Investment Market Commentary - Q3 2025

Overview

This quarter there were positive returns across most major asset classes.

The global trade disruption from the proposed US tariffs has faded, although negotiations remain ongoing between some countries and the US.

Global equity markets have bounced back strongly, but Trump’s approach to tariffs has led governments worldwide to re-evaluate their trading relationship with the US and other countries.

In equities, strong demand for AI technology drove returns from growth stocks which outperformed their value counterparts.

Strong corporate earnings and a long-awaited 0.25% interest rate cut from the US Federal Reserve (Fed) supported developed market returns, whilst emerging markets were buoyed by weakness in the US dollar.

Global bond markets produced mixed returns and US treasury yields fell over the quarter, whilst UK gilts, German bonds and Japanese government bonds increased in value.

Credit markets were positive, investment grade spreads tightened and broadly outperformed government bonds, whilst high yield debt delivered the highest returns in the fixed interest space.

Equities

Many observers have been surprised by the strength of equity markets when the factors which usually drive them have been less than consistent.

Trump’s tariffs policy has made investors aware of broader economic news and reaction to his comments, and Trump’s social media tweets could have caused a mass sell off.  Instead, asset prices reached all-time highs whilst equity returns have not been solely led by the US – other regional markets have also driven performance.

In particular; Europe, Asia Pacific ex Japan, Japan, Emerging Markets, and UK are trading at high multiples which is an indication of strong growth prospects.  The conditions behind this are, however, fragile in an unstable global political climate.

UK

The economic backdrop for the UK continued to be challenging – inflation remained elevated at 3.8% in August whilst labour market data from the Office of National Statistics showed a rise in unemployment.

Despite this, UK equities increased in value over Q3, with the IA UK All Companies sector returning 3.13%, and the IA Equity Income sector returning 2.92%.

The UK has realistic valuations, but several question marks remain ahead of the autumn budget that has provided nervousness in the markets.

Around three quarters of the FTSE 100 index revenues have been devised from abroad as weakness in the pound has supported internationally focussed businesses. This, alongside resilience within the global economy has driven returns, particularly as the FTSE 100 is a largely global index, as c.76% of FTSE 100 company’s earnings are from outside the UK.

US

After a long tussle with the White House, the US Fed cut interest rates by 0.25% to 4.25% in September after jobs data weakened sufficiently to justify the decision.

The IA North America sector posted a return of 8.17% over the quarter, and although not purely devised from US stocks, this sector return does provide a significant indication of the US market performance.

US growth has been largely fuelled by AI stocks, although AI is not the only reason the US has been growing – Personal Consumption, fixed investment in information equipment & Software, and Government have also contributed to GDP growth.

The US economy has been largely driven by the wealthiest in society, given that US policy has not benefited the less wealthy.  In this regard, the top 10% of Americans, by earnings, has been responsible for 49.2% of the country’s consumer spending.

The US dollar has weakened meaning there is less benefit for sterling investors holding US stocks. The US dollar, and therefore all dollar assets, face ongoing headwinds due to growing investor unease stemming from US policy choices.  This has led to a rotation out of the US into other world markets, which may have contributed towards growth in other regions such as Europe.

Europe

European markets rose in overall terms over the quarter, with the IA Europe Excluding UK sector returning 3.04%, although political uncertainty and weak foreign demand have dampened returns to an extent.

Despite concerns surrounding US trade tariffs, the Eurozone economy fared better than anticipated with the European Central Bank maintaining interest rates at 2.15% in the quarter.

At the beginning of the year, sentiment was improving for investment in Europe, with low interest rates and key political outcomes improving the outlook for investors. Throughout the second quarter of the year, this outlook continued to grow.

There is currently heavy investment in infrastructure and defence in Europe, whilst European unemployment has hit a new low, with loan growth improving.  European banks have provided attractive returns.

In terms of inflation, across Europe the figure has fallen below 2% leading to a looser monetary policy aimed at stimulating the economy, which if successful, will ensure Europe remains an attractive option for investors.

Asia & Emerging Markets

China was the best performing region over the quarter with the IA China/Greater China sector returning 23.87%, where optimism for China’s investment in AI and the extension of a US-China trade truce drove returns.

