Global Markets End 2025 on a Strong Note
The year 2025 has been marked by significant political noise, inflation surprises, and shifting central bank signals. However, despite these challenges, global markets are closing out the year on a strong note. The Federal Reserve’s first rate cut of the year in September marked a turning point in policy sentiment, leading to a strong performance by risk assets, particularly in emerging markets and China.
A Turning Point in Policy Sentiment
The rate cut, described as ‘insurance,’ was a clear indication that liquidity is back, and risk appetite is alive. This, combined with lower tariff-induced inflation and a powerful rally driven by artificial intelligence (AI) investment, has led to a surge in risk assets. The message for markets is clear: AI spending is booming, and risk appetite is alive.
Cyclical Outlook
Looking ahead, the cyclical outlook remains constructive. Global inflation trends vary depending on the region, with rising inflation in Japan, volatile inflation in Australia, easing inflation in Europe, and deflationary pressures in China. However, the broader global trajectory points to moderation, with tariff-related pressures proving temporary and modest.
Central Banks’ Stance
Central banks are increasingly aligned in their stance, with most major emerging and developed regions still cutting interest rates. The Federal Reserve is likely to deliver additional rate cuts over the next 12 months, while the European Central Bank has paused, and the Bank of England is nearing a similar position. The Reserve Bank of Australia has shifted to a cautious stance, keeping rates on hold amid upside inflation surprises.
Growth Risks
Growth risks now lean to the upside, with strong corporate balance sheets and accelerating AI-driven investment underpinning a base case of a soft landing. If productivity gains persist, the cycle could extend well into 2026 and beyond, potentially ushering in a ‘jobless expansion’ where growth continues without significant labor market pressure.
Asset Classes with Growth Potential
Against this backdrop, some asset classes stand out for their ability to combine resilience with growth potential. These include:
Global and Emerging Market Equities
Emerging markets remain a bright spot as dollar liquidity eases and global trade stabilizes. These markets offer attractive valuations and cyclical upside, standing to benefit from structural participation in AI-driven productivity gains. Global equities also remain compelling, supported by strong fundamentals, with return on capital near historic highs and margins and earnings showing resilience.
Unlisted Infrastructure
Unlisted infrastructure continues to attract attention for its ability to deliver stable, inflation-linked returns alongside long-term growth potential. AI adoption is amplifying demand for digital infrastructure, particularly data centers and fiber networks, which provide the compute capacity required for advanced technologies.
Risks and Challenges
While the outlook is encouraging, risks are not absent. Downside scenarios include renewed trade tensions, fiscal instability, and questions around central bank independence. On the upside, faster-than-expected productivity gains from AI and automation could further lift growth and market sentiment. Valuation concerns, particularly across US equities and the AI space, are potential contributors to volatility.
Conclusion
In conclusion, the global markets are ending 2025 on a strong note, driven by easing policy, resilient fundamentals, and transformative technological investment. While risks are balanced, the outlook is cautiously optimistic. As we look ahead to 2026, it’s essential to capture the next phase of growth while adequately protecting against the risks that remain. With the right asset allocation and a keen eye on valuation concerns, investors can navigate the opportunities and challenges that lie ahead.
