As we begin 2026, it is appropriate to reflect on what has been a complex and at times unsettled period for investors. Conflict in Ukraine and Gaza, heightened political uncertainty, trade and tariff tensions, the continuing effects of higher inflation and interest rates have all contributed to a challenging global backdrop. ‘Markets have also experienced episodes of increased volatility, including around the so-called ‘Liberation Day’ which briefly unsettled investor sentiment. Despite these headwinds, global economic activity has proved more resilient than many feared, financial markets are ending the year in relatively good shape.
Inflation remains a persistent theme driving markets and globally inflation numbers have continued to moderate over the course of the year, although it remains above central bank targets in many economies. At the same time, the US dollar has weakened from its earlier highs, reflecting shifting interest-rate expectations and a gradual improvement in global growth prospects outside the United States. A softer dollar has provided some support to non-US assets and commodities, while also underlining the importance of holding diversified currency exposure within portfolios.
In the US and Europe, consumers continue to feel the effects of higher prices, with inflationary pressures compounded in part by trade and tariff uncertainty. However, employment levels remain relatively strong, labour markets remain tight in many sectors, and wage growth is helping to narrow the gap between prices and disposable incomes. We also continue to see significant demand for investment across both public and private assets, particularly in infrastructure. This includes investment required to support the growth of digital capacity and artificial intelligence, as well as spending on defence and energy security in response to geopolitical challenges.
In recent years concentration of market returns has increased, particularly within US equity markets and the technology sector. While this has supported headline index performances, it has also increased risk for investors who rely heavily on passive or index-tracking strategies. A broader, diversified approach across regions, sectors and asset classes could mitigate this risk, with regional areas such Japan and Emerging Markets outperforming in the period, coupled with sectors such as financials, energy and utilities all making positive contributions. We are mindful that valuations for many of the largest index constituents now appear demanding and, in some cases, difficult to justify on fundamentals alone, making diversification and active stock selection increasingly important. The companies held within client portfolios are, in our view, global leaders within their respective fields. They benefit from strong competitive positions, experienced management teams and robust balance sheets, enabling them to allocate capital effectively towards growth, productivity and efficiency.
Artificial intelligence has been the most prominent structural theme influencing markets during the year. Investors have the potential to benefit from the need to expand computing capacity and supporting infrastructure. That said, we remain realistic about the pace of adoption. While the long-term opportunity is significant, large-scale implementation will take time and require substantial investment in data, energy and physical infrastructure. As with previous technological developments, early beneficiaries are emerging, but expectations and valuations for some companies have moved ahead of reality.
Alongside equities, diversification across other asset classes has again proved its value. Gold, for example, delivered a particularly strong performance over the year, recording its best annual return since 1979. In a period marked by geopolitical uncertainty, currency weakness and shifting interest-rate expectations, gold once again demonstrated its role as a useful diversifier and store of value within portfolios. Shorter-dated fixed-interest investments, particularly discounted UK gilts offer an attractive and tax-efficient alternative to holding large cash balances, providing a combination of income certainty and a tax-free capital uplift when held to maturity, with a gross equivalent yield of around 5%. This stands in contrast to cash held on deposit, where returns have continued to fall. In real terms, and after tax, this once again highlights the growing opportunity cost of holding excess cash on deposit at a bank rather than investing in high-quality, tax free, UK fixed-interest assets.
Looking ahead, while uncertainty is likely to persist, we do not view all volatility as negative. Periods of market weakness can create opportunities to add to high-quality investments at more attractive valuations, as we have been able to do during previous periods of heightened volatility. While geopolitical developments and policy decisions remain difficult to predict, there is also the possibility of more constructive outcomes, including progress towards resolving existing conflicts and greater policy clarity as political cycles evolve. The Trump administration could decide that the US economy needs greater predictability and better outcomes, and continue to adjust policy accordingly. The US will also have midterm elections in the fall. With significant concerns about employment, inflation and interest rates, it is possible that President Trump will take further steps to reduce or lift tariffs as he did with China and semiconductors just this month, and these factors would be incrementally positive for some companies next year.
The value of securities and the income from them can fall as well as rise. Past performance should not be seen as an indicator of future returns. All views expressed are those of the author and should not be considered a recommendation or solicitation to buy or sell any products or securities.
