Keeping You Informed Matters
Economic Review October 2025
Markets pushed higher again in Q3 2025, led by enthusiasm around Artificial Intelligence (AI) and expectations for easier US monetary policy. But beneath the strength lies a mix of opportunities and risks, from the nature of today’s AI build-out to shifting trade policies and political decisions at home. Discipline, diversification and a clear eye on risks remains crucial going into the final quarter.
The Outlook
AI still calling the shots
Stock markets in the US and around the world went higher again during the quarter, with particular strength in emerging markets (EM). Bond markets were mostly uneventful: weaker in the UK and a fraction better in the US, though yields remain attractive for long-term income investors.
Why were stock markets so strong? It seems that stock markets are being driven by two main themes: high and rising capital expenditure on AI projects, and expectations for further cuts in US policy interest rates. Together, these themes provide both ‘growth’ (through AI spending) and ‘liquidity and stimulus’ (through interest rate cuts).
The AI spending doesn’t just affect technology stocks: it affects everyone else along the supply chains: electricity producers, manufacturers of electric cables and connectors, even uranium miners. What’s interesting is that the market seems to applaud all large-scale AI investments – announcements of big data centre investments or contracts are rewarded with share price increases (witness Oracle’s enormous share price ‘pop’ on September 9th); while growth below expectations is punished (as usual). Normally, one would expect only profitable, well-chosen growth projects to be rewarded, but it’s not obvious to analysts or investors yet which projects will prove to be profitable, and which will be malinvestments. For now, it feels as if all large-scale AI capital expenditure is being rewarded by the market, and while this enthusiasm may drive gains for some time, it is almost certain to create some future losers.
It’s worth noting that comparisons are constantly being drawn with the dot-com bubble of the late 1990s. There are similarities – surging investment in new technology and high expectations for future growth – but also some important differences. Back then, many companies were unprofitable start-ups relying on debt and speculative capital.
Today, the AI build-out is being led by some of the largest and most profitable companies in the world, often using their own strong cash flows to fund investment. This doesn’t remove the risk of wasted capital and there will still be winners and losers, but it does mean the current wave is built on more solid ground than the debt-fuelled exuberance of the past.
Tariff complacency
Meanwhile, markets have been largely unresponsive to news on tariffs. Perhaps investors have already factored in recent changes and their impact on corporate profits and consumer prices. Or perhaps investors believe that tariffs will have little long-term impact. A worse possibility is that investors have become numb to news on tariffs, and have chosen to focus on other, simpler things instead. Recall that US import tariffs are a form of tax that has to be paid by some mix of the exporting company, the US importing company, US distributors and retailers, and the end consumer. Ultimately, tariffs should bring in some much-needed revenue for the US government, but they are also likely to dent corporate profitability and raise consumer prices. This is one area where investor complacency could be tested.
Gold glitters
As with tariffs, stock and bond markets seem little affected by geopolitical developments, war, and dramatic social change in the US. However, there is one asset which does seem to be influenced by such events, and that is gold. The gold price has risen by 45% in Dollar terms in the past year… an extraordinary move! If one thinks of gold as being a ‘non-paper currency’, then what’s effectively just happened is that the Dollar has collapsed in value – this is a worrying signal that may indicate some underlying problems. It is also a reminder that while gold can be a valuable hedge, it remains a volatile asset.
With equity markets having risen strongly and steadily since the Trump tariff shock in April, it’s easy for investors to feel content and get lulled into a sense of complacency. We can imagine, though, a very different market environment sometime in the future. To protect against change, it’s important to employ hedges and find good quality alternative investments. We currently invest in gold, infrastructure and commodity funds, amongst other hedges and alternative assets. Investments in quality and income-oriented assets may provide a further degree of protection against shocks.
Reflexivity
Something to bear in mind is that the strength of the US economy could be related in part to the strength of asset markets. High share prices may provide a positive signal and create a wealth effect that encourages spending and keeps economic activity strong. If share prices were to fall though, for some reason, this could have an impact on the real economy. This is called reflexivity, where not only do economic fundamentals affect asset prices, but asset prices also affect economic fundamentals. Put simply: when markets drive the economy as much as the economy drives markets, predictions become even harder, and risk-awareness becomes even more important.
Taking profits, staying disciplined
During the quarter we sold our position in the Natixis Loomis Sayles US Equity Leaders fund. We originally invested in this fund on 1st November 2013, and it has done well, giving a total return of 632% in Sterling terms, compared to 464% for the S&P 500 index.
