Jan 5, 2026
A very happpy New Year to all our clients and frirnds of The Global CIO Office. Whishing you all a prosperous New Year Ahead
Table 1: Assset Class returns to end Deceber 2025 (USD)
Source: Bloomberg
Executive Summary
2025 will be remembered as the year in which global markets stopped taking US policy announcements at face value.
What began as a hopeful transition toward lower inflation and gentler monetary settings evolved into a far more consequential reckoning: the realisation that political uncertainty, trade fragmentation and institutional fragility now shape markets as much as the flow of economic data.
The defining feature of the year was not recession, nor inflation, nor even war. It was policy unpredictability — and the market responses it provoked across currencies, bonds, equities, commodities and crypto assets.
Three forces dominated:
• A sharp turn toward economic nationalism, centred on US trade policy
• A quiet but profound regime shift in Japan
• A collapse in confidence in leveraged, narrative-driven assets, most visibly crypto, alongside a historic flight to precious metals
What follows is a 2025 review of how those forces unfolded, why markets reacted as they did, and what investors learned the hard way.
Chart 1: Global Asset Performance through 2025
(December 31 2024=100)
Source: Bloomberg
1. A False Dawn: Early-Year Stability That Never Quite Held
The year opened with optimism that the global economy had threaded the needle. Inflation was easing, growth was slowing but intact, and central banks appeared to be approaching the end of restrictive policy.
Yet the apparent calm concealed important divergences.
The US economy remained resilient, but increasingly distorted.Consumption held up, labour markets softened only gradually, and growth appeared respectable. However, confidence — among households and corporates alike — was already fraying. Political noise, fiscal brinkmanship and trade rhetoric were beginning to matter more than inflation prints.
Europe, long dismissed as stagnant, surprised modestly on growth and disinflation. Valuations were compelling, financial conditions were easing, and capital quietly began rotating back toward the region, not out of enthusiasm, but out of relative stability.
Japan, largely ignored by global investors, was undergoing a deeper transformation. Inflation was no longer imported or temporary. Wage growth had returned. Monetary policy had shifted from emergency accommodation toward cautious normalisation. And maybe most importantly corporates were changing for the better. This was not cosmetic. It was refreshingly consistent.
Emerging markets, particularly in Asia, entered the year with stronger government balance sheets, improving inflation, and a growing insulation from Western political dysfunction.
Chart 2: Performance of Major Equity Market Regions in Q1 2025 (USD)
Source: Bloomberg
2. Trade as Shock Therapy: When Tariffs Became Macro
The past four years of better conditions for unfettered global trade continuity broke decisively in April 2025.
The US administration’s sweeping tariff announcement covering virtually all imports through a universal baseline, alongside sharply higher “reciprocal” rates for major trading partners, marked a fundamental deterioration. This was not a tactical negotiating ploy. It was a statement of intent- destructive and often without logic.
The scale of the shift in the global consensus on trade hurt. The speed and breadth was breath taking.
Markets immediately re-priced:
• Global equities sold off sharply, with US indices suffering one of their fastest drawdowns since the pandemic.
• Technology stocks led declines, reflecting their embedded exposure to global supply chains.
• Asset price volatility spiked to levels more consistent with crisis episodes than policy announcements.
Yet the most important reaction occurred elsewhere.
Chart 3: Liberation Day – Equity Market Response
Source: Bloomberg
The Dollar Fell
Conventional models suggest tariffs should support the imposing country’s currency. In 2025, the opposite occurred. Capital flowed out of US assets. The dollar weakened sharply and persistently. Investors were not expressing a growth view; they were expressing a confidence view.
This was the first clear signal that markets were no longer willing to treat US policy as inherently stabilising. The gold market understood and immediately responded prices have exploded higher with strong demand from all quarters.
Chart 4: US dollar Under Pressure (DXY Index)
Source: Bloomberg
3. The First Capitulation: Markets Learn the New Game
Within days, parts of the tariff package were paused. Negotiations were extended. Deadlines softened. ‘TACO’ became part of the market dialogue – it was with humour but the volatility of decision-making hurt market sentiment but provided some relief for those that had feared the worst. Markets rebounded almost as quickly as they had fallen.
This moment, the first clear policy reversal under market pressure, proved pivotal. It taught investors a new rule: policy pain thresholds were low. From that point forward, markets stopped pricing announcements and started pricing probabilities of reversals. Volatility became episodic but tradable. Risk assets recovered. But something fundamental had changed: market trust had been replaced by tactical scepticism.
Chart 5: Global equities and Tech in Particular Recover from Liberation Day
Source: Bloomberg
4. A Misleading Middle: Growth That Was Borrowed, Not Earned
As spring turned to summer, economic data appeared to stabilise. But much of the growth resilience was artificial – a mirage.
Companies front-loaded imports and production to get ahead of tariffs. Inventory accumulation flattered GDP figures. Trade volumes surged for the wrong reasons. Inflation eased temporarily as energy prices fell.
Markets responded with relief rallies:
• US equities posted strong monthly gains through the summer months
• European equities extended their quiet outperformance
• Asia benefitted from a softer dollar and improving domestic demand
Crypto enjoyed a brief renaissance, fuelled by ETF inflows and renewed institutional narratives. Yet underneath, the economic and market cycle was becoming more fragile, not stronger.
