 in review

Fig.1. YTD Asset Class Returns

Valuations are stretched in some parts of the market.  But US/Tech concentration risk in world equities is a choice not an obligation.  Selectivity is key by pairing traditional equity exposure with more attractively valued, lower beta (defensive) parts of the equity market.

Fig.2. Equity market valuations by region, sector and factor

Concerns remain on affordability (the UK Government’s ability to fund longer-dated debt).  But higher productivity growth, lower inflation and lower interest rates could create more “headroom” for the Chancellor.  Productivity growth is a small assumption with a big impact – productivity growing at 0.5%, 1.5% or 2.5% makes a material impact in long-term debt affordability.  Current trend rate (10 year average) is +0.3%! (Pre GFC it was +2.1%), now +0.7%. We expect the Treasury to issue more shorter-dated bonds as part of an Operation Brit-Twist that we advocated.

Fig.3. Boosting productivity is key to keeping Debt/GDP under control

Bottom line

​Stronger US economic and earnings growth has supported US (in local terms) and global equity markets.  Valuation expansion of other non-US equity markets has led to strong performance as global investors sought out diversification.  Moderating UK inflation is positive for the gilts market, but concerns remain for long-term affordability.  Gold & Precious Metals performed strongly in the year owing to downward pressure on currencies and bonds as well as concerns around geopolitical risks.