Investors were in a festive mood in December as the MSCI All Country World Index advanced 0.8%, propelled by a robust 2.6% gain in the EM basket. The U.S. lagged global peers, with investors focused on concerns around rising concentration and valuation risks. The S&P 500 slipped 0.1% for the month, while the tech-heavy NASDAQ declined 0.5%, despite both indices posting strong gains for the year—17.9% and 21.1%, respectively. European and Asian markets fared much better: the MSCI Europe climbed 2.6%, Japan rose 1.0%, and Korea stood out as a regional leader with a 10.4% monthly gain. (total returns in local currency terms).

Central banks remained in the spotlight in December. The U.S. Federal Reserve (Fed) met market expectations by cutting the policy rate by 25 basis points (bps) to 3.50-3.75%. While the meeting was less hawkish than anticipated, there was increased dispersion in views among committee members, and the subsequent meeting minutes revealed the notable disagreement about whether the Fed should prioritize persistent inflation or a softer labor market. We anticipate another rate cut from the Fed in the first half of 2026 but believe that many other central banks are finished with rate cuts for this cycle. Policymakers in Australia, Canada, the Eurozone, and New Zealand are reconsidering further easing, given inflation that is at or above target and a supportive growth outlook.

On the opposite path, the Bank of Japan (BoJ) has continued its hiking stance and raised its policy interest rates by 25 bps to 0.75% at the December meeting, reaching its highest level in 30 years. Reduced uncertainties about the U.S. economy and tariff policies, positive developments toward wage increases next year, and continued pass-through to selling prices were all cited as reasons for the decision. That said, little was provided in terms of forward guidance, with the BoJ still refraining from offering neutral rate estimates and Governor Ueda avoiding specifying the timing or pace of future hikes, reiterating that future decisions will remain data‑dependent. Nevertheless, with real policy rates remaining in negative territory and accommodative financial conditions, the case for continued rate hikes in 2026 is likely, while current market pricing for a next hike by June/July also appears reasonable. 

The repricing of policy expectations, combined with upside surprises in economic data, led to a sharp rise in government bond yields in December. Japanese 10-year yields rose a similar 25 bps, while the U.S. 10-year Treasury yield climbed 15 bps to 4.17%. Although the rise in yields weighed on returns, higher yields are now more attractive for income, and the return of a negative stock-bond correlation enhances the role of bonds as portfolio diversifiers.

Beyond monetary policies, China’s annual Central Economic Work Conference (CEWC) was also concluded this month. Officials aimed to achieve a “reasonable” gross domestic product (GDP) growth with higher quality and emphasized expanding domestic demand and promoting high-quality development. Overall, the CEWC has set a continued supportive and more balanced policy tone to stabilize economic growth while facilitating more structural reforms. Also, compared to the Politburo meeting in early December, the signals from the CEWC appeared modestly more pro-growth, as policymakers emphasized growth challenges, highlighted the need to boost consumption and stabilize the property sector, and pledged further easing on monetary, fiscal, credit, and property fronts.

With continued fiscal support for consumption (e.g., trade-in subsidies, social safety nets) and service sector development, this should benefit consumer-related sectors, healthcare, education, and services. Policies also favor high-tech manufacturing, artificial intelligence (AI), and service sector upgrades, thereby pointing to investment opportunities in technology, innovation, and related infrastructure. While the U.S. leads in AI innovation, China is also rapidly building a self-sustaining ecosystem, supported by policy, research, and a strong supply chain.

Expectations of U.S. rate cuts, ongoing geopolitical risks, and the desire for broader portfolio diversification have driven the gold price this year. The precious metal reached another record high in December, gaining 4.2% over the month. Notably, some of gold’s luster has transferred to silver, which soared nearly 34% in December to a record high of almost USD 84/oz. This surge was fueled by rising industrial demand, its designation as a critical mineral by the U.S., and supply shortfalls.

