Summer's over – Time for investors to refocus

Whilst most of us will take a break over summer and try to “de-tune” out of work, markets were quite the opposite and decided not to take a holiday at all this year!

While headlines cheered record highs in equities and gold, the underlying picture has grown more uncomfortable: weaker growth, stickier inflation, and gilt yields at multi-decade highs. In a world where equities, bonds and even safe-haven currencies can all fall together, investors need to be more selective than ever.

So, in the spirit of children in the UK returning to school these past couple of weeks, here are the lessons from the summer – and where we see the best opportunities as autumn begins.

Summer 2025 investment market review: growth, inflation and bond yields

• Growth is softening
  UK growth looked healthy on the surface at 1.1%, outpacing the US and other G7 economies, but much of it was flattered by one-offs 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, leaving Rachel Reeves facing tough choices in the Autumn Budget. Elsewhere, US growth forecasts have been slashed to 1.6% for 2025 (just over half of last year’s rate), while Europe has managed a modest upgrade - a small counterweight, but not enough to shift the overall downbeat global picture.
• Inflation remains elevated 
  Inflation remains the toughest subject in the syllabus, 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 in a finely balanced decision amid recession concerns. Looking ahead, inflation is expected to rise further due to higher food prices and retailers passing on higher labour costs. In the US, core CPI rose to  4.2%, the highest since January.

• Government bond yields remained volatile, with attention shifting from monetary to fiscal policy as central banks near the end of their rate-cutting cycles. In the US, Trump signed his “Big Beautiful Bill” into law, which is expected to have a net negative impact on the country’s deficit. In addition, concerns over central bank independence 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 – a theme we have highlighted before here.

• Dollar rebound fizzles out
  The US dollar has lost its swagger and the once sturdy umbrella that acts as a shield for portfolios during a storm is beginning to let the rain through. Mounting worries over policy uncertainty, slowing growth, fiscal sustainability, and doubts about central bank independence have pushed the dollar index down around 10% year-to-date.

• Equities hit all time highs, with credit spreads tightening
  Equities hit record highs over the summer on easing tariff fears and strong corporate earnings, with only a short lived “pull back” towards the end of summer as the AI-driven rally lost steam. Equity valuations remain elevated, particularly in the US. Credit markets tell a similar story, with spreads now at their tightest in decades, offering scant compensation for the current macroeconomic and geopolitical risks.

Autumn 2025 investor priorities and portfolio strategies

As investors look ahead, a few themes stand out from our conversations over the summer.

For liability based investors:

1. Rebalance inflation hedges
Inflation may not be running rampant, but it is proving sticky like chewing gum on a school shoe. With UK inflation surprising on the upside, we recommend reviewing inflation hedge ratios and ensuring they align with long-term targets.

2. Review collateral sufficiency
Given the potential for increases in yields (as highlighted below), we suggest investors review their collateral arrangements to ensure they have enough liquidity, and appropriate governance processes, to top up their LDI portfolios if needed to maintain their liability hedges.

For all investors:

3.For some, consider reducing portfolio duration
Given upside inflation surprises, concerns over fiscal sustainability and, particularly in the UK, the supply & demand imbalance in long dated gilts, we believe the recent rises in sovereign yields isn’t over yet and upward pressure on yields is here to stay. For liability based this means checking you’re not currently overhedged and, for some, it may be appropriate to be less than 100% hedged to interest rates. For non-liability based investors, you can consider reducing the allocation to sovereign bonds in portfolios and / or the duration of those bonds.

4. Rebalance asset allocations to bank gains
Given strong market performance but a weaker macroeconomic outlook going forwards, now may be a good opportunity to review allocations, bank some gains from growth assets, and ensure portfolios remain aligned with long-term targets.

5. Review equity portfolios
With a threefold concentration (by country, sector and stock), we recommend clients review their equity portfolios to ensure they understand and are comfortable with the risks they are currently exposed to (such as the dominance of the AI theme on portfolio returns). For some investors, they may be comfortable with the level of risk being run whilst others may choose to diversify away from mega-cap stocks to better manage the risks they are exposed to.

6. Consider alternative asset classes that are better protected in a stagflationary scenario
In a stagflationary environment many traditional asset classes will deliver negative returns simultaneously. As a result, we recommend considering allocations to alternative asset classes such as real assets that are expected to hold up better in a weak growth environment and deliver stronger returns in periods of high inflation. For those that don’t have the liquidity budget to allocate to real assets, listed alternatives can be considered or asset-backed securities, which provides quasi inflation protection given the floating rate structure of these assets.

7. Review currency hedging policies
While safe-haven currencies typically strengthen in periods of global stress, the dollar tends to fall when the disruption originates in the US, as seen during both the 2018 Taper Tantrum and this year’s Liberation Day. Therefore, we believe the US Dollar is no longer acting as a reliable tail risk hedge given the current approach to policy setting of the US administration and how the dollar could perform in a possible stagflationary environment. As a result, we recommend investors review their level of unhedged currency exposure in their portfolios and consider increasing the level of currency hedging.

Source: Bloomberg. Global equities is the FTSE All World Series All World Total Return Index. Periods shown for each set of bars are: Financial crisis (30/09/2008 – 31/12/2008), Eurozone crisis (15/03/2012 – 04/06/2012), Taper tantrum (22/05/2013 – 24/06/2013), COVID-19 (01/01/2020 – 31/03/2020) and Liberation day (1/01/2025 – 15/04/2025). Results are based on a Sterling investor.

8. Shorten credit spread duration in portfolios
Tight credit spreads mean, all else being equal, lower prospective returns on corporate bonds. Given this, we don’t believe current spreads offer sufficient compensation for investors given the macroeconomic outlook and heightened geopolitical risk. We recommend switching from longer dated corporate bonds to shorter dated bonds to be better protected against a market sell off.

9. Diversify away from corporate bonds
With spreads tighter, we recommend clients consider alternatives in the high grade credit space to corporate bonds that offer better risk adjusted returns. Many investors have already allocated money to asset-backed securities. For those that are willing to forgo daily liquidity, we also see attractive opportunities in working capital finance and capital call finance.

Source: ICE and investment managers as at 30 June 2025.  *This is the equivalent credit rating of the instruments, which tends to be three notches higher than the credit rating of the corporate.

10. Review net zero targets
Where applicable, review the net zero target(s) for your portfolio given the current ESG backlash and potential slowdown in the low carbon transition.

Closing thoughts

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.