2025 Year to Date: Market, Economic and Political Overview

There’s a well-known (though possibly apocryphal) Chinese saying: “May you live in interesting times.” I am reminded of it often lately. The world continues to shift rapidly, and as investors, we do not get to choose the backdrop—we must respond to the conditions we’re given.

Before sharing how we have adjusted your portfolio so far this year, I would like to offer some thoughts from my nearly 30-year career in investment management.

In this profession, confidence and conviction are essential. I regularly meet with analysts, fund managers, and strategists—many of whom are quick to share strong views. But lately, even the most confident experts have admitted, “I don’t know,” when asked about the outlook. That is quite a change, and it reflects just how uncertain the current environment is. It does not mean that nothing is being done—far from it—but it highlights how complex and unpredictable things have become.

Our Approach: Diversification in Action

In a world that changes quickly, our best defence remains a diversified investment strategy—our multi-asset approach. A saying we often use in the office is: “If there’s nothing you dislike in your portfolio, it probably isn’t diversified enough.”This is a reminder that different parts of the portfolio will behave differently, and that is a good thing.

So far this year, some of last year’s strongest-performing investments have lagged, while some of the weaker ones have come back into favour. This mix is exactly what we aim for—while not everything moves in the same direction, we can still point to solid areas of performance, even in a tough market.

The Big Picture: A Changing World

Since the global financial crisis in 2008, we have faced a long list of economic and political challenges. Most recently, we’ve seen a shift away from globalisation, with the US leading a move toward tariffs and isolationism. These changes are significant and ongoing.

To understand where markets might go next, we need to look at inflation and interest rates—especially in the US, where global risk is largely priced off the bond market.

The US Federal Reserve (or ‘Fed’) has kept interest rates steady this year, despite pressure from President Trump to cut them. One reason is that the full effects of recent trade tariffs have not yet worked their way through the economy. Many US businesses rushed to buy goods before tariffs kicked in on what was dubbed ‘Liberation Day’ (April 2nd). That bought some time, but uncertainty remains.

At the same time, a major tax and spending bill is moving through the US political system. While it promises growth, markets are nervous. The US deficit is set to rise significantly, which is already pushing up long-term borrowing costs. For example, 30-year government bonds—which directly affect mortgage rates—have gone from 1.2% in 2020 to around 4.8% today. That suggests US interest rates will likely stay high for a while, unless the President replaces the Fed Chair with someone more politically aligned, a move that would create its own uncertainty.

As for a US recession, this is not our base case right now, but it is more plausible than it was earlier this year. US shares have bounced back from earlier losses, but in sterling terms, returns remain negative due to the weaker US dollar. We still think the US economy has underlying strength, and for this reason, we do not hedge currency exposure in most equity holdings. However, we remain underweight US equities in your portfolio due to high valuations and the lingering impact of tariffs.

Closer to Home: The UK Outlook

Here in the UK, the Bank of England has started cutting interest rates, but inflation—particularly wage inflation—remains stubbornly high. I will avoid commenting on the rights or wrongs of government policy, but it is clear that current spending plans are ambitious and will likely require future tax rises. Without major spending cuts, this is unavoidable.

The UK economy is slowing noticeably. That means more rate cuts are likely, possibly starting as early as August—unless there is a surprise burst of growth. Inflation has been harder to tame than expected, but we still believe it will gradually fall, allowing rates to continue declining.

Why remain positive about the UK? Simply put, UK assets still look good value—both compared to their own history and relative to markets like the US. Much of the bad news is already priced in. So while the economic backdrop isn’t particularly strong, this may represent an opportunity rather than a risk.

Europe: Slowly Awakening

After a long period of underperformance, Europe is showing signs of life. It is benefiting from a shift in sentiment away from the US, falling inflation, lower interest rates, and rising government spending—particularly in Germany, which is now investing in defence and infrastructure. The region remains attractively valued, and we have increased our exposure accordingly.

Alternative Income: From Laggard to Leader

Alternative Income has been the standout performer this year. After a period of weakness, the asset class has rebounded well, helped by market volatility and falling interest rate expectations. We are also seeing more corporate activity—companies returning capital to shareholders—which is a welcome sign. Yields remain attractive, and we continue to view this area positively.

Looking Around the World

Globally, all eyes are on 09 July—a key deadline for US trade deals. So far, only the UK has secured an agreement, and even that leaves us in a weaker position than before April. We expect some form of compromise, but uncertainty will remain.

In geopolitical terms, tensions are high. The US recently carried out military strikes on Iran. For now, a ceasefire is holding, and crucial oil shipping lanes remain open. Oil prices rose on the news but have since settled.

Meanwhile, China is stepping into the leadership gap left by the US, both economically and diplomatically.

In Summary

So, where do we go from here? In a word: cautiously. The world has changed. The ultra-low interest rate era is behind us, and globalisation is being replaced by a more fragmented, inward-looking world order—led by an “America First” stance that will likely shape the decade ahead.

Inflation and interest rates are gradually moving in the right direction. While the path is not smooth, there are still plenty of opportunities to achieve attractive returns for the level of risk we’re taking. As always, the key is diversification. That remains central to our investment philosophy—and to protecting and growing your wealth in a changing world