The main reason for selling it is that the fund’s strategy has become extremely popular over the last twelve years and now feels ‘crowded’ and risky. We wanted to act with discipline and not be afraid to sell a winner when the risks of continuing to hold outweigh the potential rewards. With the fund now very large, there are also concerns that if markets falter or performance turns, redemptions could cause additional strain.
We redistributed the proceeds into a mix of other US funds which invest in higher-dividend stocks, momentum stocks, and smaller companies. The overall effect was to increase diversification, and also to lower the underlying fees for clients, as each of the recipient funds charges lower fees than the Natixis fund.
Outlook
If stock markets are indeed being driven by expectations for AI spending and interest rate cuts, then it seems likely that the trend will continue until one of these two themes falters. It’s not hard to imagine scenarios that could cause this: a corporate decision to delay some AI spending, given doubts about the return on these investments; or a poor US inflation figure that dampens rate cut hopes. Either way, it won’t be boring.
And of course, the UK government’s Budget will take place on 26th November. The narrative around this has been terribly gloomy: if the UK government doesn’t raise taxes or cut spending, there could be a self-reinforcing spiral upwards in both budget deficit and gilt yields; and if they do raise taxes then UK growth will slow, causing tax receipts to fall, the deficit to widen and gilt yields to go higher anyway. Listening to Rachel Reeves speak at the Labour Party conference in late September, it seems that she is well aware of this narrative, and so likely to do something to soothe market nerves. Yes, it’s politically difficult for Labour to cut spending at all, or to raise taxes again, and the uncertainty doesn’t help, but the problems are manageable if tackled directly. The other interesting perspective is that the UK deficit is no worse than that of the US, France or Japan, so there’s nothing especially bad about the UK in particular.
Now, remind me: why are cakes zero-rated for VAT in the UK today? There’s no harm in buying a few boxes of Jaffa cakes before the Budget…
Key facts about the world
United Kingdom
- The Bank of England cut rates a quarter point to 4% in August, its first rate cut of the cycle, before holding steady in September.
- Inflation remained elevated at 3.8% in August, with the Bank expecting a peak of around 4% before easing in 2026.
- UK equities were buoyant, with the FTSE 100 closing the quarter at a record high of 9,350, helped by strength in healthcare and energy names.
Europe
- Eurozone inflation ticked up to 2.2% in September, from 2% in August, led by services and slower energy price declines.
- The ECB held rates at 2%, signalling a “wait and see” stance amid modest growth (c0.9% expected for 2025).
- Bulgaria received approval to join the euro from January 2026, marking the bloc’s first expansion since Croatia in 2023.
Asia
- The Bank of Japan maintained its cautious stance, keeping rates around 0.5% while signalling further tightening may come later in the year.
- China’s economy grew 5.2% year-on-year in Q2 supported by stimulus, but consumer prices fell 0.4% in August, underlining persistent deflationary pressure.
- Policy response to easing global financial conditions and sluggish Chinese domestic demand across Asia diverged: Japan stayed cautious, while emerging economies such as Vietnam targeted rapid credit growth (19–20%) to support domestic activity.
North America
- The US Federal Reserve delivered its first rate cut of the cycle in mid-September, lowering the target range to 4–4.25%, with further easing expected.
- US labour markets remained resilient; unemployment hovered near 4%, while inflation continued to trend lower.
- US equities extended gains, with tech and AI stocks driving fresh record highs for both the S&P 500 and Nasdaq.
South America
- Regional growth remained subdued at around 1–2%, with external trade and commodity prices offering limited tailwinds.
- Brazil paused its tightening cycle, holding rates near 14%, as inflation pressures eased modestly.
- Commodity exporters, particularly Chile, faced headwinds from weak copper demand and ongoing tariff uncertainty.
Africa
- Egypt’s central bank cut rates by 1% in early October, signalling easing inflation pressures.
- Inflation remains elevated across much of the continent, with debt servicing averaging 27% of government revenues.
- Growth prospects remain uneven but East Africa continues to lead, with forecasts near 6% for 2025.
Q3 2025 Performance Review
Unconstrained strategies
Key facts
Strong quarterly returns across all Unconstrained models, ahead of peers YTD
Growth and small-cap exposures drove gains, supported by Emerging Markets strength and Japan
Gold shone as a safe haven; infrastructure lagged as bond yields rose
Key trades: Natixis exit, new US momentum and small-cap ETFs, and UK repositioned with new Jupiter UK Dynamic
Summary
The Unconstrained strategies delivered another solid quarter, showing resilience in the face of shifting market leadership. Returns were broadly in line with our expectations and remain ahead of peers year-to-date, reinforcing confidence that they are well balanced for current conditions.
