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Markets Outlook Q2 2026

Mon, 13 Apr 2026 07:17:24 +0000

A Narrower Path

We began this year with an Investment Strategy titled “A Year for Prudent Optimism”. At the time, our view was that portfolios could continue to make steady progress. Significant amounts of investment in areas such as technology remained supportive, particularly in the US, whilst in Europe, greater investment in military expenditure served as an economic support too.

There was also a growing expectation that central banks, particularly here in the UK, would start cutting interest rates. That said, we also recognised that rising markets in 2025 had made some parts of the equity market become more expensive, which was making it a narrower path to navigate.

The first couple of months seemed to support this view. Markets performed well through January and February, building the momentum of last year. Conditions became more challenging during March as geopolitical tensions escalated following the conflict involving the US, Israel and Iran. This resulting disruption in oil and gas supplies through the Strait of Hormuz, increased uncertainty and market volatility. By the end of the quarter, the gains made during the first two months had been wiped out.

In periods like this, it is important to balance conviction with healthy doses of flexibility. While we base our investment decisions on a clear central view of how events are likely to unfold, fast‑moving markets can quickly challenge assumptions. Rather than reacting to short‑term noise, our approach allows portfolios to adapt as conditions change, helping to manage risk while remaining positioned for longer‑term opportunities. It is also worth remembering that this is a very real crisis for the people of Iran and wider region, who face a deeply uncertain and difficult future with profound human consequences

Energy Matters

The events in the Strait of Hormuz have caused significant disruption to supply and rising prices as a result. The immediate implication of the disruption is straightforward, in that the longer it lasts and the greater the damage to oil infrastructure:

Longer disruption → longer recovery
Longer recovery → higher energy costs for longer
Higher energy costs → more inflation pressure
More inflation pressure → potential drag on growth

Today, markets would settle for a lower-intensity, contained conflict – one which allows for the re-opening of oil supplies over the next month or two, with hostilities fading into occasional flare-ups, rather than continuous engagement. Whilst this outcome may suit the US, it is unlikely to be welcomed in Tehran given the significant economic damage Iran can still inflict at relatively little cost. This remains one of its most effective sources of leverage in a war in which it is not a military equal for deterring further action, both now and in the future.

The risk of escalation cannot be discounted. Persian Gulf countries, which initially opposed the war, are now suffering falling energy revenues with limited exports and damage to energy infrastructure. If Iran continues its attacks on their facilities, they may feel compelled to join the military intervention, potentially broadening the conflict.

Further targeted attacks on any energy infrastructure run the risk of a sharp deterioration for markets under the weight of more energy price rises.

There are real risks ahead, and we do not want to underplay them. However, the most extreme outcomes are typically the least likely, even during periods of severe stress such as COVID or the Russia/Ukraine shock in 2022, when companies and households proved able to adapt through the most challenging phases. For portfolios, this means we need to remain vigilant and be prepared to adapt as events unfold.

Interest Rates and Inflation

In short, the energy shock complicates the inflation outlook and may delay rate cuts, but it does not, in our view, fundamentally alter the medium‑term direction of lower interest rates.

Having trimmed this section back in recent quarters, interest rates and inflation have moved to the forefront again and warrant renewed attention. The reason is straightforward: energy prices have risen sharply following the war in Iran and subsequent disruption to shipping through the Strait of Hormuz. Higher energy costs tend to feed into household bills and business costs, which can push inflation higher in the near term.

As a result, expectations for interest rate cuts have been pushed further back. However, there are good reasons to avoid thinking this a re-run of the inflation spike of 2022. Markets can move quickly on headlines, and in March there were moments when market pricing briefly flirted with the idea that UK rates might rise significantly. That did not look plausible to us at the time and has since been partially reversed. The UK economy was already in the slow lane, and there are no strong reasons for thinking we are about to move into a higher‑growth environment. If rate cuts are postponed for long, it becomes harder for demand to pick up. Elevated borrowing costs would continue to burden households and businesses, especially with energy bills also climbing.

Since the onset of the crisis, we initially thought central banks would look through short‑term energy price pressures, focusing instead on weak growth and rising unemployment. This still may happen. Today, rate rises remain far from certain (particularly in the UK), but the momentum towards lower interest rates has clearly been interrupted. The Bank of England adopted a more hawkish tone, cautioning that higher energy and commodity prices will raise near‑term inflation and that it is alert to the risk of more persistent domestic inflation if second‑round effects take hold.

The near‑term risk is that official interest rates either remain higher for longer, or even rise modestly, before ultimately having to fall more sharply as the already fragile economic conditions come under pressure from weaker demand, higher financing costs and rising unemployment.

On inflation, there are several reasons why we do not think this is a repeat of the last energy price shock of 2022/23. Then, the rise in UK inflation arrived in three overlapping waves. First came goods inflation, driven by supply constraints as economies emerged from COVID‑19 lockdowns and demand for goods surged. Then, before goods inflation had peaked, a second wave hit as the war in Ukraine pushed energy and food costs higher. Finally, as economies continued to re‑open, labour found itself in a position of strong bargaining power, with more vacancies than people to fill them. That helped drive stronger wage momentum and stickier services inflation.

The chief point is that the inflation spike of 2022 had multiple, cumulative causes, not a single driver.

That matters because it helps frame today’s question: are we facing a single‑wave shock, or something that spreads into wider knock‑on effects?

Energy prices have clearly risen quickly. At the end of March, Brent Crude was around $109/barrel, having been around $60 in January. That is consistent with the early stages of a new energy price shock. The key question is whether it remains concentrated in energy, or whether it broadens into second‑round effects — for example, higher wage demands and more widespread price rises. With inflation dropping back and job vacancies falling strongly in recent years, we struggle to see a strong starting point for rising wages.

While higher energy prices are a global issue, Asia faces an additional complication: the effective closure of the Strait of Hormuz has turned what could have been “just” a price shock into a supply disruption risk. Because a very large share of Gulf energy flows ultimately ends up in Asia, a prolonged interruption has the potential to be felt more sharply there—both through higher prices and through availability. That is a risk worth keeping a close eye on, not least because it can spill over into global trade and confidence.

Whilst the focus has been on rising energy prices, supply disruptions are also happening to fertilisers, which has consequences for rising food prices, sulphur which feeds into industrial processes could lead to bottlenecks, and commercial helium which is also used in healthcare and in the technology sector for chip manufacturing.

That brings us to inflation expectations, which matter almost as much as the inflation data itself. For many of us, petrol and grocery bills are the most visible signs of inflation and they shape how confident we are about spending. You might buy a new phone every few years, but you notice bread, milk and fuel every week and it’s those frequent price signals that can change consumer behaviour. With consumption making up the bulk of economic activity (particularly in the US, and meaningfully so in the UK), anything that dents willingness to spend quickly feeds back into weaker growth prospects.

Overall, the current energy shock complicates the inflation outlook for central banks. It at least delays interest rate cuts and increases the prospect that rates stay higher for longer in the near term. On balance, our view is that this is not a repeat of the inflation surge seen in 2022–23, which was driven by multiple overlapping factors. But it is a headwind for now, with a timeline that remains hard to judge. As events unfold our view may need to evolve too.

Growth and Inflation Numbers: Under Pressure

Thanks, as ever, to our friends at Schroders for the latest consensus forecasts, which are as of 3^rd February 2026 (note these were produced before the recent Iran war):

Source: Schroders Economic & Strategy Viewpoint, Q4 2025 (Data to 03.02.2026)

The broad message is familiar: modest growth, with inflation not quite disappearing. Inflation pressure points are around energy, and that matters because energy costs don’t just nudge headline inflation they hit household confidence and spending decisions quickly.

In the United States, fiscal support is coming through in the form of larger tax refunds linked to last year’s One Big Beautiful Bill Act. A few weeks ago, that looked like a straightforward tailwind for consumer spending, it now looks more like a buffer as affordability concerns mean some households may now use that cash to absorb higher petrol and utility costs rather than to step up discretionary spending.

The same “buffer not booster” logic arguably applies in the UK, where consumers have been reluctant to loosen the purse strings for some time. With another rise in energy bills on the horizon, it would be no surprise if households stay cautious a little longer and for growth forecasts to be downgraded. The UK consumer remains in a saving, not spending, mode. That saving habit does provide some insulation against an energy squeeze, but it also highlights how households are behaving defensively. With real wages drifting lower and expected to come under further pressure if inflation stays elevated, a consumer-led recovery still doesn’t look to be on the cards. Unemployment is rising and job vacancies are falling. There is no clamour from employers seeking staff, or from workers looking to move to higher-paid positions.

Portfolio Outlook

Equity Markets – Moving forward, but with some more caution in the near term.

As noted earlier, equity markets entered the year with a fair degree of optimism. Inflation has fallen from its peaks, expectations were for interest rates to be heading lower, and corporate balance sheets are generally in reasonable health. We still believe that over the long term, these remain supportive conditions for investing in shares, but the near‑term backdrop has become more complicated. The war in Iran has introduced a fresh headwind for markets in the near term. Geopolitical shocks often feed into markets through familiar routes: energy prices, inflation expectations, and confidence. If the oil price remains elevated, inflation will prove stickier and complicate the outlook for interest rates. And when uncertainty rises, markets can become more risk averse, even if the long‑term fundamentals haven’t materially changed.

It is also worth remembering during 2025 was a strong year for equity markets, with valuations broadly rising. This has reduced the amount of cushion available for investors and therefore left less room for disappointment. That doesn’t mean a downturn is inevitable, but it does mean we are walking along a narrower path than we may have been used to.

Over quarter end we trimmed some equity risk in portfolios where we felt it was necessary given the strengthening case for having a slightly more cautious stance in the near term. In other words, we took a little bit of risk off the table.

