Economic conditions improved into year-end, particularly in the United States, where Q3 GDP was revised up to 4.3%, the strongest pace in two years. Growth was led by the American consumer, supported by exports and government spending, while business investment continued to expand despite ongoing weakness in housing. Survey data suggests activity is slowing from a high level rather than rolling over, with employment holding up. Against this backdrop, the Federal Reserve reduced rates by 25bps and indicated that further easing is likely in 2026 if inflation continues to moderate.

The Eurozone remains a tale of uneven progress. Growth improved slightly, supported by higher investment and public spending, but this was offset by weak trade and persistent regional divergence. Manufacturing remains under pressure, particularly in Germany and Italy, while services continue to expand but with diminishing momentum. Overall, the region remains resilient but fragile, leaving the European Central Bank in no rush to materially change policy.

In the UK, economic growth remained muted, with Q3 GDP rising just 0.1%. Manufacturing returned to modest expansion in November, with output and new orders improving after a prolonged downturn, but employment continued to decline as higher labour and input costs weighed on hiring. Services showed clearer momentum in December on stronger domestic and overseas demand. Inflation eased further, with CPI slowing to 3.2% in November, The Bank of England cut rates by 25bps, signalling a cautious and data dependent path ahead.

Equity markets were mixed in December. Global equities recovered modestly, with the MSCI World Index up 0.73%. US markets were weaker with the S&P 500 slipping 0.05% and the Nasdaq falling 0.53%, while UK equities outperformed, with the FTSE 100 up 2.17%, the FTSE 250 up 1.38%, and Small Cap and AIM indices gaining 1.85% and 1.63%, respectively.

Our portfolio performance was weighed down by negative sentiment toward UK financials, particularly AJ Bell, following Autumn Budget changes affecting pensions and savings. These policy shifts created short-term uncertainty around client behaviour, despite no deterioration in underlying business quality. We used this weakness to add to AJ Bell and trimmed our holding in Liontrust. The portfolio declined by 1.89% in December with the NAV down by 2.31% after allowing for expenses.

At the company level, AJ Bell delivered record FY25 results, with strong growth in revenue, profits and earnings per share, alongside a higher dividend and a further £50m share buyback. Net inflows remained robust and management continues to invest for long-term growth. Begbies Traynor reported steady H1 progress, with revenue and profit growth, a higher interim dividend, and continued strength in counter-cyclical advisory services. Impax Asset Management ended the year with £26.1bn of assets under management and remains focused on long-term sustainability themes.

The largest contributors to performance were S&U, NWF Group, and Dunelm, while AJ Bell, Impax, and Auto Trader were the main detractors, a reminder that short-term market sentiment often diverges from long-term business value and success.