Commentary for September 2025
Market Overview
Global equities rose for a fifth consecutive month in September., closing 3.6% higher. Sentiment was buoyed by a key policy change at the US Federal Reserve in favour of lower interest rates. Emerging markets led the charge, rising 7.5%, boosted by a 10% surge in China. Government support for Chinese chipmakers, alongside an acceleration in AI spending and product rollout from some of China’s biggest technology names fuelled the rally. US shares also staged a comeback to close 4% higher, although the region has still underperformed year to date for sterling-based investors due to a weaker US dollar.
Elsewhere, Japan and Europe rose by 2.8% and 2.3% respectively, while the UK main index lagged, up 1.6%, and small caps advanced by 3.1%.
The gold price is on course for its best return in more than three decades. The latest move saw a gain of 12% over the month. However, this was eclipsed by the moves in the silver price and the shares of mining companies, with silver gaining 18% and Jupiter Gold and Silver an eye-catching 29%. The fund is a core holding across our standard portfolios, investing in the bullion of both precious metals, along with related mining shares. Silver has a dual function as both a monetary and industrial metal, where it’s currently facing supply constraints due to strong demand from solar panels and its applications in AI and other high-end technologies. Relative to gold its price remains extremely undervalued, having lagged considerably; only now is it approaching the historic high of $49.45 per ounce, which was hit back in 1980.
Politics took centre stage once again this month. The US government shut down at midnight on the last day of September, after Democrats and Republicans were unable to reach an agreement on how to keep it funded. President Trump is hoping the impasse will strengthen his argument to voters that less government is better than more. In France, Macron’s latest choice for Prime Minister, Sebastien Lecomu, lasted less than a month before resigning, having failed to gain agreement on the budget. In common with his predecessors, he proved unable to find a viable compromise across the political spectrum. Fresh elections may well ensue.
The UK economy continued to stagnate, recording zero growth during the month of July. One bright spot in the data was the Services PMI (Purchasing Managers’ Index), which rose to a 10-month high in the largest monthly gain since March 2021, indicating that growth in the service sector is recovering. The Bank of England decided to leave interest rates unchanged at 4%, following on from a cut of 0.25% in August to support the weakening economy. While rates are still likely trending lower over the long term, policymakers reiterated that they are in no hurry given the still elevated level of inflation. The Consumer Price Index remained uncomfortably high at 3.8% in August for the second consecutive month. With the current uncertainty created by the Autumn Budget, scheduled for 26 November, the sixth rate cut in the cycle may have to wait until 2026. Chancellor Rachel Reeves is under pressure to pull a rabbit out of the hat by finding a way to raise taxes and reduce spending, while at the same time boosting growth. Sticky inflation, alongside concern over the fragile state of public sector finances ahead of the Budget, helped to push 30-year gilt yields to their highest level since May 1998.
The Bank of England’s stance was in sharp contrast to the US, where Federal Reserve Chairman Jay Powell’s Jackson Hole speech signalled a long-awaited pivot toward growth concerns and a more accommodative stance ahead. This was confirmed in early September, as policymakers delivered the first cut of 2025, lowering interest rates by 0.25% following months of intense pressure from the White House. The August employment report painted a clear picture of a cooling economy. Employers added just 22,000 jobs, far below consensus expectations, signalling that hiring momentum has slowed. Meanwhile, unemployment also rose to 4.3%, its highest level in nearly four years, giving policymakers cover to shift from its more restrictive stance and join the rate cutting trend that is happening elsewhere. Government bond yields closed lower, as attention shifted from upside inflation risks to downside growth risks in the US economy.
Looking Forward
The shift in US monetary policy has triggered an immediate move higher in global equities. The markets’ strong reaction shows how confident investors are about the easier monetary conditions going forward despite ongoing inflationary concerns. The historic evidence supports this. When the Federal Reserve cuts rates with stocks at an all-time high, the US equity market has almost without exception closed higher one year later, with an average gain of 15%. Bulls can therefore take solace in the likelihood of even more elevated prices a year out, although this does not preclude a correction between now and then. It does support the view, though, that any sell-off should be viewed as a potential buying opportunity.
The Fed cutting rates with the US stock market at an all-time high, inflation in the region of 3% and a fiscal deficit set to remain above 5% of GDP for the foreseeable future marks something of a departure from previous cycles. It lends credibility to the thesis that inflation is the least painful way for Western politicians to balance the fiscal books. A 1970s combination of high inflation and loose monetary policy therefore remains a possibility. In this environment, the outlook for real assets will become increasingly attractive for investors, where the winners in this case would be commodities and precious metals, along with oil and mining companies. Precious metals have taken an early lead, but we would not be surprised to see a revival across the commodity and energy spectrum from here.
