368. Navigating markets in an uncertain year

25 September 2025 (pre-recorded 24 September 2025)

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[INTRODUCTION]

Staci West (SW): Hello and welcome back to the Investing on the Go podcast. I’m Staci West and I’m joined by Darius McDermott and Juliet Schooling Latter for our quarterly market update. So thank you both for joining me.

Darius McDermott (DM): Morning Staci.

[INTERVIEW]

SW: Now we are three quarters into the year and as ever, markets have kept investors on their toes. So we’ve got geopolitics, policy shifts, regional rallies, 2025 has been anything but dull, so I’m just going to get straight into it. How would you summarise the market performance so far and what has surprised you most in Q3?

Juliet Schooling Latter (JSL): Well, I think the markets have been a bit like the British weather recently. You know, every so often you get dark clouds gathering, but by the time you’ve dug out your umbrella, the clouds have cleared, the sun’s come out and you need your sunglasses instead. Markets have just been climbing a wall of worry, haven’t they?

You know, there was the sharp sell off obviously in early April on the tariff announcements, but markets bounce back and they’ve just been sort of undaunted really. You know, there’s the threat to global growth from tariffs. There’s persistent inflation, geopolitical tensions. So I mean there has been this obviously a shift in relative performance with the US sort of going from last year’s star performer to this year’s sort of laggard at just to 2.5% year to date last time I looked.

And most regions outstrip the US now with Europe up over 15% year to date. I won’t mention China. I think Darius might have something to say on that.

On Q3, I have to confess, I’m just a bit confused. I was at a conference yesterday and someone on the panel said, risk is as expensive it’s ever been and US large cap growth is at its highest ever multiples, but I’m still bullish. It just doesn’t quite add up to me. I was expecting to see a pullback in the third quarter. So I guess that’s what I’m saying. That’s what’s surprised me, really.

DM: So Juliet said lots of intelligent things there. What we’ve seen, for me, is it’s the ‘year of the Don’ the US president Donald Trump, pretty much being the main narrative in all markets. I mean, clearly there’s the US market and Liberation Day had led to the big global selloff wasn’t just US equity selloff, but if you think about other parts of the market, Europe has outperformed the US this year. And one not the only thing has been the US defence stocks. And where does that come from? That comes from the dawn basically saying you’ve gotta spend more on of European GDP on defence. And there’s been a substantial rally, not just this year, but over the last year in European defence.

So yeah, but then, you know, you have the whole AI phenomenon which continues, and whilst tariffs maybe have yet to fully affect the likes of Nvidia, NVIDIA’s just growing, you know, the AI the people are not stopping spending on AI and that has been obviously a huge driver. Nvidia was like $90 in the big selloff. It’s $173 when I happened to be looking in a previous meeting this morning. So over a hundred percent or nearly a hundred percent. So the AI theme has also been a dominating theme, not just this year, but last and maybe we’ll continue to run.

SW: And just quickly on tariffs, because we have talked about it in previous podcasts, but it’s also been six months since this Liberation Day. What is, has anything really changed with this narrative with tariffs? Are we still just saying tariffs are their volatility and that’s what we should expect, or things settling down a little bit?

DM: I think the tariff concerns that were at their heightened around Liberation Day have definitely eased. What I still don’t fully understand the impact is now that they are about to start being introduced, what, as Juliet already said in our last discussion, what impact those tariffs will have. Will they be inflationary, like everybody says tariffs are, what impact will have that have on markets? So I think most people are, I wouldn’t say tariff fatigue, but are less concerned about tariffs than they were six months ago. Yet they haven’t really started, if you know what I mean.

JSL: Yeah. I think it’s gonna take a while, as Darius says, for the impact of tariffs to really be seen and to be understood. Again, yesterday somebody was talking about the companies they’ve spoken to and the general feeling is that about 5% of the tariff will be worn by the producers, but the rest is going to be passed on to the US consumer. And obviously that will be very inflationary and how much that will impact consumption, you know, and things like that as yet to be seen.

But interestingly on the volatility side you know, the level of the VIX is at quite a low level. You know, valuations are high, but volatility is low, which again points to how sort of complacent markets are to me.

DM: Yeah. And if you look at the spreads on corporate bonds, which is the amount that you should be compensated for holding a company debt over the holding the relevant government, they are at record low, which is another, and place the index if you like. I mean, I would say that the amount, normally if you lend to a company, you should get paid a fair amount over if you lend to the local government for the risk associated with lending to an individual company. And that amount that you get paid is a record lows in America for investment grade companies, which again, sort of sits for that complacency. And it’s a little bit odd because gold is at record prices, which I’m not saying that’s a worry index, but it’s an index of people being cautious, particularly around currency. They buy gold. So yeah, it’s a bit confused out there.

