Market commentary: 1st October to 31st December 2025

At the end of 2024 we wrote the following:

“We enter 2025 with optimism with the following elements in our base position:

• Inflation is now mostly controlled, if sticky.
• Interest rates look to have peaked and should slowly decline.
• The US economy faces some headwinds but will likely lead the G7 in terms of GDP growth.
• The UK and EU may avoid recession but will struggle to grow for structural and self-imposed reasons (climate change/net zero policies driving energy costs higher, high tax/low growth policy decisions).
• Gold and silver should continue to deliver strong returns after achieving all-time highs in 2024: they have been a good hedge against political risk and inflation.
• Our focus on short duration sovereign debt assets has protected our clients from falling prices and we have been puritan in our approach: minimising counterparty and duration risk. The potential rewards for accepting these risks have been (and remain) insufficient to justify them.

After a good year for investors in 2024, we believe we can make further progress in 2025.”

Our 2024 optimism was justified and 2025 was another good year for investors.

With one exception, which we will return to, stock markets enjoyed a year of strong growth, especially outside of the US. European (+28%), UK (+21%), Japanese (+20%) and emerging market equities (+22%) all delivered strongly positive gains for investors.

Other asset classes also delivered with gold (+65%) and silver (+147%) having standout years. The decision to sell half our gold investments and use the proceeds to buy silver (in July 2024) was directionally correct and the timing worked out almost perfectly.

Some troublesome noises in private credit markets (fraud, weak covenants, bad lending, etc.) have again reinforced our contention that the minor increases in yields to be obtained by accepting lower quality or longer duration credit is bad value.

The exception to the serene progress of equities in 2025 was Trump’s tariff hokey-cokey, up-down, off-again, on-again. This briefly shocked markets and was the focus of the world’s media throughout April before gradually diminishing. The response of markets to the announcements, the modifications, and the gradually reduced implementation, was to fall 20% on the threat and to then recover these losses on the reality. This is a frequently occurring pattern with skittish stock markets but reveals an interesting feature of investing; that perceptions of risk are conditional on the point in time you look at them. If you could look backwards in time at the ‘tariff dip’, you would see an opportunity. If you faced the other way and could see another future market crash (which will inevitably happen), you would see a threat. Humans tend to have an exaggerated fear of uncertainty and are overly swayed by short term factors. Emotional investors act as amplifiers to changing circumstances and events – good or bad.

We were able to deploy some of our cash reserves on the 7th April, when panic over the tariffs was at its peak, and reverse this trade some weeks later when the panic had subsided. We try to be resilient in the face of uncertainty but view these market dislocations as, above all else, an opportunity.

The most notable feature for investors in 2025 was, of course, the AI boom, which we have covered before. There has likely been a massive overallocation of investment driven by fragile egos and fear of missing out. Mark Zuckerberg admitted the risk in September “If we end up misspending a couple of hundred billion dollars I think that is going to be very unfortunate obviously but…I actually think the risk is on the other side”. We disagree with his analysis of risk and would point to the $100bn+ that Zuckerberg has frittered away on investment in ‘Metaverse’, its “Reality Labs” division. If Meta (the parent company of Facebook) did not have an asymmetric share structure (Zukerberg holds 13% of the shares but has 61% of the votes) then shareholders would have intervened by now to challenge this spending folly. Yet another point of evidence as to why asymmetric share structures are always a bad idea. Those that propose them should not be trusted and those that support them have no understanding of either history or that incentives drive behaviours.

We do not wholly endorse the words of Seth Harp “The biggest capital outlay ever, for a product that no one will pay for. OpenAI loses ten billion dollars a quarter. There is no path to profitability for subprime AI. These absurd data centers will stand sentinel over the ruins of our fake economy like moai on Easter Island.”

….but he has a point.

It is too early to have decisive opinions on the efficacy of AI. The lesson from history is that the transformation from innovations tends to be exaggerated in the short term but underestimated in the long term. The early winners in the dotcom boom did not last the race and the eventual winners mostly emerged after the boom dissipated.

Irrespective of its future, the AI spending boom has changed the present. Our analysis suggests that over half of US GDP growth is now derived from this CAPEX explosion. The US economy has moderately falling interest rates, sticky but declining inflation and, while jobless figures have been disappointing, looks set for a continuation of 2025’s growth. The froth in the AI boom has dissipated somewhat – in fact the “magnificent 7” returned less than 3% in 2025.

The UK had a standout year for equities – recovering from years of underperformance and driven by overseas trade – but the economic outlook remains unfavourable. Interest rates falling have failed to compensate for either the inevitable consequences of a ‘tax and spend’ 70s style Labour government, or the already sizeable national debt. Labour has shown that it has no appetite at all for even considering any spending cuts despite its huge parliamentary majority. One data point caught our attention: in 2025 not a single exploration well was drilled in the North Sea, the first time in nearly 70 years this has been the case. A casualty of net-zero and tax policies by this and previous governments.

We try not to make predictions because our focus is mostly on being resilient in a dynamic world rather than peering into a crystal ball. However, we will venture one probable outcome that seems to have not been observed by others – European car manufacturing is in total crisis and one or more are unlikely to survive 2026. 1 in 10 cars sold in the UK in 2025 were Chinese made [Society of motor manufacturers]. China’s objective is to own car manufacturing and it is willing to subsidise and offer any advantage it can to its local companies. Trump’s tariffs and the tariffs the EU applied in late 2024 were designed to combat this ambition; they are failing. European car manufacturers are generally fragile and most will not endure.

Our base position for 2026 is almost identical to 2025 (above). Gold and silver have considerable momentum but may suffer from vertigo eventually, otherwise business as usual.