As a result of the recent recovery, the US equity index is even more concentrated in terms of mega cap dominance than it was at the start of the year, and valuations have returned to historically high levels. US companies are still the best in the world, but valuations arguably more than reflect this. The price/earnings multiple is back at 23X, well above the long-term average of 16X and in the top 5% of readings since 1985. History tells us that stocks trading at these valuations rarely deliver the returns needed to justify their price tags. Robust diversification is essential to reduce risks linked to the over dependence on the fortunes of US mega cap stocks. In sector terms, we continue to expect a change of leadership, where the high-valuation growth stocks that flourished in the era of falling rates may underperform, while value-orientated stocks such as cyclicals, industrials and financials along with small-caps take over the baton. Leadership in many markets has started to switch to more recovery-orientated stocks in anticipation of a cyclical upswing.
Our Strategy
The opportunities for active long-term investors are expanding globally, supported by a broadening out of growth drivers away from excessive concentration on a handful of mega cap technology stocks in the US. A strategy based on buying undervalued assets has proved the best way to ensure superior returns over the long term and argues for a more globally balanced approach to asset allocation. Within equities, our preferred regions are the UK, Japan, Asia and emerging markets.
UK equities remain under owned despite their recent strong performance. While the domestic backdrop is challenging, three quarters of the index’s revenues are derived abroad, and thus a resilient global economy is supporting returns. Moreover, while there is much focus on the level of UK public sector debt to GDP, the private sector has reduced its debt ratio from 145% in 2011 to just 74% today. The market offers solid balance sheets, a high yield and valuations that remain low by international standards, suggesting there is still value to be unlocked. This is supported by the level of take-over activity, which has continued to accelerate. The cheapest valuation opportunities exist further down the market capitalisation spectrum, where the small-cap discount is standing at a 25 year high.
The region offers strong diversification benefits with the lowest correlation of other developed markets. The region remains desynchronised in economic terms. The Bank of Japan has maintained an ultra-loose policy stance, even though inflation is above 2%. The yen has depreciated significantly as a result, leaving it dirt cheap. This means that the export sector is receiving a boost in terms of its competitive position. Japanese equities are also extremely cheap at 14X. Recent reforms have delivered results. Shareholder returns are rising, with buybacks at record levels, while corporate profits have doubled since 2012. Investing in an undervalued currency offers potential for additional gains for the sterling-based investor.
Emerging markets are the best performing region this year. After a decade of poor performance, the gap with valuations in the developed world has widened, leaving the region offering an attractive combination of historically undervalued valuations, an improving economic backdrop and stronger profits growth. Chinese equities are back in a bull market at last. Monetary and fiscal policies are as stimulative as they have ever been. The corporate sector is also reaping the rewards of a highly productive workforce and large-scale investment in value-added sectors such as electric vehicles, engineering and increasingly AI, which has become a national priority.
While equities remain our preferred asset class, the prospect of lower rates means that bonds should outperform cash. From an income perspective, yields are now attractive in both absolute and real terms (relative to the level of inflation). Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer (except for index-linked bonds). Upside may also be capped by concerns over the sustainability of government debt, as policymakers lack the will to cut spending.
The current environment argues for broader diversification, including inflation hedges such as energy and commodities and geopolitical hedges like gold, in addition to recession hedges such as government bonds, alongside core holdings in equities. As well as reducing risk, incorporating additional asset classes allows us to capitalise on wider opportunities that exist outside of traditional equities and bonds.
We continue to own gold as essential portfolio insurance. We have held the view for some time that gold is resuming its role as the global reserve asset as a result of higher geopolitical risk, rising inflationary expectations and deteriorating fiscal trends. This is driving a powerful bull market, where multiple pockets of global capital, led by central banks, are diversifying away from dollar assets into gold as a safe monetary asset. For gold mining equities, current prices are having a transformative effect, translating into record profit margins and the highest growth rate of any sector in the broader equity market. Relative to the price of gold bullion, the sector would need to outperform by a further 30% to return to 2020 levels. Yet profit margins at the mining companies are double today what they were then, while balance sheets are much stronger and returns to shareholders via share buybacks and dividends much higher. In the latest quarterly results, producers generated c.50% more free-cashflow than consensus expectations just prior to the reporting season beginning. Despite this, the sector currently trades at a reasonable multiple of 12X earnings.
Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk to dampen volatility and smooth the path of returns.
