Markets end the year on a high note

Summary:

• Global shares rose in late 2025, led by the US, UK and Japan, while equities outperformed bonds and diversification across assets proved beneficial.
• Markets stayed resilient despite concerns, with strong company earnings, interest-rate cuts and supportive policies helping investors look past AI bubble fears and economic uncertainty.
• Portfolios benefited from equity exposure, with solid returns across regions, selective strength in corporate bonds and infrastructure, and positioning tilted toward global equities and reduced US dollar exposure.

Global equity markets delivered positive returns over the fourth quarter of 2025, led by the US, UK and Japan.

Equities delivered stronger returns than bond markets, where lower quality corporate bonds performed better than government bonds. This once again highlighted the benefits of diversification across fixed income assets.

Markets brush off AI concerns in the US

Some investors voiced their concerns about a potential ‘bubble’ in the shares of AI-focused technology companies. Equity markets were able to shrug off these concerns and a strong set of corporate results for the third quarter helped US markets to end the year on a positive note.

The Federal Reserve cut interest rates twice during the fourth quarter, which eased investor concerns around the health of the US economy. Although the government shut down temporarily, there was only a limited impact on markets.

UK markets defy economic uncertainty

Uncertainty over the health of the UK economy continued through the fourth quarter of 2025. Government bonds (or ‘gilts’) were supported by expectations that the Bank of England would make further cuts to interest rates, following the release of weak economic data and an easing of inflation.

In November, the government delivered its annual Budget which included plans to improve its ‘fiscal headroom’, or financial buffer for state spending. This was greeted positively by investors and yields on gilts fell, the pound strengthened and there was a small uplift in UK equities too.

During December, UK equity markets maintained their upward trajectory to finish the year with positive returns, defying a year of economic uncertainty.

European markets deliver

The fourth quarter was also a good one for equity markets in the Eurozone. Economic data showed that labour markets were resilient and business activity had improved, which went some way to counterbalancing the lingering political concerns in parts of the region. Yields on Eurozone bonds fell, which supported equity markets and at times the region’s markets outperformed their global peers.

The European Central Bank held interest rates unchanged and signalled that there was limited scope for rate cuts in the near term.

Currency moves shape returns from Japan

Japanese markets were influenced by a combination of political developments, shifting monetary policy expectations and currency movements. Sanae Takaichi was elected as prime minister, the first woman to hold the post, and hopes of supportive policy helped equity markets rise.

Attention then turned to the Bank of Japan and speculation that it could raise interest rates – a move it made in December. This pushed yields on Japanese government bonds upwards.

Although Japanese equity markets held up well during the fourth quarter, the yen weakened which affects returns for overseas investors.

Emerging markets

Emerging markets had a positive quarter overall. Expectations that the US will continue with supportive monetary policy measures gave investors increased appetite for risk, which boosted emerging market equities.

How did this affect portfolios?

Global equities had a good fourth quarter, as the MSCI ACWI index (a broad global stock index) returned 3.4% during the fourth quarter (in GBP terms). However, there were periods of volatility on the back of concerns around the valuations of large cap technology and AI-related stocks.

UK equities rose by 7.1%, as measured by the MSCI UK index (in GBP terms). The government’s fiscal plans detailed in the Autumn Budget were well-received by investors.

European equities were supported by rising business confidence and lower bond yields, as the MSCI Europe ex-UK index rose 6.1% (in GBP terms).

Emerging market equities benefitted from a general improvement in investor appetite for risk, and the MSCI Emerging Markets index returned 4.8% over the quarter (in GBP terms). China’s economy weighed on the country’s stocks, and this limited the upside for the emerging markets index as a whole.

Japanese markets delivered modest gains over the fourth quarter, as the MSCI Japan index rose by 3.3% (in GBP terms). Yen weakness dampened returns for global investors.

Fixed income markets were positive overall in the fourth quarter of 2025, although performance varied between sectors. US government bonds delivered a flat performance for the quarter, which reflected ongoing concerns about the longer-term outlook for inflation. Globally, corporate bond markets outperformed government bonds, while emerging market debt was another sector which delivered positive returns for investors during the quarter.

Listed infrastructure investments performed well over the fourth quarter. Electricity infrastructure in the US and Europe stood out as a strong performer, while communication assets were weaker. Global real estate investment trusts delivered negative performance in GBP terms during the fourth quarter.

Our view on the major asset classes

Equities

US mega-cap technology companies will continue to go from strength to strength, especially with their focus on developing AI. Investors remain focused on the potential for innovation from these companies and any market falls over the next year are likely to be limited. Setbacks in US equity markets could also potentially be used as buying opportunities.

Bonds

Global bond markets remain highly sensitive to changes in government policies and expectations for inflation and economic growth.

Over a three-to-five-year horizon, we expect high quality global corporate bonds to provide higher returns than global government bonds.

We continue to see pockets of opportunity, for example in UK gilts, where the returns on offer are attractive.

Real assets

We maintain our view that diversifying portfolios with some exposure to ‘alternative’ assets, such as listed infrastructure and real estate investment trusts (REITs), will help provide consistent returns over time. This is because alternative assets have lower correlation to equity and bond markets.

How are we positioning portfolios?

We have increased our exposure to the WTW Global Equity Diversified index fund (GEDI) in the Multi-Asset Funds, the Model Portfolio Service and Discretionary portfolios. This means more low-cost, diversified exposure to equities from around the world.

We also reduced exposure to the US dollar by between 2% and 5% across most of the funds, as we expect there to be greater pressure on the currency in future. The Adventurous model portfolio retained its allocation to the US dollar, as it already holds a relatively lower weighting to developed market currencies.

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Information correct as of 9th January 2026.