2025 Investment Outlook – Half Year Review and Look Ahead to the Second Half of the Year

09/07/2025 11 minutes

Looking at headline returns over global investment markets during the first half of 2025, one could be forgiven for thinking that the period was one of relative calm with low but positive returns from bond markets, and reasonable returns from the major global equity indices, at least when measured in their own local currencies.

Going into the year there was a strong consensus that the stage was set for further outperformance of US equities and underperformance of European equities. This was driven by the expectation that the election of Donald Trump with his pro-growth, tax cutting agenda would support US equities whilst the imposition of trade tariffs would hit economies outside of the US, and that in any case, any tariffs would be modest in scope.

Liberation day

This positive consensus going into the year was shattered when Donald Trump issued his much-anticipated tariff rates on ‘liberation day’, 2nd April. The scope and extent of the tariffs was far worse than markets had anticipated, leading to very sharp weakness in equity markets. The week ending Friday 4^th April was the third worst week for the S&P 500 index in the last 10 years, albeit during the covid period, several weeks of poor returns occurred in close proximity.

Source LSEG Workspace, as at 1st July 2025. Weekly change in the S&P 500 index, USD terms.

Markets subsequently rebounded on news that Donald Trump had announced a 3 month pause in the implementation of tariffs and appeared keen to do deals. Perhaps more encouragingly for markets is that Trump appeared to moderate his behaviour in the face of market movements. In particular, a sharp upward move in US government bond yields in early April appears to have acted as the constraint on the President. Higher bond yields meaning more expensive government borrowing and mortgages for US consumers. Having made an appearance in the UK in 2022, the bond vigilantes appeared to be back, this time in the US.

Although officially the tariffs are on ‘pause’ until early July, global markets have taken the view that Trump has blinked and with US macro-economic data remaining broadly resilient, equity markets have recovered all of their tariff related losses.

Impact of escalation of Middle East geopolitical tensions

Just when markets were focused on tariffs and trade policy, events in the Middle East escalated further, with Israel and then the US bombing Iran, a reminder that background risks can quickly come to the foreground. The market impact was relatively muted, with markets (seemingly correctly) viewing that Iran’s strategic options were limited with a contained and brief period of military action the most likely outcome. Oil initially spiked to the low $80s per barrel but has since fallen back to around $70, towards the lower end of the range of the last few years.

King dollar?

Although equity markets have recovered from the tariff-induced weakness, the US dollar has continued to decline, perhaps indicating that whilst still unquestionably the world’s reserve currency, the US dollar may have lost some of its halo as a uniquely safe global asset. In our view, this hit to the status of the US dollar is likely one of the reasons gold has been so strong recently, rising 26% in US Dollar terms in the first half.

It should be borne in mind though, that the US dollar had performed strongly for several years including in late 2024, hence recent moves have likely been exacerbated by that previous strength rather than being purely an indicator in the loss of status in the US dollar.

US equities – positive or negative returns?

Whilst measured in their own currencies most global equity indices delivered positive returns during the first half of 2025, the weakness in the US dollar has meant that for many investors outside of the US, US equity returns have been negative when translated back to their home currencies.

In US dollar terms, the S&P 500 has returned 6.0% so far in 2025, an impressive recovery for the index which at one point was down 15% during the height of the trade tariff turmoil. However, the weakness in the US Dollar means that when measured in Sterling, the S&P 500 has returned -3.1%. Indeed, on the last day June the S&P 500 made a new high in US Dollar terms, but to a sterling or euro-based investor, the index is some 8-10% from the highs in the first quarter.

Source LSEG Workspace, net total return, 6 months to 30 June 2025 in currency stated

Looking beyond the US

A stronger performance from equity markets outside of the US as well as currency movements have seen a notable divergence in the performance of US equities versus the rest of the World. After a prolonged period of US outperformance, equities in other markets have performed better so far this year, when measured in the same currency. This represents a sharp reversal in a trend of US outperformance which has been in place for over a decade. Whilst currency movements have exacerbated this divergence so far this year, several parts of the European (and UK) equity market have delivered strong underlying returns. Within Europe, the rally was broad based, with particularly strong returns from cyclical sectors like Financials and Industrials, which have benefited from more positive sentiment, especially with respect higher infrastructure and defence spending.

Source LSEG Datastream, performance of the S&P 500 relative to MSCI World excluding USA, rebased to 100 in US dollar terms. 10 years to 30 June 2025.

Emerging markets also outperformed US equities during the first half, although as ever performance was mixed across different emerging countries. Chinese equities, the largest component of emerging market equities performed well, albeit not as strongly as European or UK equities. Interestingly, Hong Kong listed Chinese equities, which have a large weighting to technology, outperformed the more domestically oriented onshore China equity market which continues to reflect a lacklustre Chinese economy. With some similarities to US equities, Indian equities underperformed after a prolonged period of outperformance had led to elevated valuations.

How do we manage currency risks?

Our approach to managing currency exposure in portfolios reflects our views that currency movements are essentially impossible to predict but that currencies also offer diversification and useful portfolio construction properties, particularly for higher risk asset classes.