Importantly, we continue to hold meaningful equity risk at a level that is appropriate for each risk profile. This was an adjustment at the margins, rather than a wholesale change. We also continue to maintain diversified portfolios, shying away from areas with the highest valuations and spreading exposure across regions, sectors and styles to prevent portfolio outcomes being driven by binary forces. The exact changes made do vary by portfolio range and risk profile.

Fixed Income – still attractive income, but less certainty over the pace of rate cuts.

In fixed income markets, the key challenge remains uncertainty around the path of interest rates and inflation. While inflation has eased a long way from the highs of 2022, it is still too early to be confident that it will settle quickly and smoothly at central bank targets. The war in Iran and rising price of energy only makes central banks jobs more challenging.

Today, the headline levels of yield that fixed income offers remain attractive, so it is important to take advantage of it, whilst managing interest rate risk. In portfolios, the focus has been on capturing the income potential of bonds, while reducing exposure to big price swings driven by interest rate volatility. In practice, that means investing more towards shorter‑dated, higher‑quality parts of the bond market, and taking a more careful approach to credit risk. Hence, we made further adjustments in fixed income allocations where appropriate, to reduce the overall portfolio sensitivity to interest rates and increase the focus on quality.

Fixed income returns ultimately come from three places: the yield, movements in interest rates, and changes in credit risk. Whilst we are still positive on the first, we are more cautious on the second and continue to be selective on the third. The aim is to keep portfolios well‑balanced and to capture the attractive income that is available, whilst continuing to make the fixed income portion of portfolios perform the traditional defensive role it should, even if the next few months prove a little noisy. In other words, we want your bonds not just to pay you a decent income, but also to serve as a safety net if markets get turbulent.

Conclusion: Continuing to navigate a narrower path.

Rising valuations over 2025 in equity markets made for a narrower investment path for investors to navigate. The war in Iran is a noteworthy hurdle that complicates matters further and is an unexpected setback to the view that markets can still make headway.

In portfolios, we have focused on continuing to build diversified positions and have tended to shy away from areas where valuations looked most expensive. This may have been a headwind at times, but we maintain that in an environment such as this, receiving a series of regular cashflows into portfolios is a helpful underpin to long-term returns, whether it is from fixed income holdings or equity funds that deliver dividends.

Please remember that markets do get disrupted, more often than we tend to remember after the passing of time. More importantly, over the long-term, markets do tend to move forward. We do not expect that trend to be disrupted despite the headlines today, but we do think the near-term could be more problematic, so have made some small adjustments to both fixed income and equity holdings where appropriate.

As ever, on behalf of the entire investment team, Amaraj, Becky, Hayley, Kim, Will and myself, we thank you for the trust you place in us to manage your portfolio.

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Summary Q2 2026

Mon, 13 Apr 2026 07:17:09 +0000

In the last strategy our view was portfolios could continue to make steady progress, supported by ongoing investment in areas such as technology, particularly in the US, and increased defence spending in Europe. We recognised strong market performance in 2025 had left some equity markets looking expensive, making the investment path narrower.
Markets performed well through January and February, extending last year’s momentum. Conditions became more challenging in March as geopolitical tensions escalated following conflict involving the US, Israel and Iran. Disruption to oil and gas supplies through the Strait of Hormuz increased uncertainty and volatility, with early-year gains largely reversed by the end of the quarter. Once again, energy markets sit at the centre of events. Disruption in the Strait of Hormuz has reduced supply and pushed prices upward. Higher energy costs are likely to feed through into inflation and weigh on economic growth.
Markets would settle with a contained conflict that allows oil supplies to resume over the coming months. However, the risk of escalation cannot be ignored. Further attacks on energy infrastructure, or wider regional involvement, would increase downside risks.
Our opinion is the energy shock complicates the inflation outlook and delays interest rate cuts, but it does not fundamentally change the medium-term direction towards lower interest rates. Higher oil and gas prices are likely to push inflation up in the near term, leading markets to push back expectations for rate cuts. Our opinion is this is not a repeat of the inflation surge seen in 2022–23, which was driven by multiple overlapping factors. We do recognise though that there are risks this view will need to evolve further as events unfold.
Our central view is that interest rates may remain higher for longer, and could even rise modestly, before eventually falling as weaker growth and softer demand reassert themselves. In this environment, maintaining flexibility and focusing on long-term fundamentals remains key to navigating portfolios through near-term uncertainty.
Fixed income: Yields rose and credit spreads widened as markets reacted to the war in Iran and there was a meaningful adjustment to future interest rate expectations. Whilst this has been negative in the short term, it also means headline yields remain attractive for long-term investors, but the positive boost that falling yields would normally have is on hold.
Equities: Equity market volatility returned in March as tensions in the Gulf escalated. The most affected areas were major energy importers, including Japan, much of Asia and emerging markets. More resilient were defensive parts of the market, such as infrastructure, and companies with direct exposure to energy.
Currency: The US dollar strengthened into the end of the quarter as there was a move to safety. Meanwhile sterling was broadly flat against the euro and Japanese yen.
Commodity: Gold and oil moved with the news headlines, with oil rising significantly given the closure of supply out of the Strait of Hormuz from $60 at the start of the year to c$105 by the end of March. Meanwhile gold fell back to $4585 in a period where it should have seen investors flock to it, hindered by rising bond yields, a stronger dollar and, one suspects, some speculators taking profits after an insatiable rise in value over a year.

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Summary Q1 2026

Mon, 05 Jan 2026 12:05:38 +0000

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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Markets Outlook Q1 2026

Mon, 05 Jan 2026 12:04:57 +0000

A Year for Prudent Optimism

The New Year is upon us—resolutions may already be wavering, but our commitment to navigating markets remains steadfast! If you are still being faithful to your resolutions – keep going!

It is generally considered a dangerous pastime to go back and look at previous investment commentaries. Standard operating procedure is to look back and feel foolish, before engaging in some serious post-event rationalisation in justifying why what you said would happen, didn’t happen, and why what actually happened turned out to be, well, all perfectly obvious after all.

Guilty as charged. We’ll move on.

Largely replenished with mince pies and lashings of turkey, the New Year is traditionally the time for optimism and for looking forward in anticipation. Thankfully, the investment picture last year was broadly settled. Fixed income and equity markets made solid returns – a short-lived tariff meltdown in April didn’t prove to be the naysayer it could have been, and overall portfolio returns looked respectable.

As in any year, there were highlights to note. A broadening out of positive returns being generated away from a very narrow section of the US mega-caps helped. Fixed income, to coin a phrase, did what it said on the tin, delivering positive returns with low volatility. Infrastructure, gold and some of our conservative multi-asset selections all turned out solid numbers too. They are all in the good books. Less so are smaller companies, which needed to be carried all year, likewise active managers tended to underperform indices (not exclusively, admittedly).

As we look forward, 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 continuing to cut interest rates, particularly in the UK. But we must recognise that valuations in some areas got more expensive through the year, which makes it a narrower path to navigate.

Theme for 2026? It’s a World Cup year, so it seems appropriate to go with “balancing optimism with prudence”. It’s a theme we’ll revisit (maybe) in 12 month’s time, but for now it will continue to guide our approach to markets in the year ahead.

Interest Rates and Inflation

During 2025, the balance of concern for central banks shifted away from inflation to the health of the jobs market.

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%, but still above the 2% target, albeit the expectation is for 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. It is likely to be an uncomfortable first half of the year for US inflation numbers, before beginning to roll over in the middle of the year as those tariff impacts fade through time.

Turning to the job’s situation. In the UK, unemployment is drifting higher reaching 5.1% in the December release from the Office for National Statistics. Real wage growth is slowing and as UK inflation steadily becomes less of an outlier, the path is open for the Bank of England to cut policy rates as the short-term unemployment rate creeps higher than Bank’s own forecasts. In the US, labour market data have been skewed by the recent US government shutdown, which hampers interpretation. Notwithstanding the data issues, there are signs of general employment market weakness in the US, but there is also a reduced flow of migrant labour moving to the US, and some recent labour surveys have been more positive than expected. So, a soft labour market for now, and one to watch for signs of worsening.

The most recent cut in December of 0.25% from the Bank of England is expected to be followed up with more cuts in 2026. Whilst we are not economists, our sense is that the balance of opinion among economists points toward a couple more 0.25% cuts in the year ahead (with all the usual caveats applying).

It is more of a challenge to build high confidence in the direction of interest rates in the US, which is perhaps the more important side of the interest rate equation to solve. One of the impacts of rising tariffs has been a rise in goods prices – whether through tariffs themselves, or by retailers willing to push prices higher under the guise of tariff pressures – these are contributing to a higher focus on affordability in the US, which is tied into housing costs and mortgage rates (the average 30 year fixed rate mortgage interest rate is well over 6%). This background heaps more political pressure on the Federal Reserve to act in cutting rates, at a time when inflation may need a tougher hand.

In summary, while the UK appears set for further rate cuts as inflation falls, the US faces a more complex environment, balancing inflation risks with affordability and political pressures.

Do I dare mention the Budget? A handover plan.

The Chancellor delivered the government’s budget in late November, sparking the usual media frenzy and speculation – this time with an added dash of drama when the Office of Budget Responsibility prematurely released its economic forecasts before the Chancellor had even begun speaking.

The headlines: UK government spending is going to be higher in the near term than expected and taxes are going to be higher than expected in the longer term.

Spending increases appear certain, but the backloading of tax rises towards the end of this Parliament raises questions about the government’s confidence—or willingness—to implement them. Large tax rises would seem challenging for a standing government going into an election year.

Some helpful elements should not be overlooked. UK inflation has been more persistent than anyone wanted, partly driven by government policy following last year’s National Insurance and National Living Wage rises. This time round, the reduction in energy bills from April, delaying the reversal of the cut to fuel duty to next year, as well as freezing rail fares and prescription charges should provide a helpful tailwind for inflation to fall through the year ahead.

