November 2025

“Don’t…stop…thinkin’ about tomorrow…”

As the end of the year beckons, we choose not to dwell on recent events – which have remained static talking points for months while underlying fundamentals remain cloaked in uncertainty – and instead, focus on likely outturns for the upcoming year.  Unlike recent markets we will enter 2026 with few clear drivers, given recent compression of risk premiums across most asset classes and elevated valuations in key sectors, and while it’s not written in stone that this situation will change, markets that are finely priced can force, and are more prone to, disruption.  What’s more, disruption doesn’t need to come from external shocks or deteriorating fundamentals.  Given the presence of systemic and momentum-based strategies, along with plenty of leveraged positions, history teaches us that periods of benign markets lead to accumulation of risk concentrations that only ever seem to be apparent when an adverse catalyst triggers liquidations.  Readers will have their own views about where such concentrations exist, but the bigger question is what are the potential catalysts that might unlock volatile market disruptions?  We won’t speculate on geopolitical events, although there are several that might befall us, but rather focus on economic questions, where the environment is sufficiently murky as to warrant caution.  On the one hand growth is slowing but on the other latent inflationary pressures, stoked by unconstrained fiscal spending are preventing interest rate cuts.  Will we see credit worthiness decline as margin compression hits overgeared companies?  Signs are already there in certain sectors (e.g. auto finance), but it would need to spread farther across the economy to threaten markets. However, if combined with an unwinding of debt-financed AI related capex, then things might get dicey, especially as a great deal of lending has come from private credit sources.  While this remains a possible outcome, it is just one of the scenarios that might create a malevolent market environment next year, and another reason to enjoy your Christmas eggnog, but temper your enthusiasm for the new year.

In the meantime, action was still plentiful in November, although it was difficult to be in Europe and not get consumed by UK budget mania.  Like a peevish six-year-old pushing unwanted broccoli around on a plate in hopes it might magically disappear, the Chancellor delayed presentation until the end of the month, fuelling speculation beforehand that has only been superseded by the maelstrom that has followed in the wake of measures introduced.  Of note to readers of this commentary, banks emerged unscathed, which should offer proof that redemption is possible for even the most villainous of miscreants.  Elsewhere, markets were generally calm, although there was a half-hearted attempt at a correction in equity markets, conveying the impression that any real action will have to wait until the calendar flips.

European financials were generally quiet, apart from some mid-month volatility, with little to report ahead of December central bank meetings, although UK banks were the exception showing post-budget cheer.  For the month, the funds A shares rose +0.09% with contributions from Credit of 0.08% and Equities of 0.06% on a gross basis.  It shouldn’t surprise regular readers to hear that we didn’t make many changes to the portfolio in November, and we continue to focus on retaining flexibility as long as current market conditions continue.