Our view on the investment markets

Market Review

July 2025

The second quarter saw a volatile start as President Trump’s ‘Liberation Day’ tariffs were more extensive than expected and there were additional challenges for investors from events in the Middle East and concerns over government debt levels, but markets have proved remarkably resilient and the quarter ended with widespread asset class gains. 

Key to market resilience has been signs that ultimately tariffs will settle at more manageable levels, and importantly the positive fundamental investment backdrop of reasonable economic and corporate growth, inflation largely under control and lower interest rates has remained broadly intact. 

Trump’s belief in tariffs was well known, but April’s announcements were larger and more widespread than expected and provoked negative reactions across equities, bonds and the US dollar. Tariffs are widely seen as a negative development for the global economy and US inflation, but the subsequent softening of the US approach and progress in trade negotiations has eased initial recession concerns.  

As tariff and recession worries eased, concerns shifted towards government debt sustainability as markets focused on the impact on future debt levels from Trump’s ‘big, beautiful bill’ and also the UK’s political challenges in balancing the books. The quarter also had to contend with a major escalation of conflict in the Middle East between Israel and Iran, but market reaction was relatively muted and the oil price soon settled down.

Whilst economic data has seen some tariff inspired volatility, the underlying global economic picture has remained relatively robust despite the ongoing US policy uncertainty. Although inflation remains above target levels in many developed economies, it is seen as largely under control, and welcome signs of cooling wage inflation have enabled many central banks to continue cutting interest rates, including in the UK.

Alongside favourable monetary policy, fiscal policy is also proving supportive, with further tax cuts to come in the US, Europe shifting towards significant spending on defence and infrastructure and China looking to boost its domestic economy.  

Within equities, the dominant US market recovered strongly from its initial steep declines as technology and AI related stocks returned to favour, but the dollar has not recovered and its continued weakness sees US returns for a UK investor still negative in 2025. The overall international index gained 5.1% in sterling terms for the quarter, improving the 6-month return to 0.5%, with Europe ex-UK remaining the best performing region at 13.6%.

Another solid quarter of growth for the UK equity market saw the FTSE All-Share index gain 4.4%. This took the 6-month return to 9.1%, with a strong quarter for mid and smaller-cap companies closing the 2025 performance gap to the larger FTSE 100 companies.

Despite concerns over government finances and the independence of the US central bank in the face of Trump criticism, our fixed income markets all achieved gains in the second quarter. Over the 6-month period, returns ranged from -0.6% for index-linked gilts to 5.7% for emerging market debt.  

The UK commercial property market has seen limited transaction activity as investors digest the geopolitical and economic uncertainty. Occupier demand across sectors continues to hold up, with rental growth supporting valuations, and solid income levels helping overall forecast total returns of 3% at mid-year. Overseas real estate and infrastructure markets have seen underlying growth but impacts from currency moves.

With the UK bank rate at 4.25%, returns on cash deposits remained comfortably above inflation, but further rate cuts are anticipated.  

Market Outlook

Whilst President Trump continues to dominate the headlines with his unconventional policies and leadership style, it is important for investors to stay focused on the fundamental investment backdrop which remains in a relatively favourable position. Many investors dislike his actions around tariffs, immigration, the US budget and threats to central bank independence, but despite the ongoing policy uncertainty, markets are learning to live with his ‘art of the deal’ negotiating tactics and still broadly welcome his pro-growth policies of tax cuts and deregulation.

To date only a handful of trade deals have been announced and further short-term tariff related volatility remains possible as the cycle of threats and backpedalling continue, but even though US tariffs will end up significantly above the levels of recent decades, they should ultimately settle at more manageable levels than those announced in April.

Higher tariffs and other trade restrictions are seen as negative for global economic growth and will add to short-term US inflation, but if they do avoid excessive levels then the current relatively favourable fundamental investment environment of solid economic and corporate growth with inflation falling sufficiently to support further interest rate cuts should remain intact. Other risks to the favourable outlook could come from further escalations of ongoing conflicts or increased fragmentation of the global economy undermining the benefits of globalisation we have enjoyed in recent decades, but markets have shown a good resilience to recent flare-ups.

There are growing concerns over levels of government debt and ongoing budget deficits in countries such as the US and UK, and bond markets may demand higher yields if debts aren’t seen as sufficiently under control, which is proving hard to deliver in a difficult political environment. However, for now we are seeing further fiscal policy measures to support growth, most notably in Europe with their significant spending on defence and infrastructure which has been well received by investors. 

The US remains the largest economy in the world and has been a dominant force in the investment world due to its many structural advantages such as superior growth, a vibrant financial ecosystem, its innovation and corporate leadership in key areas like technology and the global role of the dollar. However, following a strong run of US equity market outperformance and dollar strength in recent years, elevated valuations, recent political developments and events such as China’s emergence as a credible technology competitor in areas like AI and Europe’s fiscal stimulus have seen investors reconsidering the US exceptionalism narrative and looking to broaden investment exposures away from their previous reliance on the US.

