December – An astonishing year in review

2025’s January effect was strong on the back of lowering inflation and strong Q4 2024 corporate results. But the first quarter of the year quickly turned nightmarish in the wake of a first wave of tariffs being implemented. US indices were hurting the most on fear that the tariffs would mean the return of an inflation that took so long to tame post Covid. The Nasdaq, for example, was down more than -10%. Investors had every right to panic at this point, but all of our partners remained headstrong and committed and did not regret it, with hindsight.

Then came “Liberation Day”, marked by anxiety and sleep deprivation as most global markets took a -15% hit over a 3-day period. At this point, it became clear that we were no longer in a financial world ruled by core economic fundamentals, but rather one that moves at the whims of just one person. The rest of the quarter completely erased the losses and more. This was attributable to the pause in tariffs given to countries to come back with a business offer to make up for the perceived imbalance. But given the geopolitical context (Ukraine-Russia peace talk collapse, Iran-Israel-US short war) we should consider ourselves rather lucky.

In Q3, tariffs finally started to come into effect and brought their lot of uncertainties, in particular with the impact they would have on inflation, profitability and, in turn, interest rates. Despite the uncertainty, there was no stopping the stock markets from breaking one record high after another. The Fed resuming to cut rates at the end of the quarter further fueled enthusiasm.

Q4 started off on day 1 with a US government shutdown, followed by a little scare over AI stocks. But all that didn’t stop the financial markets in their ascent. Finally, as the year drew to a close, the pessimistic data were just enough to slow down the momentum, but not enough to turn the trend around, with the Fed helping out a little by cutting rates for the 3rd time in as many meetings following an encouraging inflation figure. The negative data are rising unemployment, continuing contraction in manufacturing PMIs, poor consumer confidence.

Data source : Bloomberg

Looking back at the 2025 vintage, it turned out to be a year of everything rally, something unseen since the Covid pandemic. All major asset classes delivered positive performance, with precious metals leading the pack with gold up over 60% and silver over 140%, though the other commodities can’t compare. Then came emerging market equities, ending the year at +34% and developing markets behind at +21%. On the fixed income side, emerging market debt was also the big winner at +13%. With hindsight, our avoidance of emerging markets and non-US developed markets, which we perceived as having the highest to lose in the trade war and with a President that is all about America first, was our weakest bet. Some indices such as the MSCI Spain and MSCI Austria surged seemingly out of nowhere, performing around 60% in EUR and over 80% in USD terms.

Our summary recommendations

One of our biggest worries for 2025 was geopolitical risk, and with what happened In Venezuela at the time of writing and the dangerous rhetoric coming out of the US, we sadly believe that it will remain center stage in 2026.

Another one of our worries was the trade war, but in the end, tariffs were not as big a deal as we and most economists had anticipated.

2026 will have 2 significant events as far as investments are concerned. In May, current Fed chair Powell’s mandate will expire and the new chair, appointed by President Trump, is likely to be acting as a puppet, likely to result in interest rates going down significantly. The other significant event is the US midterm election, which will either consolidate Trump’s power or rein him in and perhaps even result in his impeachment.

We should also watch out for tech companies. We would like to see them start to show some sort of incremental profitability from all the AI investments, or debt and equity holders will begin to tire out.

From our side, we will remain positioned as we were at year end, meaning rather defensive in equities and significantly overweight in alternative investments and will also look at adding risk in fixed income to make up for the gradually decreasing yields.

Chart of the month

As the year comes to a close, perhaps this table makes more sense than a chart. It is a nice visual on which sectors performed best by year and on average (Communication, Information Technology, Industrials). It also shows the wide disparity between the worst and best performing sectors each year. In 2025, that range was about 30%, while some extreme years have a disparity close to 40%. This demonstrates why we are very reluctant to make sector or thematic bets in our tactical views.

Source: novelinvestor.com

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