Q4’s market highlights
Darren Ripton of Aberdeen MPS highlights the key market developments over the last three months of 2025, and what they mean for portfolio positioning.
Duration: 6 Mins
Date: 07 Jan 2026
The big picture
Historic US shutdown hits growth
In early October 2025, the US government went into shutdown after Congress missed the deadline to approve funding for the new fiscal year. This wasn’t a one-day hiccup, it lasted 43 days, ending on November 12th, the longest shutdown in US history.
So, what caused this shut down? The Republican-controlled House and the Democratic-led Senate couldn’t agree on a spending plan. Republicans pushed for cuts to healthcare and foreign aid, while Democrats fought to keep Affordable Care Act subsidies. With no deal, around 900,000 federal employees were furloughed without pay, and another two million worked without immediate pay.
The impact spread beyond government workers. Small businesses and contractors reliant on federal contracts were hit hard. Economic data collection stalled, making it harder for institutions such as the Federal Reserve to track growth, increasing the risk of policy error. Weekly losses were estimated at between $7 & $15 billion by Congressional Budget Office and White House, reducing fourth quarter GDP by 1 to 2 percentage points.
UK Budget: Tax freeze and spending boosts
On November 26th, Chancellor Rachel Reeves delivered her Autumn Budget, aiming to balance growth ambitions with fiscal discipline. As a result, income tax and national insurance thresholds will stay frozen until April 2031, meaning more people will pay higher rates as wages rise. Taxes on dividends, property and savings income tax will also rise to align passive income more closely with earnings from work. A new council tax surcharge was also introduced on homes worth more than £2 million.
On spending, the national living wage will rise from April 2026, supporting lower paid workers. Extra funding was signalled in areas such as infrastructure, housing and education, with details to follow in departmental budgets.
Interest rates are on the move
Central banks are moving in different directions as economic conditions diverge. In the US, the Federal Reserve cut rates three times since September, responding to a softer labour market. The Bank of England also lowered rates to 3.75%, despite inflation remaining above target. Meanwhile, the European Central Bank, who has aggressively cut rates through 2024 and into 2025, held interest rates at 2% over Q4 as inflation was broadly back to their 2% target. In contrast, the Bank of Japan raised rates by 0.25% in December to 0.75%, the highest in 30 years, aiming to cool inflation and balance new fiscal stimulus.
China’s growth slowdown
China’s economy is losing momentum. GDP growth slowed to 4.8% year-on-year in Q3, with full-year growth expected around 5%. The International Monetary Fund (IMF) projects further easing to 4.5% in 2026.
Beijing’s “anti involution” campaign aims to curb wasteful competition in industries like electric vehicles and solar by encouraging mergers and reducing overcapacity. The aim is for stronger, more efficient firms in the long run, although it has trimmed production and investment in the short term, weighing on overall growth. China’s property sector also remains a major drag on the economy. New home sales fell about 8% in 2025, and prices continue to slide. Local governments, heavily reliant on land sales for revenue, have cut infrastructure spending, adding to the slowdown. Banks are also under pressure from loans to troubled developers, creating financial stress.
Asset allocation highlights
Equities: Positive but off recent highs
Equities continued to deliver positive returns in the fourth quarter, building on the strong rebound after the volatility that followed “Liberation Day”. However, markets have eased slightly from the highs reached at the end of October.
Performance varied by region and style. Growth-orientated markets such as the US, Asia (excluding Japan) and Emerging Markets posted more modest returns. In contrast, regions which are considered to have a stronger value tilt, such as Europe and the UK, performed more robustly.
Government bonds: Broad gains
Developed market government bonds posted solid returns during Q4. This was largely driven by rate cuts from the US Federal Reserve, the Bank of England and Bank of Canada. Not all moves were in the same direction. The Bank of Japan raised rates to 0.75% to combat inflation, which weighed heavily on Japanese government bonds.
Emerging Market Debt, both hard and local currency, also performed strongly and was a notable contributor to overall returns.
Corporate bonds: Mixed picture
Investment grade bonds delivered mixed results over the quarter. In the UK, both short-duration and all-maturity bonds performed well, helped by strong gilt returns and a slight narrowing of credit spreads. Global investment grade bonds also benefited from positive government bond performance, but a small widening in spreads reduced overall gains. Global high-yield bonds faced similar conditions to investment grade peers benefiting from lower rates, offset by a widening in credit spreads.
Alternatives: Infrastructure shines
Global infrastructure continued to deliver positive returns, supported by stable cash flows and demand. In contrast, global real estate investment trusts (REITs) lagged, posting small negative returns over the quarter.
Market outlook
Short term bonds look stronger
We expect interest rate cuts in the US and UK to support shorter-term bonds, which should outperform as economic growth slows. Longer-dated bonds may face more challenges as governments face difficult decisions between reducing spending or continuing to run large budget deficits.
Credit still attractive
Although credit spreads remain tight, there is little sign of a significant rise in defaults. Unless growth slows sharply, we do not anticipate major changes to this in the near term. The extra yield offered by credit compared to government bonds continues to look attractive.
Earnings slow, but opportunities remain
While earnings growth is slowing, it remains positive, supported by fiscal policy in the US and Europe. Lower interest rates should also provide a tailwind. Valuations in certain areas of the world are stretched, however opportunities exist in specific areas of the market, such as UK small caps.
Infrastructure offers diversification
Global infrastructure assets continue to benefit from long-term structural shifts and attractive valuations. These investments also offer diversification benefits, making them a useful component of portfolio construction
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