Throughout 2025 we have seen persistent political instability and, whilst we have also experienced levels of investment volatility that would be high relative to historic averages, these bouts of volatility have, generally, been short lived and the trajectory for most asset classes has been positive.
Markets have lurched from optimism to anxiety and back again, often in response to political decisions that were as abrupt as they were unpredictable. It is easy to forget the surge of confidence seen in investment markets following Donald Trump’s return to the White House in January, and how quickly this gave way to nervousness as trade policy, government reshuffles and rhetoric around foreign affairs created a climate of uncertainty which we are still navigating — with Elon Musk’s brief role in government already feeling like a surreal footnote in an extraordinary year.
The challenge for investors has been to interpret an environment where policy can swing from hard-line protectionism to reluctant compromise in the space of a week. The inconsistency in US policy was once again on display throughout the summer. Having reignited tariff disputes with China and Europe in July, Trump unnerved businesses and investors who feared a return to a trade-war style environment. Within weeks, however, exemptions were announced and rhetoric softened, leading to a partial rebound in sentiment. For investors, this type of policy whiplash is challenging. US markets remain central to global portfolios; however, their shortterm direction has been heavily influenced by politics rather than fundamentals. The result has been heightened volatility and an increased level of risk for those who choose to chase momentum in an already expensive market.
Global macroeconomic conditions have added another layer of complexity. Inflation remains stubborn in many parts of the developed world, with headline rates in both the UK and US hovering around 3% -4%. A combination of tariffs from the US and conflict in the Middle East has contributed to volatility in oil prices, raising fears that energy costs could once again ripple through supply chains and delay the disinflation process. Central banks have therefore struck a cautious tone. Having withstood significant political pressures (the likes of which markets seldom welcome) the US Federal Reserve trimmed rates modestly during the quarter, citing a slowing economy and labour markets. The Bank of England, facing similarly persistent inflation in the UK, chose instead to hold the Bank Rate at 4%, although continued weak growth figures may result in a change of course here. A significant recession notwithstanding, seeing further cuts in the UK and the US should be broadly positive for most assets with the exception of cash.
The UK economy continues to tread a delicate path. After a weak second quarter, confidence among businesses has deteriorated further, weighed down by elevated costs and uncertainty ahead of the Autumn Budget. Growth for the year is still expected to be positive, but momentum has slowed compared to the start of 2025. In Europe, political instability in France and a push from the far right in Germany are not insignificant risks faced by the two largest and most influential economies in the trading bloc. Whilst EU inflation is now back to target at c.2% (Eurozone at c.2.2%) and interest rates have been cut to far less restrictive levels than can be seen in the UK and US, it is important to remember that EU and Eurozone inflation rates represent a weighted average inflation rate for all members. The reality exposes one of the core challenges for the Eurozone and ECB in setting interest rates, as actual inflation rates of member states range from a low of 0% in Cyprus to a high of 6.2% for Estonia where falling interest rates may well be causing additional pressures on prices at the wrong time.
For equity investors, the picture in Q3 was broadly positive but with quite varied results by geography and market cap. Persistently high valuations of US large cap stocks, which dominated returns in 2023 and 2024, have been less forgiving in 2025. Periods of sharp drawdowns have been offset only partially by rebounds, resulting in an environment where volatility has outweighed direction. Our long-held caution around these valuations meant that portfolios were partially insulated during sell-offs, though naturally this also meant lagging behind in short bursts of recovery. Despite these risks, the US remains too dynamic to ignore, and opportunities still exist in smaller and mid-sized companies, as well as selective areas of technology where business models remain resilient and exciting enough to justify above average valuations.
In contrast, the UK and European equity markets have been steadier. Valuation levels continue to offer a margin of safety, particularly in small and mid-cap stocks which continue to lag but is an area that we see great value in for a patient investor. Sector composition in the UK and Europe — with more significant weightings in energy, financials and healthcare than tech — has also provided a defensive tilt that has been valuable in more volatile months. Japan has also continued to show promise and good returns, benefiting from modest inflation, wage growth and stock market reforms aimed at improving corporate governance and shareholder returns. The main long-term risk for Japan remains demographics, but for large-cap companies with global demand exposure, the outlook remains constructive.
Across Asia and Emerging Markets, conditions remain mixed. India recovered strongly in Q3 after a difficult start to the year and continues to represent one of the most compelling growth stories globally. China remains more challenging: economic momentum has slowed, and the market continues to be clouded by policy opacity and geopolitical tensions. We still believe that there is huge potential value in China given its size and ambition, however, we prefer to access the region through active managers who can adapt exposure as conditions evolve, rather than taking on the risks of concentrated direct allocations.
Fixed income markets have been steadier, and our view remains largely unchanged. Yields on high-quality bonds continue to look attractive, both as a source of income and as a defensive anchor in portfolios should growth slow more sharply. We continue to favour government bonds and (selectively) investment-grade credit over riskier parts of the bond market, where we consider spreads to be tight relative to default risks. This ultimately reduces the sort of downside protection potential that we are trying to achieve in this part of portfolios without offering sufficient upside in the good times as a reward. We believe that active management remains essential here, with a focus on balancing return opportunities with downside protection.
Alternatives and real assets continue to warrant attention as the outlook for interest rates becomes less threatening and two years of debt restructuring have left many funds in a good and stable position. After several difficult years, infrastructure and specialist property have benefited from higher yields, robust net asset values and renewed investor and Private Equity interest. Discounts to net asset value remain wide in many listed vehicles, providing an additional potential source of return alongside attractive levels of income. The nature of real assets, when carefully selected, should provide a defence against the potential for a return of inflation alongside its reasonably predictable income streams. Taken together, the third quarter of 2025 was another reminder that in the short-term markets are often moved most by politics, sentiment, and events rather than by fundamentals alone.
These remain difficult to predict and position for, and, for long-term investors, it is important to remember that a portfolio’s time horizon is far longer than any particular president or their current train of thought might last. The lesson is, therefore, not to try to second-guess every political shift or development, but to build portfolios that can withstand volatility while still capturing opportunities when they arise over time. The timing of these opportunities (and risks) will never be possible to predict with enough consistency to be a profitable strategy. Our approach therefore remains disciplined: balancing the defensive qualities of high-quality bonds and real assets with targeted equity exposure to generate long term growth in regions and sectors where valuations and fundamentals align.
The events of 2025 so far have underscored the extent to which politics, sentiment, and unexpected shocks can dominate the short-term investment landscape, often at the expense of fundamentals. While this environment has created challenges, it has also highlighted the value of discipline, diversification, and patience. We continue to believe that robust portfolios are not built on trying to anticipate every policy shift or geopolitical headline, but on combining resilient defensive assets with selective growth opportunities in markets and sectors where long-term fundamentals remain supportive. As we look ahead, the path will likely remain uneven, but by maintaining balance and selectivity, investors can stay positioned to withstand volatility while capturing the opportunities that inevitably emerge through periods of uncertainty.
Looking ahead, we expect markets to remain sensitive to policy shifts, geopolitical developments and changing sentiment, but this does not affect the core principle that fundamentals should prevail over longer horizons. By maintaining discipline and focusing on valuations, quality, and resilience, one can navigate an uncertain environment without being derailed by short-term noise. Ultimately, while the near-term path may be uneven, the opportunities created by volatility are best captured through patience, diversification and a measured approach that balances risk with reward.
This note is intended as a general market update and should not be regarded as specific advice or treated as a recommendation to invest in any particular fund or asset class. Stock market investments can fall as well as rise. If you would like to discuss the implications for your own portfolio, please do get in touch.