Setting the scene: a daunting year
I met with a new client last week — a professional investor himself — who described this last year as a daunting one. A barrage of news that caused one to question the wellspring from which we are taught that investor prosperity flows: global free trade, independent central banks, the probity of government treasury departments. Now, daunting was a great choice of words. So, let’s look back on an undoubtedly daunting year for some lessons to take with us into 2026.
Lesson one: resilience of global companies
The first lesson is the same as last year’s — we shouldn’t underestimate how resilient global companies can be in the face of daunting uncertainty: their profits and their share prices, particularly uncertainty around government policy. In local currency, total return terms for the global equity benchmark — it’s up 20%. The UK market is up 23% and the US equity benchmark is up 18%.
Remember, over the last decade, we’ve dealt with a global pandemic, war in Europe and the permanent remapping of global energy supplies, rates of inflation not seen for almost half a century, and profound trade wars. Throughout all that, markets have delivered strong returns. Patience, diversification, and a clear process have been rewarded. And we continue to manage risk actively — investing with discipline, keeping your financial goals at the heart of what we do.
The world is uncertain, but that’s always been true. And behavioural science teaches us that most of us have a tendency towards pessimism and other biases that at Rathbones we actively control for in our investment decision-making process.
Lesson two: elevated long-dated bond yields
The second lesson is that even as central banks cut interest rates, longer-dated government bond yields are likely to stay relatively elevated. That was a forecast of ours this time last year — it’s now a lesson, particularly here in the UK gilt market. Even though we correctly predicted the Bank of England would cut rates one to two more times than the market expected a year ago, we were also correct that 10-year gilt yields would end the year more or less unchanged.
Government bond yields can be broken out into three components:
- The expected path of real central bank policy rates
- Inflation expectations
- The so-called term premium — where expectations about future supply and demand for government debt play out
That term premium in the US was negative pretty much constantly since 2016 based on a common model for estimating it. But it has been firmly positive in 2025 as concerns grew about government debt and so-called fiscal dominance — whereby central banks are compelled to keep rates low — as well as uncertainty about future inflation. Indeed, one rating agency even cut the US’s credit rating in May.
Again, this dynamic in bond markets was something we predicted last year, particularly with regards to the UK gilt market, and we continue to prefer shorter-dated bonds heading into 2026.
Lesson three: correlation between bonds and equities has changed
Longer-dated bonds did no better than shorter-dated bonds during the tariff-induced equity market rout that took place between February and April this year. And in the most recent equity wobble in November, longer-dated bonds fell with equity markets. So our third lesson is that you can’t rely on a negative correlation between longer-dated government bonds anymore like you could during the first two decades of this millennium. Another reason we still prefer shorter-dated bonds and seek diversification within other parts of the portfolio.
Lesson four: don’t bet on political predictions
The fourth and final lesson I’ll phrase as a plea to all investors — please don’t pretend you know exactly what President Trump is going to do next and whether that is going to be good or bad for the US dollar. You may remember me despairing at some strategists and CIOs across the industry talking as though they had a mole in the White House and talking confidently that his policies would be good for the US economy, good for markets, and good for the dollar.
Well, the US growth rate has slowed by a third. US equity markets have delivered less than the global market and the dollar is down 6% this year. And everything tariffs did not raise the value of the greenback like so many confidently predicted. Of course, it didn’t really matter — markets powered ahead regardless, reminding investors that politics is often overreacted to in the short term. In short, investors tend to be pretty bad at predicting politics and pretty bad at predicting short-term currency movements. Prepare, stress test, manage risk — that’s what we do. But don’t make investments based on binary political predictions.
Closing thoughts and outlook
So 2025 was a year to remember — strong market returns but plenty to think about. We think these lessons will serve us well as we head into 2026. In my next video, I will discuss our outlook for the year ahead. In our base case, investors will be rewarded for staying invested. We are fully cognisant of some risks: a US-led economic slowdown in the first half of the year and the risk of AI-related returns being too slow to come through to fund the enormous expenditures planned by major technology companies. But there is also a risk of a melt-up — perhaps because of a re-synchronisation of global growth in the second half of the year or because AI drives more revenue growth or because EPS markets turn into a bubble. That’s not where we are today. And I’ll discuss our framework for monitoring that bubble risk in the next video too.