When investing in overseas bonds, we typically invest on a currency hedged basis, meaning that changes in foreign exchange rates do not impact the value of the bonds we invest in. As bonds are typically relatively low risk assets, this enables us to invest in bond markets globally without taking foreign currency risk.

For equity markets, we typically invest on an unhedged basis, meaning that movements in foreign exchange rates do impact the values of the assets we invest in. Essentially our view is that when investing in the shares of global companies, exposure to a complex set of currency relationships is an inherent part of this investment. For example, a company like Apple will manufacture and retail its products in many underlying currencies even through its share price is denominated in US dollars. Importantly, from a portfolio construction perspective, historically sterling has tended to weaken in value during periods of poor equity market performance, something which has notably ‘buffered’ negative equity returns for sterling investors during historic equity bear markets.

As shown in the chart below, during the height of market fears during the covid pandemic, the S&P 500 fell some 30% measured in US Dollars, but as the USD had strengthened compared to GBP, the fall in Sterling terms was about 20%.

Source LSEG Datastream, total return, 3 months to 31 March 2020 in currency stated

H1 return wrap-up

Overall, when measured in GBP global equity markets returned 0.6% during the first half of 2025, with the heavily weighted US market weighing on the overall return. Measured in Sterling, US equities returned -3.1%, with 9.1% from UK, 13.5% from Europe ex UK, 2.1% & 5.3% from Japan and Emerging Markets respectively.

Turning to bond markets, here despite fears over persistent government borrowing in several economies, returns have been respectable, with US Treasuries returning 3.8% and UK Gilts 2.5%. Corporate and High yield bonds have delivered higher returns, as should be expected (3.7% and 4.4% respectively). High Yield bonds showed some weakness during the tariff turmoil, but the weakness was fairly well contained given the size of the fall in equity markets. (Bond returns hedged to Sterling.)

Elsewhere, the period was another strong one for gold, whilst UK listed property enjoyed solid returns after many disappointing years, with merger and acquisition activity acting as a catalyst, something which may be a positive sign for UK listed assets more generally. Whilst acquisitions are a welcome means of catalysing value, longer-term they are negative for the health of the UK equity market with the number of listed companies continuing to decline. A genuinely pro-growth government would consider abolishing stamp duty on UK share purchases (which isn’t levied on UK investors purchasing overseas equities), however the politics and budgetary arithmetic appear increasingly difficult.

Looking ahead

US companies continue to offer world-leading growth and profitability characteristics, meaning that they will likely always have an important place in portfolios, although we tentatively suggest that the period of very strong US outperformance may now be behind us. During the first quarter of the year we introduced an equal weighted US equity fund, where every stock in the S&P 500 has an equal weight, which reduces overall exposure to the large technology stocks. We continue to hold the Sanlam Artificial Intelligence fund, albeit at lower weightings then previously, and after a blip following the emergence of Deepseek as a potential threat to the likes of Nvidia, investor enthusiasm for AI-related stocks has returned. This fund invests in stocks related to artificial intelligence across geographies and sectors, including sector beneficiaries of AI rollout such as healthcare. More recently we made modest increases to weightings to European and UK equities, recognising relatively attractive valuations and looser fiscal policy.

Governments across the world continue to face fiscal challenges. Here in the UK, although the government seems to be more keenly aware of the trade-offs between growth and taxation, its budgetary headroom has become even tighter as a result of recent policy climbdowns such that tax rises are likely in the Autumn budget. Tax rises usually results in lower growth, so downside pressures are likely to emerge for sterling and gilt yields in the second half of the year. Like many others, we also remain concerned about the dwindling number of UK listed companies and the lack of new IPOs. We hope policy action is taken to address these issues as a healthy UK economy relies on flourishing UK capital markets.

US government bonds continue to offer unparalleled qualities, but with ongoing sizable fiscal deficits and concerns over central bank independence, some of the shine has come off. Whilst we continue to believe that US government bonds are an important asset for portfolios, particularly lower risk portfolios, we added European government bonds in the first quarter of the year following a notable increase in European yields on the news of increasing German fiscal spending. After a strong second quarter for US government bonds, we made modest reductions to increase high yield and emerging market bonds, which offer attractive yields with less sensitivity to interest rate risk.

Overall, and despite the tariff-related shock in early April, we’re cautiously optimistic for the outlook for global markets. Although the tariff ‘pause’ is set to end in early July, the US administration seems keen to enter into agreements, whilst the sharp rise seen in US bond yields seen during the April episode and the recovery in US equities since, should dissuade Trump from returning to his previous ‘maximalist’ tariff rates.

So far there have been few signs of the tariff turmoil showing up in the economic data, although of course this could change, and recent events in the Middle East are a reminder that Trump retains the ability to surprise. Recent events are also a reminder that diversification is, as always, critical.

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Important information:

This document is issued by Shackleton, which is a trading style of Shackleton Advisers Limited. Shackleton makes no warranties or representations regarding the accuracy or completeness of the information contained herein. We have prepared the following document based on our view of the current market. Nothing in this document shall be deemed to constitute financial or investment advice in any way. We recommend you speak to your adviser before making any decisions. This document shall not constitute an invitation or inducement to any person to engage in investment activity. Past performance is not a guide to future returns and the value of capital invested and any income generated from may fluctuate in value.