SW: Well, there’s so many things in those answers to go into, but I’m gonna start with a little whistle stop tour of some of the places that you have both just mentioned. So we know that the US makes up, you know, the majority of our global indices and, but as you’ve both pointed out, other regions have been outperforming recently. And two that I particularly wanted to talk about, you’ve mentioned, which is China and Europe. So I’m gonna start with China because Juliet, last time you were very cautious on China. So have, have you softened, given the rally we’ve seen?

JSL: Not really is the short answer <laugh>. I’m just, I mean, and you know, I’m always a little bit wary of China, you know, it’s an authoritarian regime which means there’s always that level of uncertainty surrounding how foreign investors are treated. And you know, and indeed some sectors can be wiped out by changing government policy. You know, the government is happy to manipulate markets, you’re never quite sure whether the stats are accurate and so forth.

But having said that, yes, China had become incredibly cheap, so I wasn’t really surprised by its outperformance. Will it continue to outperform? I’m not sure. I mean, you know, China is definitely changing, you know, it’s, it with regard to the tariffs, it’s putting factories on the ground in other countries. And as it’s become more advanced, it’s sort of moving away from cheap manufacturing into higher value added areas.

And also its anti-evolution policies which are designed to sort of combat deflation and reduce excess capacity. You know, they’re coming into effect. Interestingly actually that was part of the problem was seen in the automotive industry which between 2017 and 2024 total profits in the automotive industry declined by 33%, despite a 21% increase in sales. So you know, the government’s now stepping in to stop these kind of price wars. So this will definitely benefit the stronger players in, in China. So hopefully if you’ve got, you know, a good fund manager on your China fund, they will be able to select those stronger players. But China’s had a strong run recently. Will it continue to outperform? Darius?

DM: Well, the obvious and simple answer from my side is I told you so <laugh> so you know, I’ll get the quick blow in early. Yeah, I’ve been trying to, what was cheap we saw a Chinese manager last week, they said that Chinese equities are broadly around fair value, not expensive. And the other factor I think that again comes back to my slightly flippant first answer about it’s the ‘year of the Don’ is the weakening of the dollar. And generally a weaker dollar is good for emerging markets and it’s good for emerging markets, it’s good for China, the biggest emerging market.

And I think, you know, if you look at our industry, we’re great at doing things that for asset manager are great at doing things they think that people want. So we’ve seen a rise, not a massive rise, but a rise in emerging markets ex China funds, which is fine, there needs to be a room for all differing types of investors, but overlooking the second biggest economy on the planet overlooking cheap markets because of, if you on the government does narrow one’s ability and you know, a member of this podcast no longer buys the American wine because of a member of the podcast view on the US politics, which is the largest democracy in the world.

So I tend to be slightly, you always need to factor politics in. Of course you do and you know, but there will be a time whether we like it or not, that when the Russian market reopens and Russian equities and bonds are gonna be really cheap. Now, I’m not saying that that’s where we should all pile in, but political issues and geopolitical issues do actually sometimes create opportunity and think, you know, not that one relates. So there we are.

SW: Well, geopolitics in mind, you mentioned the success of European defence stocks and Europe, both European ex UK, and European Smaller Companies were some of the best performers recently. So what’s been driving this momentum then these defence stocks and is it the beginning of this long-term re-rating or a blip?

JSL: Yes. Well, you are right. Europe has fared very well this year. European companies are up over 17% and Europe generally is up over 15%, which sort of compares with 2.5% for the US. I mean basically, you know, again, Europe was oversold. So you know, investors when they sort of got a little bit disenchanted with the US and looking around for other homes for their money, sort of looked at Europe and saw that it was kind of refreshingly cheap in comparison. And yes, the defence companies is a big part of that because Germany announced this fiscal stimulus plan over the summer, which is you know, big shift away from Germany’s to traditional fiscal conservatism and aims to boost defence and you know, infrastructure. So that is obviously gonna boost economic growth in Europe as well.

DM: I mean I wholeheartedly agree with all of that. Also, other things around the edges that, you know, post the financial crisis, European regulators have put immense capital constraints on banks and financials, meaning that they have to hold huge amounts of capital for every dollar pound or euro that they lend. And that all happened at a time when interest rates were broadly zero or near zero. The financials make them, banks make their money and they have money in deposits and they give you a rate of whatever one, and then they learn loan you money at a rate of four. And that difference between four and one is called the net interest margin, very basic, but it’s that sort of thing. And when interest rates went from the near zero level to sort of three, four, 5% that net interest rate margin increases and financials, both well globally but in Europe which were on the floor for a decade, have rallied and, you know, even some of the less quality banks are up.

