Market Outlook: August 2025
Our Chief Investment Officer, James Calder, speaks to Tracy Coghill, Client Experience Manager, about the current outlook for markets and portfolios. We have summarised below the key points, followed by a link to the video and written content.
Market Drivers & Geopolitics
Primary Market Driver: James highlights President Trump’s renewed trade and tariff policies as a key influence, with geopolitics now driving economics, not vice versa.
Market Sentiment: Tariffs and political unpredictability have created global uncertainty, especially regarding US economic leadership.
Currency Impact & Sterling Investors
The US dollar has weakened against sterling this year.
For sterling-based investors, this has negatively impacted US returns. While US equities might be up 7–8% in dollar terms, they are nearly flat in sterling terms.
James expects the dollar to strengthen again over the next 18 months, which would benefit portfolios.
Regional Outlooks
Europe: Increased allocation due to:
Lower relative valuations.
Fiscal loosening, especially in Germany (e.g. defence/infrastructure spending).
Lower inflation and rates compared to the US.
UK: Continues to be favoured due to:
Attractive valuations.
Positive outlook despite macro challenges.
Potential for rate cuts in 2026 due to weak growth and government constraints.
US: Still forms a core holding (~70% of global equity markets), but outlook is more cautious due to valuations and currency pressures.
Bank of England & Interest Rates
Recent rate cut of 25 bps, though split votes showed indecision.
Inflation is projected to rise to ~4% by year-end, which may delay further cuts.
The era of ultra-low interest rates is over. Expect rates to normalise around 3% long-term.
Navigating Uncertainty with Confidence
As we move past the midpoint of 2025, it’s an opportune time to reflect on what has been a turbulent but ultimately resilient year for investors. Against a backdrop of shifting economic conditions, political upheavals, and evolving market dynamics, we remain focused on managing client portfolios with discipline, prudence, and a clear view on where value lies.
James Calder, our Chief Investment Officer, recently sat down with Client Experience Manager Tracy Coghill to provide a comprehensive update on portfolio performance, the impact of global and domestic events, and where we see opportunities and risks emerging for the remainder of the year and into 2026.
Market Drivers: Politics Leading the Narrative
When asked what has been the single biggest driver of markets this year, James highlighted the increasing role of politics in shaping economic outcomes. In stark contrast to past decades, where economics drove political decisions, we now face a world where politics are often the primary force behind market sentiment.
In particular, President Trump’s ‘America First’ policies, especially his ongoing influence over US trade and foreign policy, continue to reverberate through global markets. Recent tariff announcements and a shifting geopolitical environment have led investors to believe that the global trading environment has fundamentally changed.
Portfolio Performance: A Resilient First Half
Despite a volatile backdrop, portfolios have performed well on a relative basis so far this year. Our multi-asset approach means that at any one time, some areas of the portfolio may not be performing as strongly as others—this diversification is intentional and a sign of sound portfolio construction.
In 2024, US equities were a key driver of performance. In 2025, however, they’ve been more of a laggard, particularly for sterling-based investors. One of the key reasons is currency. The US dollar has weakened relative to sterling year-to-date, impacting returns for UK investors. While a dollar-based investor might have seen returns of 7–9% in US equities, those returns are significantly reduced or even flat when converted into sterling.
This is a short-term currency movement that James does not see as requiring intervention. Currency hedging adds cost and complexity, and historically, sterling tends to depreciate against the dollar. Over the next 12–18 months, we would expect the dollar to regain some strength, which would feed back into portfolio returns.
Europe: Increasing Conviction
Our increased exposure to European equities reflects both valuation opportunities and improving fundamentals. European markets, which have long lagged the US in terms of valuation, are benefiting from several structural tailwinds.
We have seen fiscal stimulus starting to reappear, particularly in Germany, and a notable rise in defence spending across the continent. Infrastructure projects and industrial investments are creating a supportive environment for equity markets. Additionally, Europe continues to benefit from low inflation and lower interest rates compared to other regions, providing further support for risk assets.
As a result, we increased our allocation to European equities earlier this summer, and this remains an area of growing conviction within portfolios.
UK Outlook: Reasons for Cautious Optimism
Closer to home, the UK presents a compelling if nuanced investment case. UK equities remain significantly undervalued relative to global peers, particularly large-cap companies with global revenue streams.
While economic challenges persist, most notably inflation, which remains above the Bank of England’s 2% target, our outlook remains constructive. The recent interest rate cut from the Bank of England, albeit a finely balanced decision, reflects the ongoing tension between fighting inflation and supporting growth. With inflation expected to remain around 4% by year-end, the central bank faces a difficult path ahead.
Policy remains a concern, particularly in the context of government spending and the fiscal position. With a newly elected Labour government pledging not to raise income tax, VAT, or National Insurance for five years, we believe some form of tax rise is still likely. Potential options include ‘sin taxes,’ windfall taxes, or a wealth tax (though the latter is difficult to implement effectively).
