The Rotation Thesis

2025 began under a cloud of uncertainty, yet many of the year’s major market themes unfolded as expected.

Global equities staged a strong recovery after April’s “Liberation Day” sell-off finishing the year with 13.9% positive performance, despite tighter liquidity and profit-taking slowing momentum into year-end.

Retail investors grew nervous that three years of strong returns might be ending, while institutional investors shifted to a more optimistic stance, a reversal that created opportunities for active managers amid growing dispersion.

US equities lagged behind every major region, validating concerns about stretched valuations and tariff headwinds. US large cap equities returned 9.8% to investors over 2025.

Tariffs weighed on US consumer demand without sparking inflation, leaving the Federal Reserve reluctant to cut rates even with a weakening labour market. Despite this caution, the Fed ultimately enacted three rate cuts over the year, lowering the funds rate by 0.75% to a midpoint of 3.625%.

UK delivered excellent returns to investors over 2026 with 25.8% performance. Lower valuations relative to global peers, falling bond yields, and sterling strength attracted international capital. The FTSE 100 powered to 81 new highs disregarding the political uncertainty highlighted by the Autumn budget.
 
Europe benefitted from historic defence and infrastructure investment plans, in particular Germany’s €500 billion special fund announcement in March 2025. Improving banking profitability driven by higher net interest income also supported lending activity across Europe. 2025 ended with an impressive 26.2% return for Europe.

Emerging markets was also a strong performer for the year, returning 24.4%. The strength was driven by robust demand for commodities, linked to the global infrastructure and AI investment buildout. South Korea stood out thanks to a tech-led boom. EM countries reliant on US demand faced headwinds from tariffs whilst companies with US dollar denominated debt benefitted from a weaker dollar.

Looking ahead, change and rotation define the outlook for 2026. The positive case rests on short-term interest rate cuts, fiscal stimulus, and a surge in AI-driven investment, which should support global growth and corporate earnings in the first half of the year. These dynamics could favour previously unloved areas such as US small caps and cyclicals, while dominant tech names may struggle to maintain leadership.

However, risks remain, geopolitical flashpoints, policy uncertainty, and the lingering impact of tariffs could disrupt momentum. If growth disappoints, defensive positioning may return; if growth accelerates too strongly, inflation and tighter monetary policy could follow.

The investment managers we work with are not rushing into major portfolio shifts. Instead, they tend to be positioning for opportunity as greater clarity emerges. The ability to closely monitor global developments and dynamically adjust where appropriate but always being guided by long-term fundamentals and a disciplined approach to valuations is likely to benefit investors.