And here’s where the handover comes in. With fiscal policy stepping back, the stage is set for the Bank of England to begin reducing interest rates through 2026 as inflation subsides. Ministers will be hoping that, by the time we approach the end of this Parliament, they can unwind some of the planned tax rises—perhaps even before they take effect—in a classic pre-election ‘giveaway’.

Growth and Inflation Numbers: Scores on the doors.

Thanks, as ever, to our friends at Schroders for the latest consensus forecasts, which are as at 10^th November 2025:

Source: Schroders Economic & Strategy Viewpoint, Q4 2025 (Data to 10.11.2025)

The US is still set to grow in 2026. As we often highlight, the US consumer is key to the outlook for growth, the top 20% of households account for around 40% of spending, whereas the bottom 60% account for less than 40%. Whilst household savings rates are falling, overall household wealth, buoyed by equity markets, are rising. Though again, this is not an equal distribution – the top 50% of households control 97.5% of all US household wealth. With fiscal support for US households coming early this year in the form of super-sized tax refunds passed in the One Big Beautiful Bill Act (President Trump’s package of tax cuts passed last year), plus a tailwind from falling interest rates, the US consumer in aggregate looks in reasonable shape. There are always risks to be aware of that could upset this view, an equity market correction would create a negative wealth-effect, and policy risks are always present.

In the UK, there are no strong reasons for thinking we will be moving out of a low growth economic environment any time soon. The UK consumer is in a saving, not spending, mode. With real wages drifting lower and forecast to fall further as inflation remains elevated, a significant consumer-led recovery does not look to be immediately on the cards. Public sector spending remains a key driver, and is likely to remain so, but some more clarity following the Budget for UK corporates does at least offer some prospect of decisions being taken that could improve growth further out.

In Europe, there are some signs of optimism. The southern Europeans have enjoyed a strong 2025, Spain being a top performer, benefitting from pandemic fiscal support and positive immigration. Meanwhile, in Germany, the large stimulus package announced in 2025 may begin to positively impact the economic data. The German Federal Budget only got approved in September and whilst some of the initial defence spending went on US equipment, this is beginning to rotate to domestic defence production.

In China, if, and that should probably be capitalised, the US/China trade truce persists 2026, then it should also be a similar outlook to last year which saw lower headline levels of growth and very low inflation. China is busy diversifying its exports away from the US, with strong export growth to Africa, ASEAN and Europe, broadly offsetting far weaker exports to the US. Whilst this diversification of exports is understandable, China remains the global goods exporting country, having so far failed to light a fire under its domestic demand economy. So, for now, countries receiving Chinese goods will see their manufacturing base continue to struggle competitively but will also have an underpin of cheap goods and the deflationary pressure that brings. The domestic story in China remains anchored by a poor jobs market, weak property sector and a reluctance to grasp the necessary nettles needed to restore confidence and build domestic demand. There was some stimulus in 2025 and expecting similar support this year seems a reasonable base assumption.

Doom, Doom, Doom? Not Quite.

Blackadder Goes Forth was one of the seminal comedy series of my early teenage years. Set in the World War One trenches of France, generations of misfortune in the Baldrick clan culminates in a hapless Private Baldrick, who finds himself alongside an acerbic Captain Blackadder. In one episode, to pass some time, Baldrick shares his poetry “German Guns”, in which he mimics the relentless “Boom, Boom, Boom…” of artillery fire. Here’s a reminder.

Having talked down the UK economy earlier, there’s a danger in believing there is a relentless “Doom, Doom, Doom” of negatives pointing at the UK assets. When it comes to UK assets, we think there is still a case for a ‘glass half full’ outlook.

First, we do not ignore the headwinds. UK government debt levels are high, taxes are high, growth is low, confidence is low, and UK assets have largely been unloved by global investors since the EU Referendum in 2016. That much we know, you know, we all know.

UK equities have made good returns this year with the FTSE 100 up 25.82% on a total return basis. Through the year, headline market valuations, in price/earnings terms, have moved from 11x to 13x earnings, which may push them out of the cheap to fair value aisle, but still represents a relatively attractive discount versus global peers. With a strong starting point of a dividend and buyback yield over 5% forming a helpful underpin for future returns, UK equities deserve more attention than most investors currently give them. In UK fixed income, particularly government bonds, an elevated yield over global peers coupled with what should be a helpful backdrop of falling interest rates in the nearer term, provides another strong underpin.

Source: JP Morgan Asset Management, Guide to the Markets, 17^th December 2025

The challenge for UK assets remains finding the catalyst to unlock the stored value. In truth, there is unlikely to be one driver required, more a combination. Part of that combination will be reducing the abundance of caution that UK households and businesses have following a decade of economic scarring – whether it be heightened trade frictions, the uncertainty of COVID, or the damage from high interest rates and inflation. To make decisions that allow households or businesses to commit capital or borrow, requires an element of confidence and certainty. UK household savings rates remain well above long-term averages and financial insecurity is growing. At some point, we will reach the point where savings are built up and the requirement to save as much reduces, but we are not there yet. For business, we are the other side of a Budget that was less punitive than in 2024, which is a positive of sorts.

For both businesses and households, Bank of England interest rate cuts will be a helpful tailwind. Meanwhile UK assets continue to deliver attractive levels of income amidst valuations that look relatively attractive versus global peers. Private equity has been busy buying UK listed assets at a big premium to their listed valuations, highlighting the value out there.

Viewed through a lens of compelling value and dependable income, UK assets merit a place in diversified portfolios. They do not offer the glamour of high-growth US tech, but they bring attractive yields and valuations. For patient investors willing to look beyond the “Doom, Doom, Doom,” the opportunity remains.

Portfolio Outlook

Equity Markets – Moving forward, but higher valuations mean we are moving along a narrower path than we have been used to.

Through the course of last year, equity markets made progress and investors benefitted from a broad rise of global equity markets. The chart shows calendar year returns in both local currency, but also taking into account currency movements. The good news is 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, when currency translation was considered.

Source: Data provided by FE Analytics, chart generated by Microsoft Copilot

Within equities, whilst some of the longer-term trends remain in favour, such as US mega-cap equities, there has also been a notable broadening out on several levels. Earnings growth broadened out away from the narrow tech sector for instance. Since 2023, in the US, there has been little comparative earnings growth away from those US mega-cap tech companies, but 2025 and forecast earnings for 2026 show two things. First, whilst the pace of earnings growth from US mega-cap tech remains strong, it is on a declining trend, and importantly, earnings growth in the rest of the market has started to accelerate.

Whilst there was earnings growth in the US and emerging markets, 2025 was a year when equity valuations got more expensive. There are still some areas of relative value and we strongly believe diversification remains critical to manage concentration risk in the US as well as high valuations. There are areas which we feel warrant a strong part of a diversified portfolio. Asia, emerging markets, infrastructure and the UK all help to dilute valuation risk from those mega-cap US stocks. Emerging markets have benefitted from earnings growth, a weak US dollar and an improved outlook in China and these are tailwinds that make us feel more positive on the region than we have for some time. There have been some areas we have been far too early on, such as US smaller companies, but perhaps in the final quarter of last year there were signs of improvement. Likewise UK smaller companies, just look outright cheap for the patient investor.

In summary, certain parts of the equity markets feature highly successful, cash-generating businesses, but with expensive valuations, while others offer clear value but still lack a catalyst to unlock it. Over the long-term, it makes sense to hold a measure of both, hence our policy of having well diversified portfolios and not trying to time mean-reversion in markets. We continue to believe that maintaining diversified portfolios across sectors and geographies is crucial in this environment.

Fixed Income – still attractive income, with returns set to be boosted by rate cuts.

It has been a while since 2022, but the reset of that year and the deeply painful losses that ensued still reverberate for fixed income investors. 2022 was the worst annual year for fixed income returns since the early 1990’s, but the reset in yields that happened as interest rates rose, re-established fixed income as an attractive asset class.

Thankfully, 2025 turned out to be a year when fixed income investors got what they wanted, namely a solid level of income without much volatility, coupled with some helpful portfolio diversification benefits. Today, the headline levels of yield that fixed income offers remain attractive, so it is important to take advantage of it whilst available. Given the bulk of the return from fixed income comes from the starting yield, going into 2026 holding a series of fixed income funds with a distribution yield around 5% offers the prospect of another year of solid returns from the asset class. If interest rates do drift lower, as is widely anticipated, then this already solid foundation should be boosted further as bond prices rise as interest rates fall.

There is always a ‘but’…As we said last quarter, there are more ways than one way to generate returns in fixed income. First, there is the yield (the regular interest payments received by bondholders), second, benefitting from the movement in interest rates (also known as duration and is when a bonds price changes in response to interest rate fluctuations) and, finally, in spreads (the increased yield that can be received for taking on incremental credit risk).

We have already shown our hand and said we are positive on yields. Taking the other two levers, there are reasons for some more caution and duration risk in portfolios has drifted lower during 2025, which is a position we are comfortable with. Credit risk is present, of course, but holding some government bonds helps mitigate the risk of losses if credit spreads widen. Again, we are comfortable with this, but are also aware that developed market governments have been happy to run fiscal deficits at elevated levels – this is an issue we keep a close eye on.

Conclusion: Time to go again.

If Celebrity Traitors was the jewel of the televisual crown in 2025, then hopefully The Traitors Season 4 has got us off to an entertaining start to the New Year. Markets tend to deliver periods when they appear to be more traitor than faithful, to the hopes, dreams and aspirations we individually invest for. It is worth remembering that they do tend to be faithful over the long-term, despite the size and scale of the trap doors which are inevitably encountered along the way.

The economic backdrop continues to look reasonable. Less ‘spectacular’, more just ‘solid’ for adequate phrasing, but that is rarely a bad starting point. Consumers still look well positioned in the developed world too, albeit wage growth in real terms is falling, and the jobs market will need watching closely. Household balance sheets, in aggregate, look ok with household debt on a downward path and, in the UK at least, savings rates remain elevated. Companies and households will both benefit from interest rates that are likely to be falling through 2026.

