Investment update: what happened in markets?

What happened in markets?

The so-called ‘Santa rally’ failed to materialise in December as conflicting economic data led to a mid-month sell-off, before global stocks clawed their way back to reach new highs. US stocks underperformed the rest of the world as mining and bank stocks led gains, sectors with heavy representation in European and emerging markets.

In fixed income markets, UK government bonds (‘gilts’) made a modest positive return despite global government bonds registering negative returns overall, reflecting ongoing support for UK assets following November’s Budget. Japanese government bonds sold off in response to the approval of a new economic stimulus package, and as the Japanese central bank once again raised policy interest rates with the aim of bringing inflation back in line with its target.

Volatility in commodity markets was notable, with gold and silver rising to record high prices. Industrial metals such as copper also enjoyed a strong month, as demand linked to artificial intelligence, defence and the energy transition underpinned a commodity frenzy in 2025. However, oil prices ended the year near four-year lows as oil production increased into a market experiencing weaker demand.

What did we do in the funds?

It was another quiet month for portfolio activity as markets processed conflicting economic data and a busy month of central bank activity, which included interest rate cuts from the US Federal Reserve and the Bank of England. However, as referenced above, the Japanese Central Bank hiked interest rates, and is likely to do so again in 2026.

Across the VT Esprit funds, we switched out of the iShares Broad $ High Yield Corporate Bond ETF into the JPM Global High Yield Corporate Bond Multi-Factor Active ETF. This provides exposure to global rather than US high yield bonds, is actively managed by JP Morgan, and is a more cost-effective vehicle to access an asset class on which we continue to have a positive view.

We also completed a switch out of the iShares UK Equity Index fund into the Vanguard FTSE 100 Index fund, a move which means we now have our preferred holdings in UK stocks at their target weights across the VT Esprit fund range.

What is the outlook?

The outlook for US corporate earnings growth looks far healthier than for the rest of the world, with US companies expected to deliver low double-digit earnings growth in 2026. However, stronger-than-expected economic growth and stubborn inflation may prevent US bond yields moving much lower from current levels without a jump in US unemployment or recession (as a reminder, bond yields typically move inversely to bond prices).

At the beginning of 2025 we saw US stocks underperform the rest of the world materially, fuelled by concerns over US stock market valuations, government policy and a weaker dollar. However, we think the odds of a repeat in the first quarter of 2026 are low given that stock markets other than the US enjoyed particularly strong performance last year, despite the absence of any meaningful earnings growth for most companies.

The artificial intelligence (AI) story remains key to the performance of US stocks, and as we have previously written, we do not believe the world is in an AI bubble, nor on the cusp of an AI-related meltdown in global stock markets. In the near-term, demand for AI goods and services is likely to continue outstripping supply, and we see AI scepticism and the recent fall in technology stock prices as being healthy pre-cursors to a continuation of the longer-term bull market in AI-related stocks.

We also remain positive on the prospects for Japan, where the earnings outlook is equally attractive, whilst there is scope for Europe to outperform rather modest growth expectations as German fiscal stimulus starts to work its way through the region.

Finally, the performance of the UK economy should have little bearing on the performance of the FTSE 100, given that the majority of company revenues are earned overseas, although we do see scope for UK mid and small caps (finally) to give their large-cap peers a run for their money as UK interest rates fall faster than expected, providing a boost to the domestic economy and consumers.

We wish all our readers a happy, healthy and prosperous 2026.

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Written by:

Charlie Lloyd
Head of Investment, Shackleton

Wayne Nutland
Senior Investment Manager, Shackleton

 

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