“The trouble with our times is that the future is not what it used to be.” ~ Paul Valery, French Poet and Philosopher

Markets spent much of 2025 trying to hold two ideas in mind at once:

1. Disinflation is returning, and

2. A new productivity wave emerging through AI.

What made the year distinctive was the market’s resilience. Not even “Liberation-day” and the renewed spectre of 1930s-style tariff mercantilism was enough to derail risk appetite. Investors largely treated geopolitical shocks as transient noise, while anchoring on what felt structural: falling inflation and rising productivity.

Asset prices followed the textbook logic of discounting. As expectations for policy easing firmed, capital rotated into long-duration growth assets. From the post–Liberation-day lows on  April 9th to year-end, an equal-weight Magnificent 7 basket rose 67%. A vivid reminder that when the expected discount rate falls, the present value of growing future cashflows rises disproportionately.

Yet 2025 was not simply “mega-cap growth wins” again. The AI story broadened from a narrow ‘hyperscaler’ narrative into a capex-and-infrastructure cycle: power generation, grid buildout, cooling, semiconductors, components, cybersecurity, and defence. In macro terms, that is a shift from platform rents to a wider investment multiplier, which combined with a softer US dollar, helped revive the “rest-of-world” trade as global cyclicals and value exposures offered leverage to incremental demand.

Bonds on the other hand refused to confirm the disinflation story as rates stayed sticky. This was less a reflection of current inflation than of inflation memory. 2025 was the year markets repriced the risk that fiscal dominance, energy constraints, or renewed supply shocks could make inflation rebound quickly.

In many ways the market behaved like a perfect harmony with a behavioural finance textbook as the year’s standout winner ended up being gold. Not “risk-off” insurance, but a referendum on credibility on whether governments can sustain deficits without leaning on repression, and whether central banks can prioritise price stability if unemployment rises.

The key fragility remains the labour market. A cooling jobs backdrop should weaken demand and, via the Phillips-curve mechanism, reduce pricing power. But it also invites a policy response: easing alongside persistent deficits can reawaken inflation unless central banks, scarred by the recent cost-of-living crisis, keep policy tighter for longer.

Beyond the cycle sits a different uncertainty: AI’s capital intensity. If the cost of compute continues to rise and electricity demand accelerates, the inflation debate will not fade. Rather, it will evolve from wages to infrastructure bottlenecks.

Consequently, our conclusion for 2026 is nuanced: Disinflation may dominate near term, while inflation uncertainty rises medium term. The challenge is not choosing one story. It is holding both.

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MARKET REVIEW

Deflationary Boom Assets (Equities, Corporate Bonds, EMD)
Risk assets finished the year still balancing disinflation optimism with AI-driven growth narratives. Equity leadership broadened in December, with value (MSCI ACWI Value +1.92% (USD)) beating growth (MSCI ACWI -Growth +0.22% (USD)), and strong performance in Europe and the UK as market rose almost +4% in US Dollar terms during December. Over the course of the year, global equities delivered robust gains with the MSCI ACWI up +22.87% (USD). But dispersion mattered, as the S&P 500 (+17.88%) lagged several non-US markets (e.g., Europe +37% (USD); EM +34% (USD)). A softer dollar, which fell more than -9% over 2025, amplified non-US returns and helped justify higher equity multiples via the “lower discount rate” narrative. Credit remained constructive. US credit markets were up c. +8% and Euro corporates up c. +16% over 2025, while EMD remained largely resilient (Hard currency +12.16%, Local +9.29%), consistent with spreads staying contained as recession fears failed to fully materialise.

Deflationary Bust Assets (Government Bonds)
Government bonds were steadier over the year than the month-to-month noise implies: US Treasuries +6.32% in 2025 despite a small monthly dip (-0.33%) in December. The stickiness of yields reflected term-premium and “inflation memory” more than runaway inflation. Late-year policy easing as the Fed cuts of 25bp in December to a 3.5%–3.75% target range, supported duration at the margin, but did not trigger a classic bond melt-up.

Inflationary Boom Assets (Managed Futures, CTAs, Commodities excl. Precious Metals)
Despite a tough start to 2025, our systematic strategies and Managed Futures generally, had a solid December and mostly finished 2025 in positive territory. Commodities were mixed as the Bloomberg Commodity Index fell c. -1% in the month but were up double digits in 2025. Copper (+8.14% December / +38.67% 2025) spoke to electrification and capex intensity, while natural gas and WTI were notable laggards, falling in December and finishing 2025 lower than it started.

Inflationary Bust Assets (Precious Metals & Inflation-Linked Bonds)
The standout regime was inflation hedges via precious metals as Gold rose over +2% in the month and over +60% in 2025. A strong rally in Silver to finish the year confirmed the narratives, a mix of real-rate sensitivity, credibility concerns, and demand for stores of value as policy credibility is questioned. Inflation-linked bonds participated but less explosively: Euro Inflation Linked Bonds were up +14.37% in USD terms, while US TIPS rose c. +7% over the year. The macro message for 2026 is nuanced: disinflation may ebb through weaker labour momentum, yet the AI/infrastructure buildout (power, grids, security) keeps medium-term inflation uncertainty very much alive.

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To see graphs, download the PDF using the button at the top of this page.

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