Both equity and fixed income markets have positives and negatives attached to them. Certain segments feature highly successful, cash-generating businesses but have expensive valuations, while others offer clear value that remains unrealised but still a lack of a catalyst to unlock it. Over the long-term, it makes sense to hold a measure of both, hence our policy of having well diversified portfolios and not trying to time mean-reversion in markets.

Fixed income looks very attractive from a yield perspective, particularly if interest rates do fall. Taking advantage of that consistent income stream and allowing those cashflows to drip into portfolios continues to feel like a sound strategy.

As ever, from all of us in the investment team, Will, Amaraj, Becky, Kim, Hayley and me, we thank you for continuing to place your trust with us in managing your portfolio. May we also take the opportunity to wish you a wonderful year ahead!

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Infrastructure: The Invisible Backbone of a Changing World

Mon, 05 Jan 2026 12:03:36 +0000

Infrastructure is now a critical growth story for the global economy. From data centres powering artificial intelligence (AI) to building the grids needed to support electric vehicles and the renewable energy transition. This article by Assistant Investment Manager, William Redmond, explains why robust infrastructure is essential for future economic growth and a good potential source of portfolio returns.

1. The AI boom has a physical problem

If you only followed the headlines this year, there’s a danger in thinking the global economy was driven entirely by politics, interest rates and whatever the latest tariff dispute was. But beneath the noise, something extremely important is unfolding: the world is being rebuilt from the ground up. Infrastructure, long dismissed as the sensible but slightly dull corner of the investment universe, has become one of the most strategically important asset classes.

This isn’t the infrastructure of the past. It is the wiring and plumbing of the future economy: the grids needed to power AI data centres, the networks that support electrified transport, the airports and toll roads benefitting from demand due to a population of global travellers, and the renewable systems that must grow if the lights are to stay on. The macro outlook may be uncertain, but one thing is not – the world needs more infrastructure.

2. Data Centres: The new nerve endings of the global economy

It is easy to imagine the digital world as something floating “in the cloud”. In reality, “the cloud” is deeply physical. The cloud lives in vast, windowless industrial buildings filled with servers, cooling systems and fibre connections. These data centres have become the nerve endings of the global economy, consuming as much electricity as small towns, and acting as the processing hubs of our digital lives.

Training and running AI models requires enormous computing power, and that demand has turned data centres from niche assets into core infrastructure. It has also triggered one of the largest corporate investment cycles in history. Microsoft, Amazon, Alphabet and Meta are now spending at a scale normally associated with national energy systems, not technology companies. In 2025, according to Statista, a global data and business intelligence platform, the four firms alone are expected to pour over $350 billion into capital expenditure, with the majority of that directed toward AI infrastructure and data centres. To put that in perspective, London’s Elizabeth line – one of Europe’s largest recent infrastructure projects – cost around £19 billion and took over a decade to build from groundbreaking to opening. We could rebuild the Elizabeth line 18 times with the amount of capital these businesses have deployed into AI development in 12 months.

Global data centre electricity use has already hit 415 TWh, and is on track to more than double to around 945 TWh by 2030 – roughly equivalent to Japan’s entire electricity consumption per year. Every stream, transaction, diagnosis, logistics update and AI query passes through these buildings, consuming energy as it does. If the digital economy is the brain, data centres are the synapses, firing constantly.

Source: Aterio, Goldman Sachs Global Investment Research & Pew Research Centre

3. The Power Grid: A circulatory system under strain

The power grid we rely on today was built for a different world, a world of predictable demand and fossil-fuel generation. The grid of the 20th century was never designed to support AI, electric vehicles, heat pumps, or thousands of data centres running 24/7. Running alongside the technological demand from AI, today the power grid is going through a transition from fossil fuel to more sustainable energy supply, whilst also facing a significant increase in demand from this new technological era, which has its own investment demands.

Bloomberg New Energy Finance (BloombergNEF) expects electricity demand from AI and data centres to hit the equivalent of roughly the entire consumption of India by 2035. The International Energy Agency (IEA) warns that electricity demand is rising faster than grid capacity, and that the world will need to double its transmission lines by 2040, which equates to over 80 million kilometres of new or upgraded lines. That’s enough transmission lines to wrap around the Earth 2,000 times.

Governments are scrambling to catch up. The US Inflation Reduction Act is pumping billions into grid upgrades, the EU plans to invest €584bn before 2030, and the UK is fast-tracking approvals that once took years. The National Energy System Operator has recently reformed the grid connection process to prioritise ‘shovel ready’ projects over the old first-come, first-served queue, aiming to clear gridlock, unlock billions of pounds of investment and significantly shorten connection timelines. But the scale of the challenge remains vast: global grid investment needs are expected to exceed $21 trillion by 2050, according to BloombergNEF.

Electrification and renewables: Rewiring the body of the economy

AI workloads, electric vehicles, heat pumps, and automated factories are significant consumers of energy; however, global energy supply systems are facing challenges in meeting this growing demand.

Renewables have become the answer not only because they are ‘green’, but because they are a scalable, cost-competitive source capable of meeting this acceleration. Clean energy investment now outpaces fossil fuels two to one, and the world is set to add 4,500–5,000 GW of new renewable capacity by 2030, more than double the last five years’ build-out.

Nuclear power is also re-entering the energy conversation as governments seek reliable, low-carbon baseload generation to support an increasingly electrified economy. While large-scale nuclear projects remain capital-intensive and slow to deliver, smaller modular reactors are being positioned as a more flexible, incremental alternative – though still early-stage and facing regulatory and execution headwinds.

But the bottleneck isn’t generation. It’s infrastructure. Transmission lines, battery storage, grid connections and flexible distribution networks are all far behind demand. The Energy Transitions Commission (ETC) estimate trillions of dollars in new power investment will be needed every year just to keep pace. For all the hype around AI, electrification is what actually makes it possible. The world is in a race to build enough infrastructure to power the economy it is creating.

Source: Thunder Said Energy

4. Geopolitics: Strengthening the spine of national resilience

Infrastructure has become a tool of national power. Countries are no longer building simply to support growth, but to secure themselves in a world where technology, energy and supply chains are being contested. The rivalry between the US and China now runs through physical infrastructure. America is reshoring semiconductor production while China dominates solar, batteries and critical minerals. Both sides are accelerating investment in energy capacity and data networks because AI capability increasingly depends on who controls the chips, the electricity behind them, and the fibre routes that move their data.

Europe has undergone its own shift. The energy shock following Russia’s invasion of Ukraine forced resilience, driving a rapid build out of LNG terminals, offshore wind and cross border grid links. At the same time, big global pinch points remain – around 97% of international data travels through undersea cables at risk of disruption, most rare earth processing is concentrated in a single country, and major shipping routes like the Red Sea and Panama Canal can be disrupted by conflict.

Perhaps the greatest focus is the semiconductor arms race, making it the most strategically valuable infrastructure of all. Advanced chips are now treated as instruments of power, and the companies behind them sit at the centre of global geopolitics. Nvidia, now worth over $4 trillion, controls more than 80% of the market for AI training chips, while TSMC manufactures around 90% of the world’s most advanced semiconductors and produces the chips used by Nvidia, Apple and the US defence industry. This concentration of capability has formed alliances, from US-Japan-Netherlands cooperation on chipmaking to Europe’s emerging energy partnerships with North Africa and India’s rise as a supply chain hub, but it has created significant global tensions too.

The scale of capital now being deployed is not without risk. Spending vast amounts of money on new infrastructure comes with established risks. Big investment booms of the past, whether it was the railways, telecommunication systems, or the early internet, have tended have eventually deliver an over-supply, compressing returns and triggering price pressure when capacity is built faster than utilisation. This makes selectivity critical as not all assets, regions or operators will benefit equally from the build-out.

Infrastructure: Where resilience meets growth

Infrastructure has always been the dependable corner of portfolios – steady cashflows, inflation linkage, regulated returns. What’s changed is the world around it. The race to build enough power, connectivity and industrial capacity for an AI-driven economy is transforming infrastructure from a defensive asset into a growth engine. Every major theme shaping markets today – AI, electrification, reshoring, energy security, semiconductor rivalry – ultimately depends on physical systems that simply do not exist at the scale required.

That’s why we see infrastructure as one of the most interesting long-term stories in markets. Demand is rising across every level of the system. Governments and companies are being pushed into a multi-trillion-pound investment cycle that is not optional, it is necessary. We believe infrastructure assets provide exposure to the same structural forces driving technology markets, but through the real-world build-out that underpins them, in contrast to a set of highly valued equity stocks. Unlike many growth stories, this one is rooted in essential services the world cannot function without.

Infrastructure is no longer the ‘boring’ part of the economy – it is the backbone of the new one. It offers resilience when markets are volatile, and meaningful upside as the global race for power, capacity and technological independence accelerates. We believe it will remain a core contributor to long-term portfolio stability and growth.