So yeah, defence has been a big winner, but also financials as well. And then I think the other point that Juliet made about it, I would describe it as flow. So yes, people looking, maybe looking elsewhere for a change because the US had this big blip, but if you think 70% of the MSCI world is US, so 70% of most capital goes into the US. If you buy an MSCI tracker, you’re gonna get 70% of the US that people were just starting to think what else is there? Nominally US is expensive on valuations, where else should I look? And I’m not gonna stop putting money at the US I’m certainly not taking it away, but maybe incremental pounds, euros and dollars looking at other asset classes. And that potential change of flow has also been supportive for Europe and other regions.

JSL: I mean, the other thing as well is obviously just to add on the smaller companies side, is that Europe’s seen full interest rate cuts so far this year and that obviously as interest rates come down smaller companies tend to outperform. So that’s helped to boast, alter to the smaller companies market there.

SW: And an area that we have touched on in this podcast a few times in the past is Latin America. Now, this has typically been something else is happening to support this kind of top performance in Latin America. So my question, is that what’s happening again, is this a commodity story? Is it a weak dollar? Is it something else?

DM: I think it’s all of the above is the honest answer, the weaker dollar, commodities. But also, and again, I don’t know on a country by country basis, but I know Mexico’s tariffs and Mexico is I think the second biggest stock market in the LATAM index, if not the biggest, either Brazil or Mexico. You know, the tariffs there have been not substantial and in fact some of the weakening of the US China trade is actually a huge benefit to Mexico because it’s on the border and transportation it is so much easier. So I think it was cheap as a region. I think commodities, Latin America is a big commodity producer. Various different countries could do different things. Chile’s obviously known for copper. So yeah, I think it’s a mixture of all of the above.

JSL: Yeah, as Darius says, you know, copper’s quite a big thing, you know, in you know, the energy transition and production of EVs and so forth. So about 46% of the world’s couple comes from Latin America. So that naturally has an impact. Brazil also has a strong sort of agricultural sector and that’s been quite strong, obviously, again, the weaker dollar.

So you know, I think the LATAM sector is up about 28% year to date. And you know, it has done very well. But you know, the problem is that at the end of the day, often it’s the politics that stymie markets in Latin America and Brazilian elections are coming up next year. So I think we might see some increased volatility in markets there as the year sort of peters out and that that may well give a better entry point if investors are looking at it.

SW: Okay. And just before we get onto fixed income and looking forward towards the end of the year, I just wanted to touch on quickly some of the worst performers because I’ve noticed North American smaller companies, but also healthcare at the bottom of the table. Now healthcare I would think is typically more defensive. And so do you have any deep concerns for these sectors or is it simply a value opportunity and you need to just wait for them to turn around?

JSL: So I mean, I think some US smaller companies, they’ve been hit by money going into the Mag7. And combined with, as I mentioned earlier, higher interest rates tend to be negative for smaller companies. And in this in Q3 actually US smaller companies did fare a bit better because interest rates were coming down. But you know, you’ve got this sticky inflation and possibly higher inflation with the tariffs. So I think the jury’s out a bit on US smaller companies.

Healthcare has suffered with uncertainty around US policy and you are right, yeah, it’s traditionally been quite defensive, but it just hasn’t really been with Trump, you know, waging more on the cost of drugs in the US. But I think the unpredictable policy landscape has made investors sort of nervous and tariffs and so forth. Also there was a bit of a pullback because there was a bit of an exuberance around the GLP-1s. And that’s kind of come off and the S&P 500, healthcare is now trading on a 25% discount to the broader market. So I think you could argue that actually this is quite a good entry point for healthcare.

DM: Yeah, I think that the overhanging issue about cost of drugs in the US has been a sort of big cloud over the healthcare sector. The thing that I think easily forgotten is after the US election in Q4, US smaller companies rallied huge amounts you know, sort of in excess of 20-30% before even the inauguration on the presumption that Trump was going to be more business friendly, cut regulation, all that sort of stuff. So they’d had a big rally sort of between December and and end of January and then they had a little bit more to give back and healthcare everything that Juliet has just said really, you know, it’s definitely a sector that’s been left behind this year and potentially offers some value

SW: And quickly on fixed income because we’ve not talked much about it. You mentioned corporate bond spreads earlier Darius, but from a fixed income side we’ve seen UK index linked gilts and US dollar bonds as some of the worst performers. Is how much of this is just this sticky inflation and rate expectations? And should investors be kind of changing their approach to fixed income looking at maybe shorter duration or something else? What’s kind of your update on fixed income?

