Investment Update August 2025

Investment Update Aug 25.pdf

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Key Highlights:

• Longer-dated government bond yields rose across markets during the first half of the year, reflecting higher borrowing costs for governments and lower market confidence in longer duration debt.

• The Quarterly Refunding Announcement (QRA) confirmed increased funding needs to be met mainly through short-dated Treasury Bills.

• The S&P 500 gained 3.1% in July, supported by strong Q2 earnings, ample liquidity, and optimism around new trade deals. The NASDAQ rebounded with gains in technology stocks amid easing inflation pressures.

• US GDP grew at an annualised 3% in July, driven by improving consumer confidence. The Federal Reserve held interest rates steady, despite White House pressures to ease debt servicing costs.

• The US dollar has weakened approximately 10% since President Trump took office, with recent depreciation seen as an intentional policy shift and further declines expected.

• European equities posted modest gains in July, with the STOXX Europe 600 rising 1.6%, supported by stronger economic data, steady ECB policy, and progress on US-EU trade negotiations.

• The FTSE 100 hit record highs above 9,000, defying UK economic headwinds such as GDP contraction and rising unemployment, while Sterling surged to a three-year high against the US Dollar. Japan’s equity markets surged following a $550 billion investment pledge in the US, although rising inflation and bond yields have moved from 0.02% to 3.11% raising fiscal concerns.

• The Shanghai Composite Index rose 4.1% in July, reflecting economic stabilisation and improved investor sentiment supported by 5.2% Q2 GDP growth and strong capital inflows.

• Emerging markets outperformed, with the MSCI Emerging Markets Index up 17% year-to-date, benefiting from a weaker US dollar, improving trade dynamics, and bullish sentiment from major investment banks.

• Our Portfolio positioning delivered strong results, driven by a 50% USD hedge reducing currency risk, solid gains in regional equities, and resilient performance from short-duration fixed income amid rising long-term yields and anticipated rate cuts.

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During the first half of 2025, we observed a steady rise in longer-dated government bond yields. This is a global phenomenon, affecting developed markets across the board. Higher bond yields translate into increased borrowing costs for governments—just as global debt reaches record highs. July has been a strong month for risk assets with decent gains made.  That said, we anticipate a healthy pull back during late summer.  We explore the implications of rising bond yields, and the possible pathway for equities in the Investment Update that follows. In July, aided by ample liquidity, US markets demonstrated resilience amid ongoing trade policy uncertainty and evolving signals from the Federal Reserve. The S&P 500 rose 3.1% during the month, driven by stronger than expected Q2 earnings and optimism surrounding new trade agreements with Japan, the EU, and other Pacific nations. While markets could have rallied further, investors remained cautious, weighing the potential impact of new tariffs and the Fed’s “wait-and-see” stance on interest rate cuts. Meanwhile, the Nasdaq continued its strong recovery from the April setback, buoyed by gains in the tech’ sector and easing inflationary pressures. Linked with the step-up in technology dependence and AI emergence, we note America’s demand for electricity reached a new peak in July.  Overall, investor sentiment improved, supported by progress in trade negotiations and solid corporate earnings.

The Dollar Index stands 10% lower than when President Trump came to office although the greenback has performed better during the past month or so.  We anticipate some further dollar weakness, and we recognise this trend as a specific policy.

American GDP rose at an annualised rate of +3% in July, marking a strong rebound from the previous month. Consumer confidence also registered a positive reading, while inflation edged only modestly higher. The Federal Reserve opted to keep interest rates unchanged, despite significant pressure from the White House and some dissent within the ranks of the Open Market Committee. Whitehouse pressure seeks to push interest rates lower than GDP to ease debt servicing costs.  Given that ISM data for manufacturers has remained in contraction for the longest stretch on record, we believe there is room for rate cuts. It’s possible that the Fed is exercising an abundance of caution, influenced by the missteps made in the aftermath of the pandemic—particularly the Chairman’s characterisation of the inflationary surge as “transitory,” which likely still weighs heavily.

The Quarterly Refunding Announcement (QRA) in July offered few surprises.  Additional debt will be raised to fund America and this new debt issuance will be predominantly short dated Treasury Bills, rather than longer dated Treasury Bonds.  In the event other developed markets follow astern of this policy, we estimate there could be currency debasement against hard currencies such as gold and possibly Bitcoin.

The chart below shows earnings growth for the “Magnificent 7” technology companies and the remainder of the S&P 500, known as the “S&P 493”.

As debt continues to soar across the world, we have observed a global phenomenon of longer dated government bond yields rising for all developed nations.  This phenomenon shows a lower market confidence in longer duration debt.  Governments are issuing debt in shorter dated tranches to avoid the higher costs associated with longer duration issuance.  US debt has reached $37 trillion and 120% of GDP, whilst in Japan debt to GDP stands at a mind boggling 260%.  The UK is struggling to operate within the so-called fiscal rules, and the Eurozone has extended its debt ceiling.  Readers will be more interested in the consequences of such moves.  In essence we have entered an era of fiscal dominance where debt management will play a core role for central banks and governments.  Consequently, investment strategies aligned to yield curve management, some inflation and currency debasement are likely to yield better results. Ongoing liquidity helps ease debt refinancing and helps to push real asset prices higher.