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Summary Q4 2025

Sun, 05 Oct 2025 10:55:38 +0000

The global economy continues to be characterised by slow growth and increasing uncertainty. While some sectors are showing some resilience, tariffs, inflation, and geopolitical risks are creating a complex and challenging backdrop for investors alike, which demands a risk-aware approach.
There are signs tariffs are beginning to contribute to higher consumer prices in the US, but it is still very early to assess their impact with the data at hand, and there is some evidence to suggest the impact for some countries is lower than originally considered, particularly Canada and Mexico, highlighting the uneven impact from their effects.
Global growth is slowing, and the U.S. has yet to feel the full impact of tariffs, keeping the outlook subdued. This deceleration is pressuring the jobs market, which is in a ‘no hiring, no firing’ phase. This is not likely to result in a significant rise in unemployment, but this slowing jobs market could ultimately result in a more cautious consumer. Upcoming US tax refunds will provide a partial offset to this negative trend. Even in the UK and Europe, in aggregate, the consumer looks in relatively good health and strong enough to weather this cooling backdrop.
On interest rates, the outlook continues to evolve. In the US, concerns about the stagnating jobs market prompted an interest rate cut in September, but also a change in expectations that there will be more cuts in relatively short order. Whilst inflation is no longer front and centre of the Fed’s concerns, surprises to the upside could have a large effect on markets. In the UK, inflation remains more persistent, potentially delaying further Bank of England rate cuts to next year. The Bank of England did manage to cut in August, remaining consistent in its ‘slow and steady’ pace of cuts. The European Central Bank (ECB) seems to be nearing/at the end of its rate-cutting cycle.
In fixed income, yields remain attractive, and the income generated is a primary driver of returns. Demand for bonds has remained strong, particularly for investment grade credit, even with substantial new supply in the market. We continue to like fixed income for its yield and defensive balance against potential equity market volatility but remain wary of both interest rate risk and tight credit spreads.
Despite turbulence around tariff announcements in April, global equity markets have generally performed well this year. After years of US equity market dominance, a strong broadening out of returns is a notable feature of the year. Europe, emerging markets and even the UK have been positive contributors to portfolio returns. Within equities there remains a broad divergence – for the strongest earnings, the premium is high; for the best value, the catalyst in unlocking that remains unclear. Maintaining diversified portfolios across sectors and geographies is crucial in this environment.
Whilst sterling has strengthened against the US dollar and the yen, this year has seen a steady weakening against the euro. The strong consensus is for the US dollar to continue to weaken.
Gold continues its seemingly unending upward path – it started the year at $2600 and recently hit (another) yearly high, breaking through $3,800. Meanwhile, the Brent Crude price slips lower, from c.$75/bbl in January to $66 by the end of September.

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Markets Outlook Q4 2025

Sun, 05 Oct 2025 10:28:13 +0000

Autumn and the leaves are beginning to fall

For me, the Autumn months have become a time of reflection, marked by both caution and a sense of optimism. On the one hand, the evenings drawing in signal it is time to pack away the ‘t-shirt and shorts’ wardrobe of summer, to be replaced with something more substantial and protective as the temperatures drop and the rains descend. Outside, the vibrant summer garden succumbs to waterlogged grass and brown, wilting leaves. On the other hand, this should not overlook the optimism to be found in the woodland colours of an autumn walk, the chance to sit in front of a warming fire, the start of ‘The Celebrity Traitors’, as well as the (usually short-lived) hope of a new football season too.

Markets find themselves in a similar mood. Whilst there have been moments when markets have been unsettled this year, we reach autumn with equity markets returns looking in really quite fine fettle. As you can see from the table below, which is in local currency terms, double-digit returns are the norm, rather than the exception.

Pricing Spread: Bi-Bid • Price range: from 31 Dec 2024 to 30 Sep 2025

Name	Custom Period Performance
MSCI China TR	41.22
Bolsa De Madrid IBEX 35 GTR in EU	37.61
FTSE MIB TR in EU	28.59
MSCI Emerging Markets TR	24.29
Deutsche Borse DAX 30 Performance GTR in EU	19.95
Euro STOXX GTR in EU	18.88
FTSE 100 TR in GB	17.74
MSCI ACWI TR	15.54
TSE TOPIX TR in JP	14.88
S&P 500 TR in US	14.50
Euronext France CAC 40 GTR in EU	10.29

Source: FE Analytics

These numbers really are a triumph for the optimists, but our caution comes from market valuations moving back up towards ‘elevated’ levels, which is likely to weigh on investor returns in those most highly valued areas, particularly if volatility re-emerges. There should be some optimism to be garnered from seeing overlooked parts of the global equity market having their time in the sun, such as the UK, Europe and Emerging Markets. It will be one to watch how this broadening out of equity market returns develops, away from just the glitz and the glamour of the US technology sector, which continues to deliver an oversized amount of earnings growth.

Throw into the mix heightened geopolitical risk and uncertainty and there continues to be plenty of challenges out there that have the potential to restrain markets moving strongly forward from here, most obviously at a government level, where debt levels are high and policy making decisions are challenging.

This is all a bit doom and gloom, so for the positives. We remain in a world where corporate and household balance sheets look healthy, wages are slowing but the threat of a significant rise in unemployment looks low. Yes, much like my lawn, it looks like we have hit a soft patch but there is still a pathway forward.

The Economy: Slowing, not stalling

We have talked for some quarters about how the global economy continues to be characterised by slow growth and increasing uncertainty, and there are no notable changes to report on this count. Growth is slowing, and with that, recessionary risks are rising, but there is still plenty of evidence to suggest this is more likely to be a mid-cycle soft patch. There are areas showing resilience, but tariffs, inflation, and geopolitical risks are all creating a complex and challenging backdrop for investors alike, which demands a risk-aware approach.

There are signs that tariffs are beginning to contribute to higher consumer prices in the US, but it is still very early to assess their impact with the data at hand, and there is some evidence to suggest the impact for some countries is lower than originally considered, particularly Canada and Mexico, where increasing amounts of goods are achieving exemptions. All this highlights the uneven impact from tariff effects, and how extrapolating too far into the future all but embeds uncertainty.

Global growth is slowing, and this is keeping the outlook subdued. This deceleration is pressuring the jobs market, which is in a ‘no hiring, no firing’ phase, with much of the heavy lifting of job creation, in both the US and the UK, coming from the public sector. It looks unlikely we will see a significant rise in unemployment, but this slowing job market could ultimately result in a more cautious consumer. With consumption of both goods and services being the primary driver of US economic growth, it is worth noting that US households have been resilient in their spending despite the weakening jobs market. However, threats to this are rising. Real terms (after inflation) post-tax wage growth is slowing as prices move higher. Earlier in the year, the anticipation of upcoming tariffs appeared to boost consumer activity in the US, but that momentum is now easing as the impact of tariffs begins to take hold, and consumers can only buy so many goods at a time.

There are a couple of offsets for the household sector – overall household wealth recovered following the market disruption in April, creating a positive wealth effect, and upcoming Q1 2026 US tax refunds will provide a cash injection to households to help short term offset to this negative trend. Even in the UK and Europe, in aggregate, the consumer looks in relatively good health and strong enough to weather this cooling backdrop. With a longer-term view, consumers have, at varying levels, spent the years paying down debt since the financial crisis, impressively so for some of our southern European cousins.

Source: JP Morgan Asset Management, Guide to the Markets, 29^th September 2025

Whilst there have been no notable changes on the growth outlook, the key positive factor is interest rates, where market expectations are anticipating a faster pace of rate cuts, particularly in the US. In the US, concerns about the stagnating jobs market prompted an interest rate cut in September, but also a change in expectations that there will be more cuts in relatively short order. Whilst inflation is no longer front and centre of the Fed’s concerns, surprises to the upside could have a large effect on markets. At the time of writing (late September), according to CME FedWatch, market pricing suggests an almost 90% chance of another cut in October and a 65% chance of a further cut in December too. By July next year, 75-100 basis points of cuts is a strongly suggested outcome. I am reminded of late 2023 when a disconnect emerged between market expectations for interest rates and reality, which then led to disappointment when resultant cuts did not emerge. At a time when the Federal Reserve remains under intense political pressure to cut rates, there is justified concern to support the jobs market, but if cuts continue to come and inflation remains persistent, there will be broadening concern about the dilution of central bank independence.

In the UK, inflation remains more persistent, potentially delaying further Bank of England rate cuts to next year. The Bank of England did manage to cut in August, remaining consistent in its ‘slow and steady’ pace of cuts, but is facing the challenge of a very evident amount of persistent inflation that curtails expectations of cuts coming down the line and the background of a government unwilling to tackle spending, and limited in its tax raising options. Overall, financial conditions in the UK still look well in the ‘restrictive’ rather than ‘loose’ territory.

An exorbitant privilege, or exorbitantly taking the privilege?

“Exorbitant privilege”, a term attributed to French Finance Minister d’Estaing during the 1960’s is the privilege bestowed upon the global reserve currency and the benefits it gives, such as high demand for the dollar and the lower financing costs that result, as well as a ‘flight to safety’ quality when market concerns are high.

The US dollar is the world’s reserve currency and has also been an area of focus this year, with the dollar weakening against a broad basket of currencies. The ICE US Dollar Index (or DXY) compares the US dollar against a basket of other currencies, predominantly the euro. Over the course of the year to date, the US dollar has weakened from 108.487 to 97.80, but the shape of this move is worth noting. The bulk of the decline in the DXY to date was done by April, since when it has been in a broad holding pattern overall. The only currency that is perhaps an exception has been the euro, but even here, further weakening of the dollar has been more muted.

The obvious question is, how much further this weakening cycle can go? In July, the Economist magazine published an update on its much-followed take on the Purchasing Power Parity theory, the Big Mac Index, which compares the price of the ubiquitous burger in Golden Arches around the world. If, once converted into dollars, the Big Mac prices vary, then this arguably indicates the relative expensiveness/cheapness of the currency versus the US dollar. Using this methodology, for US dollar holders, burgers still remain great value on a relative basis for thrift like ‘Big-Mac’ enthusiasts, who could have spent a summer touring Egypt, Indonesia, India and Taiwan with change to spare. Those who like to pay up for their McSpicy would have found their eyes watering at both the spice, but also in handing over all those greenbacks, whether they holidayed their taste buds in Switzerland, Norway or Sweden.

Using the same methodology, the Big Mac index implies sterling still looks on the expensive side, suggesting more room for the dollar to fall. Other forecasters, looking beyond those who measure the ingredients of highly calorific convenience foods, look less assured that strong weakening is ahead, settling around the GBP/USD level of 1.36-40 for the end of 2026.

