Introduction to the Summer 2025 Investment Market Review
The summer of 2025 has come to a close, and with it, the UK’s children have returned to school. As we reflect on the lessons of the summer, it’s clear that the investment market has been on a wild ride. In this article, we’ll break down the key takeaways from the summer and explore where the best opportunities lie as autumn begins.
Growth, Inflation, and Bond Yields: A Summer Review
Growth is Softening
The UK’s growth rate may have looked healthy on the surface, but it was largely due to one-off factors such as pre-tariff stockpiling and the end of the stamp duty holiday. With a weakening jobs market and rising inflation set to weigh on consumers, growth is likely to slow sharply in the second half of the year. This will undoubtedly present tough choices for Rachel Reeves in the Autumn Budget. Meanwhile, US growth forecasts have been slashed to 1.6% for 2025, while Europe has managed a modest upgrade.
Inflation Remains Elevated
Inflation remains a stubborn problem, with UK inflation rising more than expected in July to 3.8%, the highest in the G7. Despite this, the Bank of England cut rates to 4.0% in August, citing recession concerns. Looking ahead, inflation is expected to rise further due to higher food prices and retailers passing on higher labor costs. In the US, core CPI rose to 4.2%, the highest since January.
Government Bond Yields and the Dollar
Government bond yields remained volatile over the summer, with attention shifting from monetary to fiscal policy as central banks near the end of their rate-cutting cycles. In the US, Trump’s "Big Beautiful Bill" is expected to have a net negative impact on the country’s deficit. Concerns over central bank independence also resurfaced, helping to push longer-dated yields higher. Within the UK, 30-year gilt yields reached their highest since 1998, driven by inflation surprises, concerns over debt sustainability, and structural supply-demand imbalances. The US dollar, meanwhile, has lost its swagger, with the dollar index down around 10% year-to-date.
Autumn 2025 Investor Priorities and Portfolio Strategies
As investors look ahead to autumn, several themes stand out. For liability-based investors, it’s essential to rebalance inflation hedges and review collateral sufficiency. Given the potential for increases in yields, investors should ensure they have enough liquidity and appropriate governance processes to top up their LDI portfolios if needed.
Key Strategies for Investors
- Rebalance inflation hedges: With UK inflation surprising on the upside, review inflation hedge ratios and ensure they align with long-term targets.
- Review collateral sufficiency: Given the potential for increases in yields, review collateral arrangements to ensure enough liquidity and appropriate governance processes.
- Consider reducing portfolio duration: With upside inflation surprises and concerns over fiscal sustainability, consider reducing the allocation to sovereign bonds in portfolios or the duration of those bonds.
- Rebalance asset allocations to bank gains: Given strong market performance but a weaker macroeconomic outlook, review allocations and bank gains from growth assets to ensure portfolios remain aligned with long-term targets.
- Review equity portfolios: With a threefold concentration by country, sector, and stock, review equity portfolios to ensure they understand and are comfortable with the risks they are currently exposed to.
Alternative Asset Classes and Currency Hedging
In a stagflationary environment, many traditional asset classes will deliver negative returns simultaneously. Consider allocations to alternative asset classes such as real assets, which are expected to hold up better in a weak growth environment and deliver stronger returns in periods of high inflation. Review currency hedging policies, as the US dollar is no longer acting as a reliable tail risk hedge.
Conclusion
The summer may have delivered strong market returns, but the underlying picture is far less comfortable. With growth slowing, inflation sticky, and traditional safe havens less reliable, investors face a tougher term ahead. Now is the time to check portfolios are resilient: banking gains where they can, diversifying risks, and making sure collateral and hedging strategies are fit for purpose. The easy marks have been scored; the next stage will require sharper preparation.
