- Macro: The global economy remains in a stable, but low growth cycle. Growth is holding up better than feared, with Bloomberg Consensus forecasts of global GDP at 2.6% for 2025, though risks to this remain tied to US-China trade tensions and political uncertainty.
- During 2025, concerns for central banks shifted away from inflation to the jobs market. UK unemployment is slowly rising, real wage growth is slowing, and the short-term unemployment rate is creeping higher than Bank of England forecasts. In the US, labour market data has been skewed by the recent government shutdown, which hampers interpretation. Notwithstanding data issues, there are signs of general employment market weakness in the US, but there is also a slower supply of migrant labour moving to the US.
- Inflation continues to ease globally, but there are some countries where inflation remains persistent – in the UK, the latest data saw inflation fall more than expected to 3.2% and the expectations of further falls through 2026. In the US where tariffs and their impact on goods prices remain a heightened risk for the inflation numbers, the risk is that the expectations of inflation falling further does not come to fruition.
- For interest rates, the Bank of England is expected to continue cutting rates during 2026 after its December 0.25% cut. Two more cuts in 2026 seems like a reasonable base assumption. In contrast, US interest rate direction remains uncertain. There is increasing political pressure on the Federal Reserve to cut rates even with inflation persistent.
- Fixed income remains attractive for income and diversification. The yield on offer remains attractive and given the bulk of fixed income returns come from the starting yield, heading into 2026 holding a series of fixed income funds with a distribution yield of around 5%, offers the prospect of another year of solid returns from the asset class. Tight credit spreads versus history and the risk of fewer interest rate cuts than previously anticipated are noted, however.
- Equities provided a year of solid returns in 2025, broadly offering double-digit gains over the year in local currency terms, although the weak US dollar took the shine off US equities for UK investors. Amidst areas of earnings growth, both in the US and emerging markets, 2025 was a year when equity valuations got more expensive. There was a broadening out in markets in both earnings and returns and there remain relative areas of value. We strongly believe diversification remains critical to manage concentration risk in the US as well as high valuations. Asia, emerging markets, infrastructure, & the UK all potentially help in this regard.
- Currency: A year of two halves for the US dollar, weakening significantly in the first half, before holding its ground in the second, to finish down almost 7% for the year. Sterling strengthened by a similar amount versus the Japanese yen, but against the euro trended lower all year.
- Commodity: Gold shone brightly during 2025, finishing the year above $4300/oz, supported by strong demand and central bank buying. Brent crude traded at $60/bbl by the end of the December, a significant reduction from c$75/bbl in January.
- Outlook: We remain optimistic that in the year ahead portfolios can continue moving forward. Capital investment in the tech sector remains a strong underpin, so too is the prospect of central banks cutting interest rates, particularly in the UK. We do recognise that valuations in some areas got more expensive through the year, which makes it a narrower path to navigate.
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