What is the USD exposure in portfolios? We are not basing any significant portfolio decisions on the outlook for the dollar. Our concern about valuations in US equities has meant we have brought our US dollar down naturally as our allocations have drifted lower. We have also more recently sold all holdings in US government bonds across portfolios, although we had already taken the precaution of hedging the currency risk whilst in the portfolio anyway – part good fortune, part our disinclination to accept currency risk in any of our fixed income holdings as a matter of course.

We are actively thinking about our currency risk and positioning and do not discount reducing exposure further, but whilst we recognise risks of dollar weakening, we also see a challenging backdrop for sterling and the relatively low exposure to the US dollar, does mean we have already built in some mitigation of the risks from the impact of further dollar decline.

Growth and Inflation Numbers: Shifting Sands

Thanks, as ever, to our friends at Schroders for the latest consensus forecasts, which are as at 19th August 2025:

Name	GDP (%) 2025	GDP (%) 2026	CPI (%) 2025	CPI (%) 2026
Global Economy	2.4	2.3	2.7	2.5
China	4.8	4.2	0.2	0.8
Emerging Markets	3.8	3.7	3.0	2.8
US	1.6	1.7	2.8	2.7
EU	1.2	1.1	1.7	1.8
UK	1.0	1.0	3.3	2.5

Source: Schroders Economic & Strategy Viewpoint, Q3 2025 (Data to 19.08.2025).

The consensus remains that we are in a low growth environment for the global economy. As challenging as the UK Chancellor has it, it is not just the UK government that is wrestling with supporting growth. In France, governments are coming and going with concerning regularity, faced with the unpopular task of trying to rein in the deficit. In China, policymakers are struggling to close the gap between a target of 5% GDP growth and a reluctant consumer, who worries more about jobs than rising prices. With stimulus of RMB500B being announced at the end of September to speed up construction projects and trigger an increase in economic activity, the Chinese government are looking at shorter-term infrastructure projects to keep growth on track and bridge the longer-term ambition of becoming a more service-orientated economy with a more developed social security framework.

Independence Matters

Central bank independence is a cornerstone of monetary policy credibility, enabling policymakers to make decisions based on economic fundamentals rather than political pressure. So, whilst President Trump’s attempt to sack one of the governors of the board of the Federal Reserve for issues surrounding a mortgage application could sound a little ‘niche’ to grab your attention, the broader market concern is that this is a first step in undermining the credibility that matters so much.

The rights and wrongs of Governor Cook’s mortgage application will be decided in the fullness of time, but this is being seen as the case that witnesses the starting gun being fired for control of the Fed’s interest rate setting body. This race could see new and existing Trump appointees becoming the dominant bloc within the ratesetting committee by next year, should Chair Powell retire as expected. With new appointee, Governor Miran, very much Trump’s man and an echo for the President’s view that interest rates need to fall sharply, in September he duly rose to the occasion with a call for an immediate 0.5% cut. Likewise, his forecast to year end, suggesting policy rates fall towards 3-3.25% has made him very much an outlier in what is an increasingly divided committee, and will help feed investor uncertainty over the coming quarters.

Portfolio Outlook

In fixed income, yields remain a key attraction, which is important given it is the primary driver of returns. There are more ways than one way to generate returns in fixed income and we broadly think of three that we can use, which are yield (the regular interest payments received by bondholders), duration (a bonds potential price change in response to interest rate fluctuations) and spreads (the increased yield received for taking on incremental credit risk). We are still positive on yields, but in portfolios we take a more cautious approach towards the other areas, which overall may lead you to conclude we are wary of the return outlook for fixed income, but this is not the case.

And that is down to the favourable conditions for yields. Whilst we can seek to manage the risk from the other areas, allowing all those attractive cash flows to drip feed into portfolios is precisely what fixed income can deliver for portfolios, where we aim for mid-single digit returns, in a defensive asset class with portfolio diversification benefits.

There is good evidence to show the primary driver of fixed income returns over the long term comes from the starting yield, so it is important to capture it whilst it is available. The evidence also shows that whilst duration can add and detract to returns, this tends to be at points of time when the interest rate cycle changes. Think 2022 for a recent example! If interest rates do fall significantly, we are unlikely to capture all the benefit, but prefer the more cautious stance given should that environment arrive, the equity part of each portfolio should find this to its liking.

Market demand for bonds has remained strong, particularly for investment grade credit, even with substantial new supply in the market. We continue to like fixed income for its yield and defensive balance against potential equity market volatility but remain wary of both interest rate risk and tight credit spreads.

Despite turbulence around tariff announcements in April, global equity markets have generally performed well this year. After years of US equity market dominance, a strong broadening out of returns is a notable feature of the year. Europe, emerging markets and even the UK have been positive contributors to portfolio returns. Within equities there remains a broad divergence – for the strongest earnings, the premium is high; for the best value, the catalyst in unlocking that remains unclear. Maintaining diversified portfolios across sectors and geographies is crucial in this environment.

Whilst there were no portfolio changes in the Core, Passive or Positive Impact portfolios during the Quarter, we did make some changes to the Offshore & Currency hedged portfolios. These were largely following the trends we implemented in the previous quarter in other models, namely reducing US government bond exposure as well as the underperforming Janus Henderson Horizon Strategic Bond. We have maintained the asset allocation at broadly the same levels, topping up existing fixed income selections and adding Artemis UK Select, an offshore version of the fund we have held in onshore models for some time.

Conclusion: More of the same, just muddling through

Whilst acutely aware of the danger of repetition, but not afraid to walk down that slippery path at least one more time, we are in a protracted period of slow economic growth. At the beginning of the year, we wrote how there were some positives and some negatives in the outlook, but there were still good reasons why portfolios could continue to move forward. We believe that this remains the case.

In portfolios, we have focused on continuing to build diversified positions and have tended to shy away from areas where valuations looked expensive, over the last few years. This may have been a headwind at times, but we maintain that in an environment such as this, receiving a series of regular cashflows into portfolios, whether it is from fixed income holdings or equity funds that deliver dividends, this helps underpin a path forward despite uncertainty on many levels very high.

We continue to expect a bumpy ride on many levels, but governments and the political world are having an oversized impact on capital markets at the current time. Below that however, corporate and household balance sheets look relatively strong. Yes, wages and jobs are coming under pressure, but there is the possibility that we are in an unsatisfactory muddle through world in which it remains possible to eke out positive returns. An uncertain world demands trying to understand more than one side of an argument and we are trying to do just that in order to steer portfolios forward.

As ever, from all of us in the investment team, Will, Emma, Amaraj, Becky, Kim, Hayley and me, we thank you for continuing to place your trust with us in managing your portfolio and we wish you all a wonderful autumn!

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Gold: Everything in its Right Place, or time for the Exit Music?

Sun, 05 Oct 2025 10:01:31 +0000

On the surface, the only thing seemingly more in demand than gold right now is a Radiohead ticket, so it is unsurprising to see the gold price reaching another recent record.

Whilst this is intended to be a short piece, it is sensible to set the background for some of the broad themes that have been underpinning the rise in the gold market. These broad themes have been:

Increased central bank purchases of gold following the freezing of Russian assets after its invasion of Ukraine. This spurred a demand from central banks, led by China, Turkey, India, and also Poland that has ambitions to achieve a 30% reserves allocation to gold.
Chinese household demand for gold has been high in terms of jewellery, bars and coins as an alternative store of value given the weakness of the property sector where much of Chinese household wealth has been invested.
Heightened geopolitical risk has pushed investors to the precious metal as a potential shield against trade wars and a destabilised world, as countries attempt to stop the dollar being used as a geopolitical weapon.

These more recent themes are not to ignore traditional tailwinds that are usually helpful conditions for gold price, namely inflation and a weakening US dollar.

Why is the price rising?

Demand has been high: Demand has been coming from two sources. The official sector and from investors.

The official sector, which includes central banks, have almost exclusively been net buyers of gold over the last three years with an exception only for a few short months in the first half of 2023. According to World Gold Council data, global central banks added over 1000 tonnes of gold to their reserves in 2024. Whilst this has been a very strong source of demand, the strength of that demand has been waning this year, with net demand still positive but far more muted than the last couple of years. With central bank demand drifting back to lower levels, it is reasonable to question whether official sector buying is strong enough to continue to push the gold price higher.

Meanwhile, investors have also been clamouring to buy and have been a strong source of demand at the point at which central bank demand has lessened. An example of this is gold ETF flows, which are currently the second strongest on record with a year-to-date inflow of $47bn up to the end of August.

Source: World Gold Council, Gold ETF Flows. Chart prepared by Co-Pilot

Climbing up the Walls

“Climbing up the wall of worry” is an investment phrase saying that describes how markets can still creep forward despite a negative backdrop. Gold, perhaps, feeds off it.

Feeding into this fear is the market expectation that a slowing economy and a poor jobs market is going to precipitate deeper interest rate cuts than expected. In recent weeks, markets have increasingly been pricing in interest rate cuts, particularly coming from the US Federal Reserve as weak labour data encouraged traders to price a high pace of cuts. At the time of writing (late September), according to CME FedWatch, market pricing suggests an almost 90% chance of another cut in October and a 65% chance of a further cut in December too. By July next year, 75-100 basis points of cuts is a strongly suggested outcome.

This is favourable for gold in two ways. First, it reduces the opportunity cost of holding gold, which doesn’t have any income stream in comparison to many other assets. Second, history suggests that gold finds favour in environments when interest rates are being lowered, because that suggests a period when economies are weak and therefore demand is higher for traditional safe-haven assets.

We are in unsettled times

How about portfolios?

