Introduction
Global equity markets rose in the fourth quarter of last year, with a number of indices ending 2025 either at or near their record highs. Investor sentiment was supported by solid earnings growth numbers, whilst technology-related stocks continued to benefit from optimism over Artificial Intelligence (AI), particularly in the US. Markets also benefited from further cuts in US interest rates.
From an economic point of view, at its December meeting the Bank of England (BoE) voted 5-4 to reduce its interest rate by 0.25% to 3.75%, whilst warning that future decisions were likely to be a ‘closer call’. Headline UK inflation fell by more than expected to 3.2% in November, the lowest level in eight months although remaining well above the 2% target. There were nerves ahead of the Autumn Budget, but in the end there were no major tax rises with the Chancellor relying mainly on stealth measures to raise taxes. UK economic growth struggled to make progress, with the most recent data showing a 0.1% contraction in October, which followed a similar decline in September, whilst the third quarter saw only a 0.1% expansion. The US Federal Reserve reduced its interest rate twice, each time by 0.25%, to 3.5%-3.75%. However, the longest US government shutdown in history resulted in delays to economic data being released, although the end of the year saw evidence of further weakness in the labour market, but other data remained resilient. The European Central Bank left its interest rate unchanged at 2%, whilst turning more optimistic on the “resilient” Eurozone economy.
Market Performance
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
UK Equities
UK equities rose in the fourth quarter, with the large cap FTSE 100 outperforming the mid cap FTSE 250 as it ended 2025 close to multi-year highs. The FTSE 100 was supported by good performance from large, globally-focussed companies, notably in financials, mining, defence and other commodity-linked sectors. These companies benefited from strong global demand, as well as high commodity prices and a slightly weaker sterling. The more domestically-focussed FTSE 250 lagged the FTSE 100 as consumer spending remained under pressure, whilst there continued to be persistent cost challenges.
Global Equities
The US S&P 500 (which measures 500 of the largest US companies), rose but underperformed other developed markets. The gains came despite the government shutdown and softness in the jobs markets, with support from the cuts in the interest rate. Performance was led by the communication services and technology sectors, although there were signs of a broadening out to other areas of the market. The FTSE World Europe ex UK Index (which measures large and mid cap stocks across Europe) produced a decent gain, supported by strength across the regional indices with financials among the strongest performing sectors. The Japanese Nikkei 225 Index (a measure of Japan’s top 225 companies) recorded a very strong double-digit gain, amid optimism over strong growth in generative AI and defence spending. There was also support from the election of Sanae Takaichi as Prime Minister, which gave rise to hopes of greater political stability and increased fiscal stimulus.
Asia and Global Emerging Markets Equities
Asian and Global Emerging Markets produced decent gains, as they both outperformed the US. Both the MSCI Asia ex Japan Index (which captures the performance of over 1,000 companies across Asia) and the MSCI Emerging Markets Index (which covers over 1,200 stocks from across 24 emerging markets countries), rose by over 5%. There were notably good returns from the technology-orientated markets of Korea and Taiwan, where strong demand for AI-related products boosted performance. Latin America also performed well, led by Brazil and Mexico. However, China underperformed following strong performance throughout much of last year, amid some profit-taking and weaker economic data.
Fixed Income
There was some divergence in performance across global government bond markets in the fourth quarter. UK gilts, as shown by the gain in the FTSE Actuaries UK Conventional Gilts Index, outperformed with support from November’s Autumn Budget being well received by markets following the announcement of a larger-than-expected fiscal headroom and lower gilt issuance for the year, whilst the interest rate cut in December was also supportive. US Treasuries saw more muted performance, with longer-dated bonds seeing rising yields (bond prices and yields have an inverse relationship), but there were declines in the more interest rate sensitive short-dated bonds amid two interest rate cuts by the Federal Reserve. However, Japanese bonds suffered a sharp sell-off as the new Prime Minister announced a large fiscal stimulus package, leading to concerns over Japan’s already large debt burden.