Although there has been less trade with the US, China have traded more within Asia and Africa to compensate – the US / China relationship is becoming less important.

China’s vehicle exports have also increased significantly over the last 5 years, which is partly due to the improved quality of Chinese cars.  China also has a big advantage in they produce rare earth materials needed for AI.

The performance of the Chinese economy was also captured by the broader Asian index which, alongside Chinese equities, benefited from exposure to tech-heavy sectors within South Korea and Taiwan.

By contrast, Indian equities fell over the quarter by -4.33% as returns were hampered by global trade tensions, perhaps most notably President Trump’s 50% tariff on Indian goods that was imposed to discourage the purchase of Russian Oil.

Weakness in the US dollar and the impact of strength within the technology sector both contributed to the strong performance of emerging market equities over the quarter, with the IA Global Emerging Markets sector posting a return of 11.70%.

Japan

Japan’s economy continues to improve after a long stagnation according to the Bank of Japan’s ‘Tankan’ survey (June 2025).

Japanese equities performed well over Q3 with the IA Japan sector returning 9.53% – export-oriented businesses benefitted from weakness in the yen and returns were bolstered by the US-Japan trade deal which reduced tariffs on Japanese exports from 25% – 15%.

Investor sentiment also benefitted from the release of economic data showing the Japanese economy had grown quarter on quarter over Q2.

Bonds

While fixed interest markets have been relatively quiet, government debt has been under pressure as yields have remained high, despite the greater threat of interest rate cuts.

Capital values from longer term UK and US bonds have fallen.

Global bond markets produced mixed returns – US treasury yields fell over the quarter, whilst UK gilts, German bonds and Japanese government bonds rose.

Credit markets were positive, investment grade spreads tightened and broadly outperformed government bonds, whilst high yield debt delivered the highest returns.

Alternative Investments

Infrastructure, especially in the private sector, has provided relatively stable returns and continues to act as a defensive ‘real asset’ anchor against more volatile investments.

Property has performed reasonably well but has lacked the momentum investors require before committing to greater capital levels.

Within commodities, precious metals were the standout performer, with gold and silver both making significant gains over the quarter – the IA Commodity/Natural Resources sector returned 17.45%.   Part of the reason of gold has provided strong returns is because central banks are buying gold at unprecedented rates which has been driven by geopolitical tensions, inflation concerns, and a shift away from US Treasuries.

Market outlook

Many investors believe some markets and sectors are overvalued but values appear to be supported by recent quarterly company earnings, even if some fear we are entering a bubble where prices exceed their true value. The prime example of this being AI, whereby overinvestment will push up valuations meaning a correction is likely.  This underlines the importance of avoiding concentration into AI stocks.

Geopolitical tension is driving new trading alliances, notably between China and Russia.  Meanwhile other Asian countries have found new trading partners, including India, where the UK has recently completed a two-day trade mission.

Trust in the US is being eroded, and the US dollar is likely to weaken further.  Global stocks are likely to move higher which will be largely driven by non-US markets.

In terms of fixed interest securities, governments are issuing more debt, to manage deficits and refinance maturing bonds, which increases supply in bond markets.

Demand for government debt appears stable, valuations look attractive, and the UK still has many levers it can pull to improve the situation before a debt crisis.

We expect current trends to continue, and now the US Fed has started to cut interest rates, the market is focusing on the next 12 months, which will determine the strength of conviction in the economy and risk assets in general.

Probably the most compelling trend is the more extreme variations in values – a wider gap between winners and losers within asset classes including the equity, bond, commodities and property markets. This makes it harder for investors to pick winners, therefore the best approach continues to be a diversified portfolio across the asset classes.

Summary

We believe our proposed changes will continue to assist with the future growth potential of our portfolios, whilst maintaining the level of volatility experienced within a range that is deemed suitable for each investor.

It is worth noting the weighted fund charges across all our Model Portfolios will slightly reduce following the updates we have recommended this quarter.

The following documents provide more detail around the recent performance and updated asset allocation and fund selections for each of our Model Portfolios.