First, why do we hold some gold? It is less for inflation proofing, and more for two reasons. First, to protect from geopolitical risk and second, to protect from a weak US dollar. A severely weaker dollar that could precipitate out of a dilution of Fed independence, would be a support for gold moving quite a bit higher. Couple to that no near- term resolution to any of the global geopolitical hotspots (Ukraine, Iran, Gaza), and ongoing geopolitical tensions are likely to feed investor demand for gold and its safe haven status. When the path of least resistance is for prices to move higher, sometimes it is best not to stand in the way.

However, gold has doubled in price over the last five years, so with no valuation method to value gold (it has no income to assess some relative value), we are wary of extrapolating the last five years and carrying it forward into future expectations. We also acknowledge that reliance on particularly large buyers, in both the official and investment sectors introduces risk, as any sudden reduction in their purchases could place pressure on the price and add an element of unpredictability.

While the prospect of US interest rate cuts is generally supportive for gold, central bank purchases have eased this year compared with recent years. Given this shift, we view gold as a useful portfolio diversifier but would exercise some caution before adding further exposure. That said, it is not yet time to hit the exit button either.

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Summary Q3 2025

Thu, 03 Jul 2025 15:55:06 +0000

The coming quarters are likely to be one of slow and slowing Tariffs have muddied the water as consumers and companies dragged forward demand to earlier this year to mitigate some of the tariff impact. There is a risk that this gives an illusion of a more solid economic backdrop in comparison to what we are likely to step into during the second half of the year. This slow and sluggish economic growth will bring with it rising stresses in the jobs market, which in turn, triggers a more cautious consumer and lower spending.
In the UK & Europe, increased defence spending is the order of the day. Whilst the UK is more constrained with its budget, Germany has much more capacity for higher government investment. In China, consumer spending and confidence remain incredibly low, but there are signs of a stabilising property market. Loosening monetary policy hints at signs of credit growth, but tariff conflicts with the US are a headwind for its exports.
With tariff impacts emerging in the US, this helps keep consumer prices higher than would have otherwise been the case and weakening growth is unlikely to spur the Federal Reserve into rate cutting action until the very end of this year. In the UK, the steady as she goes, once a quarter rate cut is likely to continue, whilst the ECB, no longer concerned with the inflation picture is probably closer to the end of its own rate-cutting policy than peers.
Fixed income yields remain attractive, and increasingly the level of yield available looks like the primary driver of returns. Delivering steady income and defensive ballast to the inevitable buffeting equity markets is fixed incomes primary role. There’s both a danger that central banks don’t cut interest rates as fast as we had hoped, but also the possibility that economies slow faster than expected and central banks have to bring rates down quicker than planned.
Meanwhile, equity markets are divided. Certain sectors feature highly successful, cash-generating businesses with expensive valuations, while others offer clear value but still lack a catalyst to unlock it. Over the long-term, it makes sense to hold a measure of both, hence our policy of having well diversified portfolios and not trying to time mean-reversion in markets.
In currency markets, year to date, there has been notable weakness in the US dollar, although there were some signs of this stabilising in more recent weeks. Whilst the chief beneficiary of US dollar weakness has been the euro, the Japanese yen and sterling have enjoyed a period of relative strength too.
Gold continues to shine bright, briefly hitting record highs of $3500/oz. Rising uncertainty, a weakening dollar and interest rates falling are helpful backdrops which are drawing investors to the metal, but so too is the level of demand from central banks bolstering the amounts of gold in their reserves as a diversifier to US Treasuries. The outlook remains solid.
Brent Crude prices were looking weak as production was set to be increased by OPEC+ members (and quotas were already being broken). In addition, the weakening economic outlook was weighing on demand expectations and there is a US administration keen to bring down energy costs too. Hostilities between Israel and Iran and the potential threat that levied against oil supplies and transportation, saw a spike in the price of Brent before falling back to $67/barrel by quarter end.

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Markets Outlook Q3 2025

Thu, 03 Jul 2025 15:50:15 +0000

One too many Wasted Sunsets, One too many for the road

Good news – it’s summer!

The sun is warm, the BBQ’s have been fired into action and schools are officially out for summer. Well, in our household anyway as we leave behind GCSE season, and are just a hop, skip and a jump away from skipping some of those school holiday queues, shedding what feels like months and months of abstinence from both fun and enjoyment by jumping on a plane for a Swiss mountain adventure and a couple of games supporting the Lionesses at the Euros.

Whilst the revellers at Glastonbury this year have enjoyed the sun-baked fields of Somerset, when it was my time to enjoy ‘the GCSE summer’, all the way back in the early 1990’s it was unseasonally wet and soggy. Looking through some of the economic data today, there is a certain sogginess underfoot too in the jobs data, growth outlook and inflation numbers. These will all need keeping a close eye on to make sure that sogginess does not turn into a true ‘Glasto’ mudfest, at least more attention than equity markets are paying anyway, as the FTSE 100 hits all time high’s…

Throw into the mix heightened geopolitical risk and uncertainty and there continues to be plenty of challenges out there that are likely to restrain markets moving that far forward from here. As we settle into some summer holiday reading, we will also be spending plenty of time thinking about these questions:

1) What is the potential economic pattern we are expecting to see in the coming quarter or two?

Turning to the potential pattern ahead for the next quarter or two. To our mind, the coming quarters are likely to be one of slow and slowing growth. Tariffs have muddied the water as consumers and companies dragged forward demand to earlier this year to mitigate some of the tariff impact. There is a risk this gives an illusion of a more solid economic backdrop in comparison to what we are likely to step into during the second half of the year. This slow and sluggish economic growth will bring with it rising stresses in the jobs market, which in turn, triggers a more cautious consumer and lower spending. With tariff impacts emerging in the US, this helps keep consumer prices higher than would have otherwise been the case and weakening growth is unlikely to spur the Federal Reserve into rate cutting action until the very end of this year. In the UK, the steady as she goes, once a quarter rate cuts are likely to continue, whilst the ECB, no longer concerned with the inflation picture is probably closer to the end of its own rate-cutting policy than peers.

2) What should we be thinking about that could potentially change our thinking or portfolio positioning?

Watchlist 1: Jobs

Jobs remain a key metric to be looking out for. Why? Well for central bankers, whilst inflation is a bugbear, the causes for elevated UK inflation at least can be identified and are not perceived as long-term drivers – these are things like annual rises in energy bills, car tax and so on, but also national insurance and national living wage rises which are pushing through wage cost increases.

Important too because in developed economies, such as the US & the UK, roughly 2/3rds of our economies are driven by consumer spending, so fewer people in work means fewer people out spending on goods, leisure and ‘stuff’.

Whilst there are question marks about the reliability and volatility of jobs data, there are broad signs of weakness which should be watched. These are:

The unemployment rate which is slowly moving upwards. After Covid, there was an element of labour hoarding, but the unemployment rate has now been drifting higher since 2022 and recent jobs reports have been weak. In the United States, hiring has slowed to its slowest pace for two years. In the latest Federal Reserve Beige Book – an economic snapshot of the US economy – it highlighted uncertainty that was preventing hiring, lowering labour demand and resulting in declining hours being worked.
The employment rate is in decline – it has now fallen 9 out of the last 10 months here in the UK. The number of payrolled (PAYE) employees here in the UK is also trending lower, both in overall numbers but also the growth rate which has been falling since it peaked in March 2022.
The number of unemployed people per vacancy is rising as unemployment rises and employers cut back on hiring. In the UK, the number of vacancies has dropped below pre-pandemic levels.

There are signs of sustained weakness in labour markets. Indications that the jobs market is weakening because of a slowing economy and one in which higher levels of uncertainty are deploying caution on companies’ willingness to hire new staff. Whilst this is an understandable reaction, should there be more evidence that the pace of weakness in the jobs market increases, central banks will need to respond quicker than currently anticipated to bring interest rates down.

Watchlist 2: Deficit

The trajectory of government deficits is concerning, but deficits very much remain the order of the day as governments struggle to constrain spending whilst needing to fund an expansion to areas such as defence and energy independence. In particular, there is increasing focus being turned to the size of the deficit and what this potentially means for the US bond market.

The US borrows almost $2tn annually and has debt servicing costs of $1tn. To put that in perspective, that is well in excess of the US defence budget. Whilst the US deficit ballooned during the Covid years, politicians from both sides have found deficit financing an increasing temptation. From the turn of this millenium, when the budget was in surplus, outside of the global financial crisis and COVID, the US has tended to have a deficit in, or around, 3% of GDP. In recent years however, the deficit has been creeping up to 5, then 6 and now almost 7%.

So why the concern now? The current budget reconciliation bill heading to the Senate seeks to extend existing tax cuts that were implemented in the first Trump Presidency that were due to end shortly. It also offers further tax cuts. The crux of the issue is that, if implemented, this essentially cements a super-high deficit through the course of this Presidency, at a time when foreign investors appetite for US assets is being questioned.

So, things to be watchful of:

Yields rising (or not falling as much as expected),

Poor uptake at a US bond auction (this means the US government failing to tempt enough investors to buy the debt being issued),

Signs of foreign holders of bonds not rolling maturing proceeds into new issues and for this to be picking up pace.

Watchlist 3: Tariffs – what next?

All options remain on the table and there is considerable uncertainty on what future tariff policy will emerge.

There are cases in Court challenging the President’s ability to impose some of the tariffs under specific pieces of legislation, but even if this is lost, the judgement won’t come before July 9^th when the bulk of the 90 day pause ends. There are also other legislative paths the President can take to implement tariffs, if that route is legally blocked. The legal challenge is not on all the tariffs either, and some tariffs are already in place (steel, aluminium and cars for example). Clear as mud isn’t it!

The US wants tariffs to bring in revenue to fund tax cuts, so there will be tariffs. When the 90 day pause comes into effect, despite the potential for a flurry of deals beforehand, as in the UK agreement, if there are deals done they may not be there to reverse the full tariff burden. China/US have agreed to bring tariffs down from the excesses that they both announced in the immediate aftermath of Liberation Day, but suffice to say, we’re in a period where the goalposts keep moving.

