Throughout what has proved to be a turbulent year so far, financial markets have continued to exhibit considerable resilience despite a backdrop of heightened geopolitical and monetary policy uncertainty. As active portfolio managers, we have been forced to navigate periods of market volatility, with the April 2nd ‘Liberation Day’ announcement driving a rapid repricing across global financial markets as tariff implementation clouded the outlook for global economic growth. Since the tariff-induced sell-off, we have seen a rapid recovery in risk appetite, with US equity markets hitting a number of all-time highs, whilst Asian and European markets have benefitted from a broadening out of equity market strength.
All Eyes on the Fed
The aggressive trade policies laid out by the Trump Administration in the early months of the year drove fears that inflation would once again surge, forcing the US Federal Reserve to retain a hawkish stance despite the potential for slowing trade to weigh on economic growth. After a remarkably strong 2024, the US economy has slowed significantly, with a rapid weakening of the US labour market resulting in the US Federal Reserve cutting interest rates in September following five straight meetings at which rates remained unchanged.
The build up to September’s rate cut came at a time where Fed Chair Powell was coming under increasing pressure from President Trump to lower borrowing costs, and the prospect of more rapid policy loosening is widely seen as positive for bonds as well as equities, with lower interest rates encouraging investors to put their cash to work.
Following the September rate cut, Fed Chair Powell noted that the decision to lower rates was a ‘risk management cut’, reflecting the softening labour market which can have a significant impact on consumer sentiment, and therefore spending which remains the key driver of US economic growth. Financial markets have moved rapidly to price in further monetary policy easing over the coming months, with one cut priced in to both the October and December Fed meetings.
Challenges Remain Across Europe
Heading into the final months of the year, challenges are continuing to mount for UK Chancellor Rachel Reeves as UK government borrowing has consistently overshot forecasts. With inflation remaining above target, the Bank of England has so far been cautious in its bid to lower borrowing costs, cutting interest rates at alternative meetings so far since beginning its cutting cycle in August 2024. Elevated borrowing costs, alongside recent policy shifts, has resulted in the Chancellor facing what many economists believe to be a £25 billion black hole.
Despite households facing a period of moderating wage growth and a cooling labour market, it is increasingly likely that we will see a host of tax increases and spending cuts as the Labour government looks to balance the books. Further fiscal tightening, alongside stubborn inflationary pressures, is widely expected to weigh on economic growth moving into 2026 as fears of a period ‘stagflation’ are rising as economists forecast a prolonged period of stagnant growth.
Across continental Europe, we have also seen risks emerge in France, where political uncertainty has unsettled bond markets as the fiscal deficit shows no signs of being addressed by a government lacking a clear majority. A rebound in earnings growth alongside greater defence and infrastructure spending remain likely tailwinds for European equities in the fourth quarter.
Geopolitical Concerns Linger
Since the Russian invasion of Ukraine in 2022, geopolitical instability has been cited by economists as one of the most significant risks to the global economy. The ongoing conflicts in Europe and the Middle East have continued to unsettle European energy security, while the Israel-Hamas war has fuelled regional instability as supply chain disruption remains a distinct possibility.
While the conflict in the Middle East has fed into a particularly volatile year to date for oil markets, the economic fallout has so far been relatively contained. There is of course, the potential for a spike in tensions to lead to pivotal disruptions such as the Strait of Hormuz closure, which analysts believe could push global oil prices rise to over $120 per barrel, complicating the outlook for interest rates across key developed economies. As things stand, investors must be wary of another spike in tensions as any shift in the outlook can have a significant impact on financial markets given how stretched valuations appear and the minimal level of risk currently priced in.
Our Views
Despite short-term uncertainties, as we look ahead over the medium-term, equities are set to remain as the core engine of portfolios, driving capital appreciation. Moving into the final quarter of the year, it is clear that risks remain elevated as US valuations in particular appear stretched, whilst an unstable geopolitical backdrop can shift rapidly as we have seen in recent years with conflicts in Europe and the Middle East weighing on risk appetite.
It is our view that in the short-term, equity assets continue to offer opportunities, but greater selectivity is required to capture them. Over what has been a volatile year-to-date, we have focussed on maintaining a high level of diversification across the OCM portfolio suites, favouring quality, actively managed assets which have been able to capture the upside during periods of positivity, but also deliver a level of protection during periods of market turbulence. We have seen active funds outperform across Europe and the UK in particular this year, and we believe this is a theme which is likely to persist as key headwinds remain.
Across our actively managed OBI Volatility Managed portfolio suite which takes a more tactical approach, we are currently holding elevated levels of cash as we look to manage risk following a strong period for portfolio performance. After a remarkable recovery from the April lows, we took the opportunity to take profits on richly valued equity assets which we feel offer little upside potential given the significant downside risk. With key risks clouding the outlook for US monetary policy in particular, further market turbulence in our view remains likely, and we are looking for any opportunities which may arise, with the elevated cash levels allowing us to move quickly should valuations become more attractive.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