Global economy

• The December Federal Open Market Committee (FOMC) meeting, albeit delivering a widely expected 25 bps cut, showed three dissents to both a pause and a steeper rate cut. Chair Jerome Powell’s press conference commentary also noted the risk of overstated labor market metrics on job growth and remaining inflationary pressure, though he provided little signal on the future policy rate path. Elsewhere, macro data were mixed with the delayed jobs report showing -41k and +64k on nonfarm payrolls in October and November, and the unemployment rate ticked up to 4.6% in November due to increase in temporary layoffs. The November consumer price index (CPI) report also came in much cooler than expected, with headline inflation reversing to 2.7% year-over-year (y/y), though data collection quirks may have biased this reading lower.
  (GTMA P. 25, 27, 28)
• China’s economic activity remained sluggish in November with a deceleration in investments, cooling retail sales growth, moderating industrial output, and an ongoing housing market contraction as new home prices fell again. That said, export growth has held up better and core inflation has steadied. Both official and private Purchasing Managers' Index (PMI) manufacturing surveys also showed an expansionary reading after several consecutive months of contraction. The CEWC delivered little policy surprise and continued to set a supportive and more balanced policy tone to stabilize economic growth while facilitating more structural reforms.
  (GTMA P. 4, 5, 6, 7).
• The BoJ raised interest rates by 25 bps to 0.75% in December. As the decisions were mostly anticipated and fully priced in, the market’s focus was on whether the BoJ would offer additional information on the neutral rate, although the BoJ refrained from providing a new estimate and Governor Ueda also avoided specifying the timing or pace of future hikes. The December Tokyo core inflation, albeit slowing, has remained above the BoJ’s target.
  (GTMA P. 16, 17)

Equities

• Global equity markets were positive in December, and non-U.S. markets led the way as global diversification was a key theme for investors. Concerns over concentration risks in the U.S., as well as the ability to deliver on large capex investments, added to investor nerves. Asia was a stand-out as the Asia Pacific ex-Japan index rose to close the year up 30.2%. Asian markets have performed well given the revaluation in China and the tech dominance of Taiwanese and Korean markets. The MSCI Korea returned 100.8% in 2025.
  (GTMA P. 30, 31)
• Equity valuations have come off year-to-date highs even as they remain above long-run averages. The forward price-to-earnings (P/E) ratio for the S&P 500 was 22.2x, MSCI Europe at 15.1x, and MSCI Japan at 16.1x.
  (GTMA P. 50)

Fixed income

• It’s been a tricky year for fixed income investors, and yields rallied higher in December. It was difficult to pin down one driving force for the move higher in yields. The repricing of the rates outlook globally, a rate hike by the BoJ, stickier inflation, and a better growth outlook all added to pressure on 10-year bond yields. Australian 10-year yields rose to 4.75%, and a similar-sized move saw Japanese yields lift to 2.07%.
  (GTMA P. 56, 57, 61)
• Spreads on both investment-grade (IG) and high-yield bonds remained at the bottom of their 10-year range as solid fundamentals and a generally supportive economic backdrop added to demand for credit. The movement higher in yields did create a drag, and U.S. IG fell 0.2%, while high-yield was 0.6% higher.
  (GTMA P. 63, 64, 65)

Other financial assets

• Crude prices continued to fall as supply restrictions eased. WTI crude oil fell by 1.9% per barrel. The supportive economic backdrop, as well as some supply disruptions, helped to lift industrial metals over the month. Copper gained 13.6%, and nickel was up 12.4%. However, the big mover was silver, which rose 34% in December and gained nearly 150% in 2025, surpassing the 67% rise in gold price.
  (GTMA P. 74, 75, 76)
• The U.S. dollar (USD) lost against major partners in December, and the U.S. Dollar Index fell 1.1% in December. The euro (1.2%), Swiss franc (1.4%), and British pound (1.5%) were the main beneficiaries. The Australian dollar gained 1.7% against the USD. Heading into 2026, it may be difficult for the USD to repeat the 10% decline it experienced in 2025, but ongoing concerns about central bank independence and the fiscal outlook may keep the greenback weak.
  (GTMA P. 71)

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