Changing leadership: It has been a remarkable start to the year with President Trump threatening his NATO allies with tariffs over Greenland, the ongoing conflict in Ukraine, the prospect of war in the Middle East and, of course, problems for our own Prime Minister here in the UK. Not surprising then that the gold price has hit record levels. In times of trouble, investors seek safe havens.
However, although geo-political developments are important I’d like to begin by focusing on one of the key investment trends of the past year, the change in leadership in markets and ask whether it will persist.
In 2025 US financial markets stopped outperforming the rest of the world. The S&P500 beat all comers in 2023 and 2024, but in 2025 the best performing equity markets were found in Europe, including the UK where the FTSE-100 hit new highs, and the Emerging Markets. It was the same story in fixed income markets where investors were better off in European or Emerging market bonds. Sterling based investors lost money in US government bonds in 2025 as the US dollar fell more than 9% against a basket of currencies.
There were still some strong performances from US companies particularly the tech giants, but overall it looks like 2025 was the year when investors decided to sell the US. Judging from these price moves, they went into equity markets in Europe, Asia and Latin America and, of course, gold and precious metals.
Two factors underpin this. First, valuations on the US equity market were (and still are) very high judging from the ratio of prices to earnings (PE ratio), so a lot of good news has already been priced in, limiting the scope for positive surprises. Meanwhile, valuations elsewhere have been more modest and consequently, investors have been looking for better value by diversifying their regional exposure.
Second, there is an ongoing reappraisal over what the Trump presidency means for the US and the world economy. There are concerns over the size of the budget deficit and dependence on foreign capital as evidenced by the falling dollar. Tax cuts and de-regulation are popular with investors, but tariffs are problematic. Unfortunately, the President is still keen on tariffs as his chosen weapon for Making America Great Again, creating problems for US companies who face higher costs in importing parts and raw materials. When those costs can’t be passed on, firms see a squeeze on profit margins. When they are passed on, the US consumer is worse off as inflation rises. Neither are great news for the US economy.
Higher tariffs are not helpful for countries trying to sell to the US either, but so far world trade has proven to be remarkably resilient. Countries such as China have been very adept at keeping their exports growing by switching to markets outside the US. At the company level, firms are responding by relocating to regions where tariffs are lower, or they are moving closer to their target markets. Such actions generate economic activity, and generally help firms outside the US.
Meanwhile, by recognising that the US will no longer automatically come to the aid of its allies, countries are spending more on their own defence. Military spending is rising in Europe and Asia and defence stocks have outperformed. The need for greater security extends into other sectors such as energy, food and medicines. The rise in geo-political tension is obviously worrying and has driven the rise in the gold price, but investors are looking at how the new balance of power will create opportunities.
Self-reliance is becoming key as countries recognise the downsides of globalisation when relationships with trading and coalition partners sour. Some of this is overdue, but the pattern of growth is changing as business seeks new alliances and markets. This process was already underway after Covid disrupted supply chains, now it is being accelerated by geo-politics.
Looking ahead, the good news for 2026 is likely to be on inflation. Recent figures in the UK have been better than expected. Inflation at 3.4% is still above its target, but we expect it to fall in coming months as many one-off price hikes from last year drop out of the CPI index. Wage growth is easing as the jobs market cools and measures in the last budget will reduce inflation in the spring. It is quite likely that UK base rates will fall to 3% this year as inflation returns to target. Lower interest rates will bring relief to borrowers and now that the budget is behind us, uncertainty over tax policy should fade thus enabling business to invest for the future.
It is a similar story in the US where inflation is expected to ebb and, whilst the gold price fell sharply on the announcement of Trump’s more hawkish pick as the new chair of the Federal reserve, we still expect Kevin Warsh to cut rates further. US economic growth is holding up well despite the politics and is benefitting from the surge in AI spending, particularly on datacentres.
Pulling this together, a backdrop of modest growth, lower inflation and lower interest rates should support both equity and bond markets. Geo-political risk will persist and gold could continue to do well as a safe haven. There are still concerns: valuations on the US equity market remain high and the index is very concentrated in the top 7 tech firms. Also, it is hard to find many bearish strategists amongst the plethora of reports looking at the outlook for 2026. Consequently, diversification away from the US is likely to persist in 2026 as investors seek to spread their bets and benefit from the new world order.
Keith Wade
Former Chief Economist, Schroders
Adviser to the KMD Investment Committee
