Chief Investment Office 2025 portfolio review and outlook
IN BRIEF
- Tariff uncertainty replaced by a return to fundamentals; interest rates and earnings.
- Weakening US labour markets allowed the Fed to resume a cutting cycle despite above trend inflation.
- AI spending, fiscal loosening & lower short term rates support equity returns despite ‘full’ valuations.
Market Comment
A year of highs and lows for markets but the end outcome illustrated the power of staying invested and ignoring the headlines; so often the cause of diverting investors from their long-term financial goals. Referencing the S&P500, by 7th April investors were nursing a decline of c.15%, which was followed by a rally of some 39% and a full year return of 17.9%.
Much happened in 2025 but a simplified summary of the key drivers as follows (noting the 2024 y/e context of a new Trump regime and US exceptionalism):
- Q1: Tariff escalation caused markets to price a tax on growth; US equities declined, long duration bonds rallied hard, while European equities made progress.
- Q2: Price action remained dominated by politics but a walking back of the tariff narrative caused a reversal in markets, equities rallying, bonds declining.
- Q3: a return to fundamentals; markets dominated by the AI tech spending boom, strong earnings but declining economic growth and weakening US labour markets. The Federal Reserve cut rates for the first time; both bonds and equities performed well.
- Q4: equities continued to perform well, following strong Q3 earnings growth, tech investment, a resurgence of corporate deal making and an outlook of fiscal easing ahead.
By year end, global interest rate curves had steepened:
Upward sloping yield curves traditionally suggest growth ahead and that is our expectation for 2026; fiscal easing (US tax cuts, European government spending on infrastructure and defence), continued AI capex spending and greater tariff clarity allowing corporates to focus back on growth. But risks have increased too; this positive economic outlook means continued normalization of inflation will be more illusive, meaning less scope for central bank rate cutting and governments facing increased debt and higher servicing costs – not a sustainable long-term path. Then there is the question of whether AI is turning into a bubble and the potential for corporates to earn a return on their investment, particularly given that investment is beginning to be funded from debt rather than free cash flow – signs of ‘late cycle’.
As the chart illustrates, markets are pricing a narrowing of rate differentials, particularly between the US and Europe. That dynamic caused the USD to weaken, meaning returns for non-USD base currency investors were more challenged. Our view is that much of that re-pricing has happened and we expect a return to normalised growth in the US to result in less foreign exchange volatility, with relative corporate earnings growth being the key determinant of equity returns in 2026.
In Asia, Chinese policy continued to address sub-trend growth and the fall-out from property price declines through somewhat stimulative policy. In Japan, pro-growth Sanae Takaitchi was elected prime-minister, helping boost the equity market, while bond yields rose as a result of Bank of Japan rate increases.
Heightened geo-political risk remains, which markets have substantially shrugged off, perhaps best illustrated by the price of oil declining close to 20% over the year; a helpful disinflationary force.
Key portfolio activity over the year
We came into the year slightly overweight equities and 4% overweight high yield. As tariff related volatility increased in Q1, we moved equities back to neutral, retaining a geographic equity bias to the US. Following the volatility of ‘liberation day’ in April, we carried out some sector changes, taking profits in consumer staples and moving overweight healthcare in its place. Additionally, we reduced cyclicality in portfolios and rotated some US financials exposure into Europe.
Within fixed income, as the growth outlook for the US relative to Europe declined, we rotated some European duration into the US. Having been overweight US securitised debt at the sub-sector level and following out-performance, we took gains and switched proceeds back into Treasuries.
In the final quarter, following strong risk asset performance, we decided to maintain positive equity drift and move 2% overweight equities, funded from high yield.
Year end high-level positioning
Portfolio risk is moderately pro-cyclical, being 2% overweight both equities & high yield – we retain considerable flexibility to increase risk should opportunities arise. Geographically, we retain an overweight to the US equity market vs rest of world, given our expectation for higher equity earnings growth, driven by the AI tech chain. At the sector level, our overweights are technology, financials and healthcare, while we have underweights in materials and industrials. In absolute terms, tech related companies (c.40%) and financials (c.20%) are the main drivers of equity exposure and we feel both sectors have good earnings outlooks.
Within fixed income, we are underweight Core bonds in favour of high yield and neutral duration around 6.5 years at the portfolio level. Our main duration underweight is to Japanese JGBs given the risk of further rate increases. Despite corporate spreads (the yield premium to government debt) being relatively tight, we retain a slight overweight and believe that valuation levels are justified by strong corporate fundamentals.
For portfolios with hedge funds, we are positioned in line with the strategic allocation and have a slight bias to relative value and global macro.