AFP243 exp02/27
Home > Market Commentary – Quarter 4, 2025
Market Commentary – Quarter 4, 2025
Introduction
Global equity markets rose in the fourth quarter of last year, with a number of indices ending 2025 either at or near their record highs. Investor sentiment was supported by solid earnings growth numbers, whilst technology-related stocks continued to benefit from optimism over Artificial Intelligence (AI), particularly in the US. Markets also benefited from further cuts in US interest rates.
From an economic point of view, at its December meeting the Bank of England (BoE) voted 5-4 to reduce its interest rate by 0.25% to 3.75%, whilst warning that future decisions were likely to be a ‘closer call’. Headline UK inflation fell by more than expected to 3.2% in November, the lowest level in eight months although remaining well above the 2% target. There were nerves ahead of the Autumn Budget, but in the end there were no major tax rises with the Chancellor relying mainly on stealth measures to raise taxes. UK economic growth struggled to make progress, with the most recent data showing a 0.1% contraction in October, which followed a similar decline in September, whilst the third quarter saw only a 0.1% expansion. The US Federal Reserve reduced its interest rate twice, each time by 0.25%, to 3.5%-3.75%. However, the longest US government shutdown in history resulted in delays to economic data being released, although the end of the year saw evidence of further weakness in the labour market, but other data remained resilient. The European Central Bank left its interest rate unchanged at 2%, whilst turning more optimistic on the “resilient” Eurozone economy.
Market Performance
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
UK Equities
UK equities rose in the fourth quarter, with the large cap FTSE 100 outperforming the mid cap FTSE 250 as it ended 2025 close to multi-year highs. The FTSE 100 was supported by good performance from large, globally-focussed companies, notably in financials, mining, defence and other commodity-linked sectors. These companies benefited from strong global demand, as well as high commodity prices and a slightly weaker sterling. The more domestically-focussed FTSE 250 lagged the FTSE 100 as consumer spending remained under pressure, whilst there continued to be persistent cost challenges.
Global Equities
The US S&P 500 (which measures 500 of the largest US companies), rose but underperformed other developed markets. The gains came despite the government shutdown and softness in the jobs markets, with support from the cuts in the interest rate. Performance was led by the communication services and technology sectors, although there were signs of a broadening out to other areas of the market. The FTSE World Europe ex UK Index (which measures large and mid cap stocks across Europe) produced a decent gain, supported by strength across the regional indices with financials among the strongest performing sectors. The Japanese Nikkei 225 Index (a measure of Japan’s top 225 companies) recorded a very strong double-digit gain, amid optimism over strong growth in generative AI and defence spending. There was also support from the election of Sanae Takaichi as Prime Minister, which gave rise to hopes of greater political stability and increased fiscal stimulus.
Asia and Global Emerging Markets Equities
Asian and Global Emerging Markets produced decent gains, as they both outperformed the US. Both the MSCI Asia ex Japan Index (which captures the performance of over 1,000 companies across Asia) and the MSCI Emerging Markets Index (which covers over 1,200 stocks from across 24 emerging markets countries), rose by over 5%. There were notably good returns from the technology-orientated markets of Korea and Taiwan, where strong demand for AI-related products boosted performance. Latin America also performed well, led by Brazil and Mexico. However, China underperformed following strong performance throughout much of last year, amid some profit-taking and weaker economic data.
Fixed Income
There was some divergence in performance across global government bond markets in the fourth quarter. UK gilts, as shown by the gain in the FTSE Actuaries UK Conventional Gilts Index, outperformed with support from November’s Autumn Budget being well received by markets following the announcement of a larger-than-expected fiscal headroom and lower gilt issuance for the year, whilst the interest rate cut in December was also supportive. US Treasuries saw more muted performance, with longer-dated bonds seeing rising yields (bond prices and yields have an inverse relationship), but there were declines in the more interest rate sensitive short-dated bonds amid two interest rate cuts by the Federal Reserve. However, Japanese bonds suffered a sharp sell-off as the new Prime Minister announced a large fiscal stimulus package, leading to concerns over Japan’s already large debt burden.
AFP243 exp02/27
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