Commentary for December 2025

Market Overview

Global equities ended what has been an exceptional year at fresh highs. The key takeaway from 2025 has been the renewed importance of diversification. Despite the predominance of fast-growing tech stocks benefiting from the AI theme, the US market struggled to keep pace with global peers for the first time in over a decade. The UK was up an impressive 22%, its best annual performance since 2009. Emerging markets posted gains of 20%, while Europe and Japan also outperformed the US market. However, the biggest story was in the precious metals complex, where gold gained 71% while silver soared 148%, living up to its reputation as “gold on steroids”.

December saw markets adjust to shifting expectations following diverging policy outcomes among major central banks. Equities in Europe, the UK and emerging markets enjoyed a traditional Santa rally, recording solid gains of 2.3%, 2.2% and 1.5%, respectively. However, the US failed to participate, closing flat on the month, with dollar weakness translating this into a fall of 1.5% for sterling-based investors.

There were more fireworks in precious metals, with silver rocketing 33% over the month. Its explosive move has been widely justified by a structural supply deficit and its role as a critical industrial input. The gold price moved up by a more sedate 3%, driven by expectations of lower interest rates and fresh geopolitical tensions. Elsewhere, copper prices also hit a record high, boosted by promises from the Chinese Government to boost spending next year, while the oil price remained depressed, falling 2%.

US equities may have closed flat over the month, but there was meaningful rotation below the surface. Mega cap technology stocks continued to move lower from their highs in October. Investors are becoming more selective as questions surrounding elevated capital spending requirements for AI infrastructure continue to weigh on sentiment. AI darling Oracle fell sharply over concerns regarding its data centre financing partner, Blue Owl Capital. Basic material stocks advanced sharply on the back of soaring precious metal prices. Health care, financials and industrials also saw gains.

On the economic front, third quarter US GDP surprised to the upside, expanding at a 4.3% annualised pace and reinforcing the view that policy easing does not imply an imminent recession. In further positive news, inflation increased 2.6% in November from a year ago; the slowest pace since 2021. However, the labour market continued to soften, with job growth sluggish and unemployment hitting 4.6%. The Federal Reserve cut interest rates by 0.25% to a range of 3.50% to 3.75%. This marked the third consecutive rate reduction since summer. Fed Chair Jay Powell emphasised that the labour market has slowed and downside risks to employment have increased. Bond yields fell in response, as investors moved to price in two further rate cuts in 2026.

UK equities rallied strongly, with the FTSE 100 ending the year within a whisper of the 10,000 level. The move was led by strength in financial and commodity-linked stocks. With the Budget now out of the way, there is more clarity around the policy outlook. Considering the extent to which pre-Budget uncertainty weighed on sentiment, the economy showed resilience, flatlining over the three months to October. Inflation fell to 3.2% in November, its second consecutive fall having remained stubbornly high throughout 2025. Most economists expect a further decline in the coming year, taking it closer to the official 2% target. The Bank of England cut interest rates to 3.75%, bringing the base rate to its lowest level since February 2023. Two further cuts are anticipated during 2026.

The European Central Bank held rates steady after earlier cuts, citing improving growth and inflation near its target. Equity markets responded positively. The Eurozone economy ended the year in better shape than many anticipated, as a resilient service sector has offset ongoing weakness in manufacturing.

Japan marked one of the most significant policy shifts of the year. The Bank of Japan raised rates to 0.75%, continuing its gradual exit from three decades of ultra-loose policy. Japanese equities surged to new highs, driven by renewed global interest following an improving political environment and strong earnings momentum, driven by shareholder reforms.

 

 

Looking Forward

Markets are entering the new year in an ebullient mood. 2025 saw global equity leadership broaden, with almost every major market outpacing the US. This trend looks set to continue, offering excellent opportunities for active managers who are not dependent on the US large caps that now form the bulk of passive portfolios as a source of returns.

Fundamentally, the outlook remains supportive. Markets are starting to price in stronger economic growth and corporate earnings in 2026, as the impact of more stimulatory monetary and fiscal policies take effect. This economic outlook should support a broadening of global growth, creating a tailwind for more cyclical sectors and small cap stocks over the coming year.

The environment is also becoming more constructive for commodities. Less benign inflationary conditions, coupled with rising geopolitical tensions and supply chain constraints are all converging in ways that have historically favoured real assets as a durable store of value.

Oil is extraordinarily cheap compared to other commodities; relative to the metals it is at multi-year extremes. Sentiment remains universally bearish. Yet, despite calls for demand to peak it has continued to grow. The International Energy Agency has just revised its estimates and is now expecting continued growth to 2050 and beyond. Meanwhile US shale production, a key driver of increased supply in recent years, has turned negative. Without new investment, overall supply is set to contract. Energy stocks have fallen to just 2.5% from 15% of the total US index. Historically the oil price has tended to follow gold, with a lag. One has to wonder if it is also setting up for a significant reversal.

 

Our Strategy

Our current allocation to US equities is significantly lower than a passive index market capitalisation-weighted approach. Looking forward, we believe that other markets offer a better long-term return and risk profile. 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. The recent return of international investors is an encouraging trend, as is the level of takeover activity this year, with M&A having accelerated in the UK compared to the rest of the world. These deals have often been transacted at a significant premium to market prices, helping to unlock shareholder value. Our UK exposure is biased towards small and mid-cap companies. Falling interest rate environments have typically favoured this area of the market, which is far more exposed to cyclical, domestic and value-orientated businesses.

Emerging markets also look well-set to extend 2025’s outperformance, as an improving domestic outlook draws attention to the combination of higher earnings growth and lower valuations in the region. The fundamental backdrop is improving for Chinese equities, powered by the technology sector where earnings growth is above 30%. This follows gains in AI and a dominant global position in other innovation-led sectors such as electric vehicles, illustrating how quickly China has moved up the value chain. These new industries are driving a new era of growth in an economy that has struggled to gain traction since the bursting of its property bubble. Despite this, the Chinese equity market remains just 3% of the total All-World index, which is less than the current value of Apple.

While equities remain our preferred asset class, the prospect of lower rates means that bonds should continue to 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. Upside may also be capped by concerns over the sustainability of government debt, as policymakers lack the will to cut spending. Our focus is therefore on shorter-duration bonds.

The current environment argues for broader diversification, including inflation hedges such as energy and commodities and geopolitical hedges such as gold, 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.

Our positive view on gold and silver remains unchanged. However, position sizes have been reduced following outsized gains as part of our risk management process. We continue to view gold as an essential diversifier in an environment characterised by policy uncertainty, fiscal fragility and growing investor doubts over the long-term role of US Treasuries and the dollar. For precious metal mining equities, current prices are having a transformative effect, translating into record profit margins and the highest growth rate of any sector.

A portion of the profits from our holdings in precious metals have been recycled into the energy sector, where oil stocks look to be the best contrarian bet for 2026 after a long period of underperformance. The Trump administration’s ‘run it hot’ economic policy will likely result in a more inflationary growth environment that will likely see commodities outpace bonds.

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.