Returns
Outlook
The decision to move overweight equities in Q4 informs our outlook as we move into 2026. Valuations are full but we think with good reason; we expect an increase in global economic growth resulting from looser fiscal policy, AI spending and lower rates. While an outlook of potentially stickier inflation and therefore higher rates may lead to heightened volatility, we would be looking to use such events as opportunities to buy more equities. Technical factors remain supportive, namely, record levels of cash on the sidelines – some $7trn in money market funds, which may begin to move into risk assets as cash returns fall. Indeed, Euro base currency investors face zero to negative real returns if remaining in cash. There is much optimism for Euroland from German infrastructure spending in 2026; we see that as positive for the outlook but not in itself a driver of superior growth – AI capex spending is likely to be the bigger factor and a reason we expect US earnings growth to be most resilient. And that is in part also why we think that the biggest move in USD weakness is behind us.
Careful portfolio construction (not leaning too far in any one direction) and being nimble are top of mind in 2026. Our views are informed not just by a positive macro outlook but also by what corporates are telling us; they are focused on continued growth, despite the relative weakness in labour markets.
KEY RISKS
For illustrative purposes only. Estimates, forecasts and comparisons are as of the dates stated in the material.
Indices are not investment products and may not be considered for investment.
Past performance is not a guarantee of future returns and investors may get back less than the amount invested.
Benchmark definitions
All index performance information has been obtained from third parties and should not be relied upon as being complete or accurate. They are not investment products available for purchase. Indices are unmanaged and generally do not take into account fees or expenses. Furthermore, while some alternative investment indices ay provide useful indications of the general performance of the alternative investment industry or particular alternative investment strategies, all alternative investment indices are subject to selection, valuation survivorship and entry biases, and lack transparency with respect to their proprietary computations.
MSCI WORLD INDEX: The MSCI World Index is a free-float-adjusted market capitalization index that is designed to measure equity market performance in the global developed markets. (Source: MSCI Barra)
MSCI EUROPE INDEX: The MSCI Europe Index captures large and mid cap representation across 15 Developed Markets (DM) countries in Europe*. With 448 constituents, the index covers approximately 85% of the free float-adjusted market capitalization across the European Developed Markets equity universe. (Source: MSCI Barra)
MSCI JAPAN INDEX: The MSCI Japan Index is designed to measure the performance of the large and mid cap segments of the Japanese market. With 318 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in Japan. (Source: MSCI Barra)
S&P 500 INDEX: The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market, includes a representative sample of 500 leading companies in leading industries of the U.S. economy. Although the S&P 500 focuses on the large-cap segment of the market, with 75% coverage (based on total stock market capitalization) of U.S. equities, it is also an ideal proxy for the total market. (Source: Standard & Poor’s)
STOXX Europe 600: The STOXX Europe 600 index represents large, mid and small capitalization companies across 17 countries of the European region.
NIKKEI 225: The Nikkei 225 is a price-weighted equity index, which consists of 225 stocks in the Prime Market of the Tokyo Stock Exchange.
NASDAQ: The Nasdaq Composite Index is a stock index that conveys the overall performance of all Nasdaq-listed stocks according to market capitalization.
CAC 40: A broad-based index of common stocks composed of 40 of the 100 largest companies listed on the forward segment of the official list of the Paris Bourse.
DAX: The DAX is a German blue chip stock market index that tracks the performance of the 40 largest companies trading on the Frankfurt Stock Exchange.
MSCI EM: The MSCI Emerging Markets Index consists of 23 countries representing 10% of world market capitalization. The Index is available for a number of regions, market segments/sizes and covers approximately 85% of the free float-adjusted market capitalization in each of the 23 countries. (Source: MSCI)
BARCLAYS GLOBAL AGGREGATE BOND INDEX: The Barclays Global Aggregate Bond Index is an unmanaged index that is comprised of several other Barclays indexes that measure fixed income performance of regions around the world. (Source: Barclays)
BARCLAYS GLOBAL CORPORATE HIGH YIELD INDEX: The Barclays Global Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. (Source: Barclays)
BARCLAYS GLOBAL INVESTMENT GRADE INDEX: The Barclays Global Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by industrial, utility and financial issuers. (Source: Barclays)
HFRX Global Hedge Fund Index: The HFRX Global Hedge Fund Index is designed to be representative of the overall composition of the hedge fund universe. It is comprised of all eligible hedge fund strategies; including but not limited to convertible arbitrage, distressed securities, equity hedge, equity market neutral, event driven, macro, merger arbitrage, and relative value arbitrage. The strategies are asset weighted based on the distribution of assets in the hedge fund industry. Index returns are net of fees. Performance is reported on a 180 day lag, so recent performance numbers are flash estimates. (Source: HFR)
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