Market leadership once again tilted toward growth stocks (companies with higher expected earnings growth, often in technology sectors) over value stocks (companies whose shares look inexpensive relative to their assets or earnings), with the MSCI World Growth index up 8.6% versus 5.6% for Value. Small- and large-cap stocks also outperformed mid-caps. This dynamic supported positions such as the Vanguard Global Small-Cap ETF (+10.1%), which captured the strong rebound in smaller companies, and the JPM BetaBuilders US Small Cap ETF, introduced in the quarter.
Within thematic allocations, the iShares Edge MSCI USA Momentum Factor ETF was introduced following the sale of Natixis, so while it did not influence performance across the whole period, it reflects our tilt towards maintaining exposure to US leadership trends in a more diversified and lower-cost way. Similarly, the Xtrackers MSCI World Momentum ETF (+5.7%) contributed positively, aligning with the global tilt towards growth.
Regionally, the Vanguard Global Emerging Markets ETF (+14.6%) was a standout contributor, reflecting the strength in EM markets highlighted in our main commentary. Japan was more subdued, with the Zennor Japan Fund (+10.2%) still performing strongly but in line with the broader pause seen in Japanese equities after a strong run earlier in the year.
Diversifiers continued to play an important role. The Royal Mint Physical Gold ETC (+16.3%) was a major contributor, underscoring gold’s safe-haven role amid geopolitical uncertainty. The L&G All Commodities ETF (+3.6%) added modest gains. In contrast, the TM Gravis UK Infrastructure Income Fund (-3.5%) detracted, reflecting its bond-proxy characteristics as gilt yields rose over the period.
Within UK equities, the switch from RGI UK Recovery Fund into Jupiter UK Dynamic Equity (+3.7%) provided more flexible domestic exposure. The Vanguard FTSE 250 ETF (+2.7%) delivered steady though less exciting returns in comparison with global peers.
Finally, the sale of the Natixis Loomis Sayles US Equity Leaders Fund – a strong long-term performer but now very large and at risk of crowded positioning – was an important risk-management step. Proceeds were reallocated into a combination of higher-dividend, momentum, and small-cap US exposures, improving diversification while lowering overall fees.
The Unconstrained strategies remain well positioned, benefitting from exposure to prevailing market leadership in growth, EM and small caps, while retaining balance through diversifiers such as gold and commodities. Portfolio changes during the quarter have reinforced diversification, discipline, and cost efficiency at a time when markets continue to present both strong opportunities and potential risks.
| SECTOR | Q3 2025 | 1 year to 30/09/25 | 1 year to 30/09/24 | 1 year to 30/09/23 | 1 year to 30/09/22 | 1 year to 30/09/21 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| IA UK Index Linked Gilts | -2.1% | -9.4% | 6.2% | -9.8% | -31.0% | -0.7% | -9.9% |
| IA £ Corporate Bond | 0.9% | 4.0% | 11.1% | 7.1% | -20.8% | 1.2% | -0.2% |
| IA Property | -0.8% | -0.6% | 1.5% | -9.4% | 5.0% | 3.4% | -0.2% |
| IA UK Equity Income | 2.8% | 10.6% | 15.2% | 13.3% | -8.8% | 32.6% | 11.8% |
| IA UK Smaller Companies | -0.3% | 2.3% | 15.7% | 2.1% | -32.4% | 48.7% | 4.0% |
| IA North America | 8.2% | 13.4% | 20.6% | 8.1% | -2.4% | 25.2% | 12.6% |
| IA Europe Excluding UK | 3.0% | 11.8% | 14.6% | 19.0% | -16.0% | 22.4% | 9.4% |
| IA Japan | 9.5% | 15.9% | 10.9% | 10.7% | -15.8% | 16.5% | 6.9% |
| IA Asia Pacific Excluding Japan | 12.2% | 14.0% | 14.1% | 0.3% | -10.5% | 15.4% | 6.1% |
| IA Global Emerging Markets | 11.7% | 15.5% | 13.0% | 2.6% | -15.5% | 17.3% | 5.8% |
Source: Morningstar in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Unconstrained strategies
Cautious
Growth
Balanced
Adventurous
Q3 2025 Performance Review
Ethical strategies
Key facts
Ethical portfolios delivered positive returns in Q3, building further on gains made earlier in the year
UK mid-cap and global equity income/growth strategies were softer after a strong summer, tempering results
Gold pushed to new highs over the quarter, adding resilience to portfolios
Infrastructure detracted as rising bond yields pressured bond-proxy assets
Strategies remain ahead of peers year-to-date, underlining their resilience
Emerging Markets benefit from a weakening US Dollar
Summary
The Ethical strategies delivered another quarter of positive returns. While results since August have been more muted than earlier in the summer, performance year-to-date remains ahead of peer groups, reflecting the strength and balance of the portfolios across changing conditions.