That said, we believe the structural undervaluation of UK equities presents a significant opportunity for long-term investors.
Inflation and Interest Rates: A New Normal
After a decade of ultra-low inflation and interest rates, we are now adjusting to a new environment. Inflation is no longer transitory: it is structurally embedded into the global economic landscape, driven by deglobalisation, supply chain realignments, and rising labour costs.
We now expect the ‘new normal’ for interest rates to settle around 3% over the medium term. This shift has meaningful implications for portfolio construction. For one, it means that holding cash, while offering attractive short-term yields, is unlikely to deliver inflation-beating returns in the long run. The days of 5% interest rates are limited.
Moreover, investors should be aware that the Bank of England and other central banks have only one main tool at their disposal: interest rates. Unfortunately, this is both a blunt and lagging tool. Policy changes take months to filter through to the real economy, making the path of monetary policy harder to navigate in real-time.
Alternatives: Delivering Latent Value
One of the standout contributors to portfolio performance this year has been the alternative income sector, a longstanding area of focus for our team. These investments, often overlooked by mainstream investors, have offered high yields (in some cases over 10%) and are now benefiting from renewed market interest. In many cases, underlying assets have been trading at significant discounts to their net asset values, prompting increased corporate activity.
Behind the scenes, our investment team has engaged actively with the boards of these trusts, advocating for shareholder-friendly actions such as buybacks, balance sheet restructuring, or even full portfolio sales. This activism has helped unlock latent value and return capital to investors more efficiently. Importantly, our long-term belief in the asset class is supported by recent market activity, and we continue to see opportunities for attractive risk-adjusted returns.
Fixed Income: Reclaiming Its Place
After years of low yields, fixed income is once again playing a meaningful role in portfolios. With interest rates higher, bonds now offer attractive risk-adjusted returns, often in the high single-digit range, with less volatility than equities. While bonds historically provided downside protection during market shocks, their role in a portfolio has evolved. With yields now more compelling, fixed income serves as both a source of income and a defensive buffer in uncertain times.
We have been proactive in reviewing our fixed income exposures, adding to positions that offer strong fundamentals and attractive valuations. This area will remain a core component of multi-asset portfolios going forward.
Property: M&A Activity Driving Revaluation
Another area that has surprised positively this year is the property sector, specifically, real estate investment trusts (REITs) focused on commercial real estate. While headwinds remain (including interest rates and valuation pressures), merger and acquisition activity has breathed new life into the sector. Private buyers have been acquiring assets near or at net asset value, helping to close the discounts that had persisted in listed property trusts. The number of investable options has declined slightly as a result, but the remaining players still offer compelling yields and strong fundamentals.
We continue to monitor the sector closely; recognising both the opportunities and risks it presents in this evolving market.
Cash vs. Active Investing: A Common Question
Given current interest rates, some clients may be wondering: why not simply hold cash at 4% and avoid market risk altogether?
While this is a reasonable question, it is important to view this in context. Cash rates are unlikely to remain this high for long; indeed, we expect them to fall toward 3% over the next year as inflation eases. Meanwhile, inflation itself remains above 3%, meaning that in real (inflation-adjusted) terms, cash is barely preserving purchasing power.
Active investment remains the most effective way to grow wealth over the long term. Trying to time the market by shifting in and out of risk assets is notoriously difficult and often counterproductive. Instead, we focus on time in the market, constructing diversified portfolios designed to outperform inflation over time.
Looking Ahead: 2025 and Beyond
As we look toward the remainder of 2025 and into 2026, our message is one of cautious optimism. Market sentiment has begun to shift, with less emphasis on the US and growing interest in undervalued regions such as Europe and the UK.
We will continue to actively manage portfolios, adjusting asset allocations gradually in response to changing market conditions. For example, we anticipate further increases in European equity exposure, given its improving fundamentals and attractive valuations.
There will undoubtedly be bumps along the way: geopolitical events, policy surprises, and economic volatility are all part of the investment landscape. However, we believe our disciplined, research-driven approach positions us well to navigate these challenges and capture opportunities as they arise.
In Summary
2025 has already tested markets in numerous ways, but it has also reinforced the importance of diversification, active management, and a long-term mindset. Our portfolios have proven resilient, supported by timely adjustments in asset allocation and an ongoing commitment to uncovering value across asset classes. As always, we invite you to explore the latest insights from our investment team on City Thinking, where articles and commentary are updated regularly to provide context behind our decisions.
If you have any questions about your portfolio or wish to discuss any of the topics covered in this update, please contact a member of your CAM team directly.
We thank you for your continued trust and look forward to helping you navigate the months ahead with clarity and confidence.
