Key themes for Q4 2025
Markets have recovered fully after the shock of 'Liberation Day'. Valuations are supported by the promise of a series of interest rate cuts from the Federal Reserve (Guide to the Markets – UK pg 20). For risk assets to cheer rate cuts, US inflation must remain benign. The prospect of inflation proving more troublesome is a key risk that we need to monitor (pgs 7, 19, 22).
Another good set of earnings releases from the tech companies has also helped the US market recover (pg 51). As questions around the return on artificial intelligence (AI) capex remain (pgs 15, 50, 61), we continue to believe that investors should consider sectors and regions where there is more scope for positive surprises, particularly in Europe as fiscal stimulus begins in earnest (pg 30).
Across the west, governments face the difficult challenge of meeting the demands of an ageing electorate while not displeasing their bond investors (pg 10). France and the UK are at the forefront of these political challenges at present (pg 36). While bond volatility will stay elevated (pg 66), bonds do now provide decent income and will provide portfolio support if growth weakens (pgs 64, 65). Alternatives, such as transport and core infrastructure, are also needed to insulate against inflation and fiscal risks (pgs 77, 78).
We continue to believe the US dollar will weaken further as the divergence between growth in the US and the rest of the world narrows and capital moves to take advantage of more geographically dispersed opportunities (pg 12). This process should be slow and orderly but risks of more disorderly movements will arise if the institutional architecture that preserves the value of the dollar is challenged.
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