The Montanaro UK Income Fund (-3.3%) detracted, alongside the BNY Mellon Global Equity Income Fund (-5.7%), as UK and income-oriented names underperformed global peers. Similarly, the TM Gravis UK Infrastructure Income Fund (-3.5%) weighed on returns, reflecting the bond-proxy characteristics of infrastructure as gilt yields rose.
Among global allocations, several funds produced positive absolute returns but fell short of the headline index, including EdenTree European Equity (+5.9%), Janus Henderson Global Sustainable Equity (+4.5%) and Amundi MSCI Climate Paris Aligned ETF (+4.5%). This reflects the more difficult backdrop for European equities and mid-growth/dividend-focused global strategies since July.
On the positive side, diversifiers provided meaningful support. Gold was again a key contributor through the Royal Mint Physical Gold ETC (+16.3%), while EM added strongly via the Vanguard ESG Emerging Markets All Cap ETF (+11.4%). The Vanguard ESG Screened Developed World ETF (+9.3%) also benefitted from the global rebound in smaller companies. Sustainable fixed income holdings such as the Rathbone Ethical Bond (+1.1%) and Vontobel TwentyFour Sustainable Short-Term Bond (+1.3%) delivered steady positive returns, offering ballast against more volatile equity allocations.
The Ethical strategies made further progress in Q3, with positive absolute returns across all models. Gains from gold, emerging markets and small caps helped offset softer performance from UK mid-caps, European equities and infrastructure. While conditions since August have been more testing, the strategies remain ahead of peers year-to-date and continue to demonstrate resilience, consistent with their long-term objectives.
| SECTOR | Q3 2025 | 1 year to 30/09/2025 | 1 year to 30/09/2024 | 1 year to 30/09/2023 | 1 year to 30/09/2022 | 1 year to 30/09/2021 | 5 years (annualised) |
|---|---|---|---|---|---|---|---|
| Global Sustainable | 6.5% | 10.9% | 19.2% | 9.4% | -6.8% | 18.8% | 9.9% |
| UK ESG Enhanced | 4.7% | 12.8% | 13.9% | 17.3% | -7.4% | 26.6% | 12.1% |
| US ESG Enhanced | 10.3% | 16.7% | 23.9% | 11.2% | -1.2% | 24.7% | 14.7% |
| Developed Market Europe Sustainable | 4.8% | 10.5% | 17.4% | 15.2% | -13.7% | 22.1% | 9.5% |
| Emerging Market ESG Enhanced | 10.4% | 11.3% | 10.5% | 0.2% | -12.9% | 10.9% | 3.5% |
| UK Corporate Bond Sustainable | 0.5% | 3.1% | 11.0% | 7.8% | -25.5% | -0.5% | -1.8% |
| Global Corporate Bond Sustainable | 3.6% | 4.4% | 4.2% | -3.0% | -6.0% | -3.3% | -0.8% |
| Global Green Bond | 2.3% | 5.2% | 4.7% | -2.8% | -13.7% | -5.7% | -2.7% |
| Global Renewable Energy | 10.6% | 10.5% | 8.5% | 2.3% | -4.0% | 32.4% | 9.3% |
Source: Morningstar sustainable indices in GBP. Net income reinvested. Past performance is not a reliable indicator of future results.
The positioning of our Ethical strategies
Cautious
Growth
Balanced
Adventurous
Disclaimer
Opinions constitute our judgment as of this date and are subject to change without warning. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment. Past performance is not a reliable indicator of future results and forecasts are not a reliable indicator of future performance. Where an investment involves exposure to a foreign currency, changes in rates of exchange may cause the value of the investment, and the income from it, to go up or down. The information in this document is not intended as an offer or solicitation to buy or sell securities or any other investment, nor does it constitute a personal recommendation.