US consumers have yet to feel the full impact on tariffs and the real-world consequences have not yet materialised in the inflation numbers. Research from JPMorgan suggest the effective tariff rate is around 14%, which is impactful and will push inflation higher in the second half of the year, well above the Fed target rate and bond yields have moved higher as a result. The potential tariff revenue raised is estimated to be in the region of $400bn, so whilst near-term there will be higher inflation in the US, long-term, there may be a reluctance to unwind this new revenue flow.

Growth and Inflation Numbers:

Thanks, as ever, to our friends at Schroders for the latest consensus forecasts, which are as at 15^th May 2025:

	GDP (%) 2025	GDP (%) 2026	CPI (%) 2025	CPI (%) 2026
Global Economy	2.6	2.5	2.6	2.4
China	4.5	4.1	0.6	1.1
Emerging Markets	3.8	3.7	3.0	2.7
US	2.2	2.0	2.7	2.6
EU	0.9	1.2	2.1	1.9
UK	1.1	1.3	2.8	2.4

Source: Schroders Economic & Strategy Viewpoint, Q2 2025 (Data to 15.05.2025)

Consensus forecasts made when the growth and inflation outlook are being built on the shifting sands of a US tariff policy are probably best served with a pinch of salt.

Nonetheless, the consensus has shifted lower for global growth. There is a slightly nuanced picture to paint though with lower growth in the US, both this year and next, China lower this year, but stronger next, and both Europe and the UK broadly static.

On inflation, in the US it is forecast to be noticeably higher this year on the presumption tariffs push prices higher, but this will be a one-off impact, China continues to struggle with the threat of deflation, Europe is broadly the same, whilst the UK sees slightly higher inflation this year as a result of energy prices.

As for the UK, slightly embarrassingly, the Office for National Statistics had to admit to an error in calculating its April inflation number, which surprised to the upside by coming in at 3.5%, “blowing past forecasters’ expectations of a 3.3% rise”, according to The Economist. Suitably chastened, the ONS apologised and dutifully corrected by 0.1%. The culprit? Vehicle Excise Duty.

Despite the rise in inflation, much is to do with annual increases in energy, mobile phone and hefty jumps in water bills. Without resorting to any “that’s money down the drain” jokes, these are not drivers of the type of worrisome inflation that the Bank of England will be concerning itself with. Indeed, the expectation is for inflation to remain stubborn, partly as the pressure is coming from companies seeking to push through labour cost increases. The Bank of England will be watching both the increase in employer national insurance that begun in April as well as increases in the National Living Wage, which went up by 6.7% for over 21 year olds and 16.3% for 18-20 year olds. These both combine to increase the cost of labour – most impactfully in those lower paid roles, such as in leisure and hospitality, which reside in the dominant services part of the inflation picture – and why the pizza in your local pizza restaurant is pushing £20, but £3 in your supermarket.

Portfolio Outlook

Fixed income yields remain attractive, and increasingly the level of yield available looks like the primary driver of returns. This is a bit of a strange statement to make, given the starting yield in fixed income has typically always been the primary driver of returns from the asset class. Less common, but certainly a welcome bonus, is the impact on bond prices should market interest rates fall, as in this environment there are capital gains to be had as the market re-prices.

Bond prices change based on the return an investor would get by holding the bond until it matures. When overall market interest rates go down—mainly, but not only, because of expectations for central bank rate changes—existing bond prices usually go up. This happens so that the return (or yield) on older bonds matches the return on new bonds being issued, which offer lower interest payments (called coupons) because of the lower interest rates in the market.

The opposite is true when rates are falling, which is why bond prices fell so heavily during 2022 when interest rates rose rapidly in the wake of rising energy prices following the Russian invasion of Ukraine, which happened when inflation was already elevated as a result of the reawakening global economy following COVID, as demand of goods and services soared at a time of supply constraint.

Whereas a few months ago, the expectation of falling bond yields was driven by the thinking that, as economies slowed and as inflation quietened, the pathway for central banks to cut rates and for fixed income yields to fall as a result, was relatively straightforward. This opened the opportunity for fixed income to contribute to portfolio returns, not only because of income at levels largely unseen for the bulk of the last 15 years, but also because there was an expectation that lower interest rates would push up bond prices as a result.

As time moves on, thinking needs to evolve too. What happens if central banks do take interest rates lower, but market bond yields don’t follow? There are reasons to think why this may be the case. A bond is a loan after all, and anyone providing the loan will alter the level in interest being charged depending on the degree of expectation that the loan will be fully repaid. ‘Rock solid’ guarantees of repayment see the lowest level of interest, lower quality results in a higher interest rate.

If you break the economic world into three constituent parts, firstly, the government, second, corporations, and third households, it is governments who have typically enjoyed the ‘rock solid’ status, no more so than the United States which benefits from an independent central bank, the rule of law, as well as the US dollar as the world’s reserve currency.

However, the level of government debt today is much higher than it has been for decades. This higher debt burden has arisen primarily out of two crises. First, in the huge stimulus put in place as the global financial system teetered on the brink of collapse during the global financial crisis. This saw government debt as a percentage of GDP rise strongly as a result and an extended period of low interest rates, which assisted both households and corporate balance sheets to enter a lengthy period of repair. At the onset of the COVID pandemic in 2020, it was only the government third of this triad that had not begun to recover, and it was from this position of relative weakness that government debt burdens extended even further, as support packages for health systems and economies were put in place. This is placing a strain on governments, not just because of the limited amount of leeway governments have to raise more debt, but also through the high amounts of interest payments – as mentioned, the US alone pays $1 trillion per year on servicing its government debt burden.

Source: J.P. Morgan Asset Management, Guide to the Markets.

It has been quite some quarter for global equity markets. April turned sour quickly with tariff threats dragging down markets in short order, making April one in which volatility reigned, but ultimately recovery came through as the biggest excess of the tariff storm abated.

There was a brief moment when market valuations dropped, but with their recovery, we return broadly to where we were, which is with equity markets are divided. There remain sectors, such as mega-cap US tech, that contain highly successful, cash-generating businesses, but their valuations have gone back to where they were at the beginning of the year, which is in the ‘expensive’ bracket. Other sectors, and indeed equity markets outside the US, offer more value but still lack a catalyst to unlock it. Over the long-term, it makes sense to hold a measure of both, hence our policy of having well diversified portfolios and not trying to time mean-reversion in markets.

We made several changes to the Core, Passive and Positive Impact Portfolios while remaining mindful of the current macroeconomic environment. These changes are designed to reflect our long-term asset allocation views, streamline portfolios, while maintaining strong diversification across asset classes, geographies, and investment styles. Broadly, we want to ensure that our strategic asset allocation is reflected as closely as possible across all model portfolio ranges, whilst recognising there will always be a level of variation given the different mandates.

We can’t cover every single change here, but broadly:

In Core portfolios, we removed Janus Henderson Strategic Bond and Vanguard US Government Bond as well as trimming other holdings. This was to begin new positions in L&G Strategic Bond and a new absolute return fund, PM Tellworth UK Select. We also added to Fidelity Index UK Gilt.

In Passive Portfolios, we sold Vanguard US Government Bond, typically reinvesting in Fidelity Index UK Gilt, given yield levels in the UK look attractive and given concerns around US government deficit levels. We also altered the equity geographical weightings with the overall intention of decreasing US equity, to diversify into other geographies. In lower risk/reward portfolios, we also topped up L&G Global Infrastructure Index.

In Positive Impact Portfolios, we removed several funds which were underperforming, such as JOHCM Regnan Global Equity Impact Solutions and FP WHEB Sustainability. We also sold some funds where we had identified better options, bringing in CCLA Better World Global Equity and BNY Mellon Responsible Horizons Strategic Bond. One area of difference between Positive Impact Portfolios and Core and Passive ones has been the limited amount of government bond exposure, given the limited options available. We completed research in this area and have added EdenTree Global Sustainable Government Bond to portfolios.

Conclusion: You don’t need to be a sailor to know how to tie a rope, sorry

As Linda from ‘The Traitors’ proclaimed, some things are just so obvious that there is no explaining necessary. As much as we look forward to Celebrity Traitors with both anticipation (mostly for Claudia’s one-liners), but also with some trepidation (will adding a host of well-known celebrities somehow lose some of its relatability and authenticity?), there’s no hiding from some of life’s bigger questions.

Unfortunately, there are no obvious, easy answers when it comes to markets, which means this is not a moment to try and play hero. “Steady as she goes” and “tough-sledging” are all appropriate!

Fixed income assets look well positioned to take back their rightful role in portfolios. Namely, delivering steady income and defensive ballast to the inevitable buffeting equity markets go through each and every year. There’s both a danger that central banks don’t cut interest rates as fast as we had hoped, but also the possibility that economies slow faster than expected, in which case central banks continue to hold firepower to bring rates down faster than planned.

Meanwhile, equity markets are divided. Certain segments feature highly successful, cash-generating businesses with expensive valuations, while others offer clear value but still lack a catalyst to unlock it. Over the long-term, it makes sense to hold a measure of both, hence our policy of having well diversified portfolios and not trying to time mean-reversion in markets.

For portfolio returns, this is likely to be another year of trekking through heavy mud and back to the good ol’ days of Glastonbury in the early 1990’s!

During the quarter, we became responsible for over £1bn of client assets as we crossed this milestone in our 15^th year of discretionary portfolio management. Whilst this is significant for us, our chief focus and energy remains building portfolios for you, so that you have the financial foundation to achieve your goals and aspirations. This commentary does though give me the opportunity to say a very sincere thank you. As ever, from all of us in the investment team, Will, Emma, Becky, Kim, Hayley and me, we thank you for continuing to place your trust with us in managing your portfolio and we wish you all a wonderful summer (and for those facing exam results come August, the very best of luck!).

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