The global economic growth outlook continues to paint a subdued but broadly positive picture despite initial concerns over the impact of tariffs, with emerging market economies overall growing at a faster pace than those in the developed world. Inflation has made considerable progress from the elevated levels of recent years, and the remaining sticky areas such as wage and service sector inflation are now easing sufficiently to enable most central banks to continue cutting interest rates. The US has not cut rates in 2025, much to President Trump’s annoyance, and threats to the Chair and independence of the Federal Reserve have further unnerved investors, although future rate cuts are still expected.   

The UK bank rate has seen a further reduction to 4.25% and rates are expected to settle in the 3-4% range in coming quarters. Cash can still provide a useful low risk option for savers alongside other investment assets, but cash returns are unlikely to match the medium to long-term return potential available elsewhere, so it is important for investors to get the right balance of assets to suit their risk appetite. 

It has been a difficult 5 years for most fixed income assets as yields rose from exceptionally low levels due to a period of high inflation and rising interest rates. Inflation concerns have eased and interest rates have been coming down, but some sticky elements and concerns over government debt levels have limited the amount of rate cuts and the recent performance of government bonds. However, with 10-year UK government bonds (gilts) offering yields above 4.5% alongside the risk reduction benefits they provide in many potential stress scenarios such as recession, we have rebuilt exposures in our mixed asset portfolios. Other fixed income options such as investment grade corporate bonds, high yield and emerging market debt offer higher income to compensate for their greater risk. Corporate finances are in decent shape and these additional yields over gilts (known as spreads) are narrow by historic standards, but with default risks remaining relatively low the overall yields of around 5-8% offer investors some attractive levels of income.

Equity markets have navigated the multiple challenges seen in recent years remarkably well, including the recent tariff concerns, with many returning towards all-time highs as they benefit from corporate profits growth, lower interest rates and structural growth opportunities from developments in areas like AI, healthcare, decarbonisation and greater defence and infrastructure spending. 

However, we have to acknowledge that there is a danger that markets are being complacent over the potential impact of tariffs and policy uncertainty, so we will have to monitor how negotiations and trade relationships develop and how this impacts economies and companies. Having said that, history tells us that it is important to remain invested through challenging periods and keep a focus on the longer-term global investment fundamentals, which still have attractions. From their current valuations, equities have the potential to maintain their long-term track record of delivering growth above inflation and cash returns, and we retain our conviction in their ability to offer reasonable longer-term income and growth opportunities for patient investors who are able to cope with shorter term volatility.

The previous structural headwinds for UK equities such as significant outflows from institutional and private investors are diminishing, valuation and dividend income levels remain attractive, the sector mix and tariff risks are relatively favourable for the current environment, and there is the potential for sentiment to turn towards markets such as the UK as investors look to reduce their heavy reliance on the US market.

Within international equities, the previous dominance and exceptionalism of the US market is being challenged. The quality of their companies and above average exposure to growth and technology sectors remains a long-term strength, but recent policy concerns and their elevated valuation premium above all other regions means we continue to look to diversify exposures towards other more attractively valued equity markets such as those in Europe and Asia. These markets are vulnerable to trade war risks, but they also have positive catalysts such as Europe’s fiscal policy stimulus, China’s growing technology capabilities, and valuations that are still at or below historic averages. 

UK commercial property market fundamentals remain broadly positive, but stronger activity and performance is likely dependent on further interest rate cuts and lower bond yields. Valuations are expected to continue to be supported by resilient occupational markets and rental growth. Total return forecasts suggest potential gains of around 7% for 2025, with income contributing significantly to performance. Overseas real estate and infrastructure continue to be introduced to relevant portfolios as global sectors are expected to return to growth, and to provide additional diversified sources of returns.  

In conclusion, Trump’s policies have created an uncertain policy environment and an unwelcome significant increase in tariffs, but we remain hopeful that this will ultimately not be a fatal blow to the current broadly positive market backdrop of resilient global economic and corporate growth, subdued inflation, falling interest rates, fiscal stimulus in Europe and China and tax cuts in the US. The more normalised levels of interest rates and bond yields have improved the valuation appeal of cash and fixed income assets, and despite debt level concerns they provide useful attributes in mixed asset portfolios. Some tariff risks remain for equities, but their longer-term attractions are intact and valuations especially outside of the US remain reasonable. Overall, whilst the risks of higher shorter-term volatility remain, this can create opportunities and investors should continue to focus on the longer-term attractions of remaining invested through more challenging periods, and diversified portfolios across different asset classes, sectors and geographies continue to be a good way of managing risk.

Paul Glover
Chief Investment Manager
July 2025