5. Japan Re-Enters the Global Equation
While attention remained fixed on US politics, Japan completed one of the most important macro transitions of the year.
Inflation stayed above target. Wage gains broadened. Corporate governance reforms accelerated. Share buybacks surged. Foreign capital flowed in.
Crucially, monetary policy normalised further. By year-end, policy rates were at levels unseen in decades.
Japan was no longer a passive funding source. It had become an active transmitter of global bond volatility.
This shift reverberated through:
• Global duration markets with higher long-term interest rates
• Currency carry trades
• Equity factor leadership
It was one of the most underappreciated developments of 2025 — until it wasn’t.
Chart 6: Japanese Equities Hold their Own
Source: Bloomberg
6. Protectionism Meets Easing: An Unstable Policy Mix
The second half of the year was defined by contradiction. Trade barriers were reinforced. Yet monetary policy eased.
The Federal Reserve cut rates not because inflation had been defeated, but because political pressure coincided with a softening labour market. Growth remained solid, but employment momentum weakened. Inflation stayed awkward rather than alarming.
This combination — tighter trade policy alongside looser money — distorted capital flows:
• The dollar weakened further
• Emerging markets attracted inflows
• Gold surged relentlessly
By late summer, it was clear that traditional policy frameworks were no longer sufficient to explain price action.
7. The Peak: Excess Finds Its Limit
October marked the high point for risk appetite.
Equities reached new highs. Technology leadership narrowed further. Japan and Asia ex-Japan outperformed. Emerging markets diverged sharply by policy credibility.
Crypto peaked decisively. Leverage had rebuilt. Liquidations followed swiftly. The unwind was violent, indiscriminate, and unforgiving. Institutional narratives collapsed under the weight of basic market mechanics.
Gold, by contrast, continued to rise — eventually reaching levels that forced margin-driven corrections, but not narrative collapse.
Chart 7: Crypto in Gold’s Shadow
Source: Bloomberg
8. Year-End Reality: Consolidation, Not Collapse
The final months of 2025 were not dramatic. They were revealing. Markets consolidated and volatility subsided. Returns became harder to extract.
In equities investors rotated toward quality, balance-sheet strength, and income. Defensive sectors regained relevance. Technology corrected selectively rather than catastrophically.
By year-end:
• The US dollar had fallen nearly 10% over the year
• Gold had delivered one of its strongest annual performances in modern history
• Crypto had round-tripped from euphoria to disillusion
• Japan had re-established itself as a structural macro player
• Emerging markets had re-established their mantle as growth markets
No recession arrived. No crisis erupted, but the world felt good less stable.
Emerging Markets: The Year Capital Re-Learnt Discrimination
One of the most striking and underappreciated features of 2025 was the remarkable performance of emerging market equities. In US dollar terms, the MSCI Emerging Markets Index delivered returns of around +30%, comfortably outperforming developed markets and confounding a consensus that had entered the year deeply sceptical of the asset class.
That scepticism proved to be misplaced, but not because “emerging markets” moved as a single block. Quite the opposite. The defining characteristic of EM performance in 2025 was dispersion — by country, by policy credibility, and by exposure to global political risk
Why EM Worked in 2025
Three macro forces aligned in favour of emerging markets:
First, a structurally weaker US dollar.
The dollar’s near-10% decline over the year provided a powerful tailwind. Unlike prior cycles, dollar weakness was not driven by global growth optimism but by confidence erosion in US policy coherence. That distinction mattered. Capital flowed into markets offering policy stability rather than pure beta.
Second, earlier and cleaner disinflation.
Many emerging economies entered 2025 with inflation already trending lower and real rates still positive. This gave central banks flexibility just as developed market policymakers became boxed in by tariffs, politics and sticky services inflation.
Third, political pragmatism over ideology.
In contrast to the policy volatility seen in parts of the developed world, several EM governments demonstrated a steady hand: orthodox monetary policy, targeted fiscal support, and a reluctance to weaponise trade.
Emerging markets did not rally because risk appetite exploded. They rallied because relative credibility improved.
Chart 8: Emerging Markets Outpace Developed Market Equities
Source: Bloomberg
What 2025 Taught Investors
Four lessons stand out:
1. Government and Central Bank policy credibility now matters more than policy intent
Markets no longer assume competence, coherence or follow-through.
2. Global leadership is fragmenting
Capital is more selective, more mobile, and less forgiving.
Real hedges matter again
Gold succeeded not because of inflation, but because of distrust.
4. The future is increasingly in the East
One cannot write off the United States, its economy, its capital markets, or the dollar. Yet the future of global growth is likely to rely increasingly on the East, where growth remains more vibrant, geopolitical thinking more inclusive, and valuations materially more reasonable.
Closing Thought
2025 was not a crisis year. Growth did not collapse, markets did not break, and the financial system held. What changed was something more important: investors stopped assuming that the institutions, policies and frameworks that supported the last global cycle will automatically work in the next. Trade policy became unpredictable, central banks were forced to balance politics as much as economics, and capital moved in ways that defied old rules. That shift in trust — not a single data point — will influence asset allocation decisions long after the headlines fade.
