Commentary for July 2025

Market Overview

Global markets continued to power ahead in July to a fresh record high. Strong gains were recorded across the board, with the US and emerging markets gaining 6%, while the UK and Asia rose 5%. Japan and Europe closed a more muted 2% higher. Bond markets remained subdued, closing marginally higher. The gold price rose 1%, while silver continued to take up the running, advancing a further 4% for the month.

Much of the bullish tone was driven by renewed optimism that the Federal Reserve would cut interest rates as soon as September. Minutes from the June FOMC meeting revealed a growing willingness among policymakers to ease, contingent on inflation remaining relatively subdued following the introduction of tariffs. Expectations of lower rates led a rotation into cyclical sectors such as industrials, financials and energy, while defensive areas such as utilities and consumer staples lagged.

The FTSE 100 index closed above 9,000 for the first time, an achievement which highlights the resilience of UK equities despite ongoing economic challenges and political uncertainty. Sectors such as aerospace and defence and banks have boosted returns this year. The UK earnings season was also supportive, with solid results from companies across sectors such as Nat West, Barclays, Next, IAG and Unilever.

The month also brought greater clarity over US trade policy. President Trump’s trade deals have allowed him to exact his pound of flesh while somehow convincing markets it was the best possible outcome. The US and EU concluded a trade agreement that imposed a 15% tariff on EU exports, lower than earlier threats that were as high as 50%. In exchange, Europe pledged hundreds of billions in purchases of US energy and military equipment. This followed a similar agreement with Japan. Both deals were welcomed by markets, as the removal of uncertainty should encourage businesses to resume investment spending. However, the reaction from equities in the EU and Japan was far less exuberant than that of their US counterparts. China has yet to come to an agreement with the US, despite multiple rounds of talks, with a further tariff pause looking likely. Elsewhere, India and the UK finally sealed a free trade agreement after three years of negotiations, eliminating tariffs on a wide range of products.

Weaker US economic data and an in-line Consumer Price Index print combined with more political pressure on the Federal Reserve from the Trump Administration raised expectations that interest rates would fall through the second half of 2025. Payroll figures missed expectations and saw huge negative revisions to prior months – data so poor that Trump decided to fire the messenger. The Federal Reserve voted to keep interest rates unchanged for the fifth time in a row, but the minutes suggested a more doveish stance looking forward.

The UK economy grew by 0.4% in June having shrunk for two consecutive months in April and May. The biggest contribution to growth came, not surprisingly, from government spending. On a less welcome note, the rate of inflation jumped by more than expected, hitting 3.6%. The rate of unemployment is also heading in the wrong direction, moving up to 4.7% from 4.4% at the start of the year. The Bank of England voted to cut interest rates from 4.25% to 4.0% but warned that the increasing price of food will limit its ability to make further reductions. Worse still, policymakers placed the blame for the economy’s predicament squarely at the Chancellor’s door. The raid on employer’s National Insurance contributions and the latest jump in the minimum wage are forcing up living costs, particularly for food and drink. The Bank warned that the cost of the weekly shop will keep rising for the rest of the year amid a challenging backdrop of weaker pay growth and higher inflation, which is now expected to peak at 4% in September. Elsewhere, the European Central Bank held rates at 2.15%, following seven consecutive cuts since September 2024.

Looking Forward

Risk appetite has returned as a result of easing trade tensions and a positive results season. The trade tariffs to date have not yet inflicted any serious damage to either the growth, inflation or corporate earnings data, despite being much higher than expected at the start of the year. A trade war has also been avoided as virtually no country has retaliated.

Investors can now look forward to the prospect of lower interest rates during the remainder of the year, providing a positive backdrop for financial markets. Leadership in many markets has started to switch to more recovery-orientated value stocks and smaller companies in anticipation of a cyclical upswing.

Another reason for optimism is the shifting landscape for global growth. For the first time in years, regions such as Europe and China are taking a proactive role in stimulating their economies. This diversification of economic drivers should lead to a more balanced global economy, where investors don’t have to rely on the US for returns.

As a result of the recent recovery, equity valuations in the US have returned to historically high levels. Valuations in other markets have also moved up but remain reasonable in relation to both their history and relative to the US (US equities trade at twice the valuation multiples of other major markets). US companies are still the best in the world, but valuations arguably more than reflect this. History tells us that stocks trading at these valuations rarely deliver the returns needed to justify their price tags. A strategy based on buying undervalued assets has proved the best way to ensure superior returns over the long term.

It is a welcome change to see the UK at the top of the leader board this year. However, we would not be surprised to see a pause for breath ahead of the Autumn Budget, where the Labour government appears to be setting themselves up for a repeat of last year’s confidence sapping run. The difference this time around is that the black hole in public finances is of their own making. Forecasts for the amount to spending cuts or tax rises needed currently range from £20bn to £50bn. Ultimately the final number will depend on the forecasts of the OBR. In the meantime, speculation about new taxes is likely to overhang sentiment in the short term.

Our Strategy

The opportunities for active long-term investors are expanding, supported by a broadening out of growth drivers in the US (away from excessive concentration on a handful of mega cap technology stocks), and a reappraisal of the attractions of other regions.

UK equities remain undervalued and under owned despite their recent strong performance. It’s worth noting that the five-year compound total return of the UK index has risen to an attractive 13%. The market offers exposure to global earnings, 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 recent broadening of the recovery beyond large caps highlights the superior valuation opportunities further down the market capitalisation spectrum.

Emerging market stocks offer an attractive combination of historically undervalued valuations and opportunities for growth and income. A weaker dollar and potential for monetary easing presents a good backdrop for the region. Profits growth has picked up in recent months and is now growing at a faster rate than in the US. China remains on the cusp of a recovery and has the potential to surprise investors with an improvement in data. Latin America is also well positioned to benefit from the repositioning of global supply chains following Trumps’s tariffs.

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 like energy and commodities and geopolitical hedges such as gold, in addition to recession hedges like government bonds, alongside core holdings in equities. As well as reducing risk, incorporating additional asset classes allows us to capitalise on wider opportunities outside of traditional assets.

We continue to view gold as essential portfolio insurance. We have held the view for some time that the combination of higher geopolitical risk, deteriorating fiscal trends and strong central bank demand have the potential to drive a powerful bull market, where multiple pockets of global capital attempt to diversify away from dollar assets into gold as a safe monetary asset. For gold mining equities, current prices are likely to translate into record profit margins and the highest growth rate of any sector in the broader equity market. 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.