European markets posted modest gains, with the STOXX 600 index rising by 1.6%. Investor sentiment was buoyed by strong economic data showing faster-than-expected growth across the Eurozone, and the European Central Bank's decision to hold interest rates steady as inflation neared its 2% target. Optimism around ongoing trade negotiations between the EU and the US also contributed to market strength, particularly in sectors vulnerable to tariffs as President Trump and the EU reached agreement. Overall, the month reflected cautious optimism amid improving macroeconomic indicators and stabilising monetary policy.

Europe remains America’s largest trading partner. The tariff agreement reached in July appears to favour the US, in our view, although the 15% tariff still allows trade flows to continue, enabling European companies to thrive. Equity markets reflected this optimism in the aftermath of the deal. Another positive development for Europe is enhanced energy security, with the US pledging support to ease the pressure stemming from past errors —particularly when reliance on Russian energy became dominant.

The image, courtesy of CNN shows the US/EU trade deal announcement in July. UK markets defied economic headwinds, with the FTSE 100 reaching a record high above 9,000 points despite signs of a slowing economy. The FTSE 100 is not a true reflection of “UK PLC” and much of the earnings growth recorded is derived outside Great Britain.  The dominance of certain sectors such as mining, banking and pharmaceuticals is also relevant. The pound also strengthened, hitting its highest level against the dollar in over three years. This market optimism came amid geopolitical tensions and rising inflation, which stood at 3.6% in June, driven by higher food and fuel costs. Although GDP contracted by 0.3% in April and unemployment rose to 4.6%, investor sentiment remained upbeat, supported by expectations of interest rate cuts from the Bank of England and an improving global economic backdrop.  Chancellor, Mrs Reeves is struggling to maintain the so-called fiscal rules and operate within the debt ceiling committed to in the Government’s manifesto.  Will we see a notable further hike in taxation, cuts to services or an acknowledgement that the debt ceiling must rise?  How will Gilt markets react if the debt burden is allowed to rise even higher?  We should see some decisions later this year.

Meanwhile in Japan, equity markets performed strongly on the back of a trade deal with America which was considered positive overall, although once again, we estimate the deal to benefit the United States most.  By pledging an investment of $550 billion in the creation of factories in America and other investments, Japan has effectively agreed to spend 10% of her GDP in the United States.  Investor sentiment turned bullish and trading activity in domestic stock spiked notably higher.  Corporate earnings remain strong.

We are mindful of Japan’s soaring national debt and the presence of inflation, yet the inability to raise interest rates meaningfully to control it, for fear of hiking debt servicing costs further.  Japanese bond yields moved from 0.02% to 3.114% and yet valuations remain higher than we consider appropriate with such a move.  We monitor the Japanese fiscal position carefully.  The General Election saw power passing to smaller parties and pressure on Japan’s prime minister to resign.  We are mindful of any uncertainty this may bring.

China’s markets surged, with the Shanghai Composite Index jumping 4.1% amid renewed optimism over US-China trade talks and signs of economic stabilisation. A robust Q2 GDP growth of 5.2%, government stimulus, and strong southbound investment flows into Hong Kong helped lift investor sentiment. The MSCI China and CSI300 indexes reached multi-year highs, reflecting broad-based recovery across sectors.  The People’s Bank of China is adding liquidity which assists asset prices at home and abroad.

Emerging markets (GEMs) also continued their strong performance, with the MSCI Emerging Markets Index up 17% year-to-date, outperforming developed markets by over 6 percentage points. JPMorgan and Goldman Sachs both turned bullish, citing improving trade dynamics, rising IPO activity, and notably a weaker US dollar as key drivers.

At portfolio level, we held off on making any changes last month. Our current positioning has proven advantageous, enabling us to benefit from gains in UK, European, and US equity markets, whilst our 50%-dollar hedge also added value year-to-date. Japan also joined the rally late in July with our allocation benefitting.  Our fixed income allocation remains conservatively positioned at the short end of the yield curve, which stands to benefit from future rate cuts while shielding us from the global trend of rising longer-dated yields, and falling capital values.  Ample liquidity has certainly supported real asset prices during July.

We anticipate a pullback in equity prices, which we may well view as an opportunity to increase our US exposure while conditions remain supportive for risk asset appreciation.  However, we need to make that call when the time comes and we shall update you when a decision and timing is reached.

Year-to-date performance relative to peers remains strong, and we aim to preserve this position without taking on undue risk. Overall, there does appear to be a shift in focus from rebound to risk as the recovery from the April low runs its course and seasonal headwinds begin to weigh. Short-term technical factors look a little stretched, pressure continues to build, but medium/longer-term trend indicators remain healthy indeed.  We look forward to providing another update on our progress next month.

Written by the Alpha Beta Partners Investment Team

All sources Bloomberg unless otherwise stated.