DM: So full disclaimer, I’m not gonna anyway claim to be an expert on index linked bonds other than inflation should be good for them because it’s a number plus an inflation figure. So the higher inflation figure, the higher the yield that one might expect.

There’s been some odd things happening in the bond market. And then by that I mean the government bond market. So interest rate moves determine short term interest rates in the bond market, but it should have some impact on all ends, you know, all durations. And by that I mean, you know, 10 year bonds, 20 year bonds, 30 year bonds. Yet during the Liberation Day sell off in America, US long dated bonds went up. It’s not traditionally supposed to happen. And whilst UK interest rates, which have been cut a number of times already this year, the US gilt has been going, the long dated gilt has been going up two levels in excess of the Liz Trusts mini budget yield spike tantrum. That tells me that the bond market doesn’t believe the fiscal plans or the ability of the governments – not just in the UK – to balance those books.

So if there is some fairly attractive yield in government bonds and as I said earlier, the return for lend lending to either investment grade companies or high yield companies, that extra bit that you should get is at record lows. So broadly, as we sit here here and end this of September, you know, we definitely favour government bonds and as you said, short duration.

So just as a brief reminder, if rates go up, prices go down and if rates go down, prices go up and the more of that duration that you have, you are more sensitive to that rate move. So rates go down, bonds go up, you want more of the duration, but excuse me, you get actually not particularly in the US there’s not that much yield between the longer dated bonds and the shorter dated bonds. So most people are going just buy the shorter dated bonds, I remove that sensitivity, yes, it might be there, but I don’t want it, I just want this nice 2, 3, 4, 5% return without taking, you know, going to 5% on the longer dated bonds where you might make capital returns. Absolutely, but you might make capital loss.

So if I buy short duration duration bonds, I sort of remove most of that duration rate risk. So yeah, I think government bonds offer a fair return at the moment and you know, at some stage I think, you know, that longer dated certainly on the gilt market when we’re not taking any currency risk, you know, has looked attractive because of worries about the ability of the government to balance the books.

JSL: Yeah, that’s right. One manager said you know, the market, you know, the government bond market, is telling you basically that it doesn’t trust the government because both the UK and the US governments are highly indebted with no plans to cut spending and sticky inflation. So it’s not really a pretty picture.

DM: But you touch on the inflation word, which is obviously, I didn’t mention and inflation has been stickier, particularly in the UK but also in the US and the want to cut rates, which I think both sets of governments would like, because it puts pounds back in the consumer’s pockets and makes you feel slightly better off as your mortgage payments are reduced, inflation is sticky and that’s the conundrum at central banks.

SW: Well let’s try and finish on a slightly positive note. So final question: final quarter of the year, what do you see as the kind of best opportunity and if you had to give listeners a takeaway for their portfolio before the end of the year, what would that be? What would you be telling them?

JSL: Oh, right, okay. Well shockingly for me, because I’m really the biggest risk taker on the team, I would say maybe reduce risk. As I mentioned, I’m sort of wary of, you know, equity valuations looking a bit stretched and markets looking vulnerable to negative economic and political events. But you know, there are, I think there are pockets of value out there. I mean <laugh>, dare I say it, UK smaller companies still look good on a long term basis.

And as we talked about, healthcare looks a little bit oversold India, which is another thing I like, is actually down over 8% year to date. So could that be a good entry point? And you know, as Darius has mentioned, emerging markets are positively impact impacted by the weak dollar. So that’s another interesting area. But always above all, stay diversified and if there’s a pullback, use it as a buying opportunity if you can.

DM: Well I think maybe the lesson of the year is that markets can go down and I think we all understood why markets went down that tariff fear looked really bad for global growth, a potential global recession, but that quickly was removed and then markets have more than bounced. And if you were trying to be clever in timing markets, I think just buy the dips is fine and Jules is the highest risk taker. I’m gonna throw a really high risk thought, which is gold miners.

So gold is being rip-roaring silver as well. And when gold and silver go to elevated prices, which they now are, and I’m not saying that gold is going up, but even if gold stays at this level or anywhere above 3000 tends to be really positive for gold and silver mining companies. There are funds that you can find at FundCalibre, which have high exposure to those themes. So if gold stays high and silver stays high, I think silver could still go considerably higher as it always lags gold. But gold and silver miners made a lot of money this year, so, you know, I don’t like backing this year’s winner, but if gold and silver stay high, I think you could still make a lot of money in the next 12 months. If gold and silver collapses, all bets are off.

SW: Well on that note, we will leave it there. Until next time, our next quarterly podcast is going to be in January, so we will recap 2025 and look ahead to the new year. But until then, the Investing on the go will continue with its weekly interviews of our Elite Rated fund managers. So thank you both Darius and Juliet and I will see you in the new year.

JSL: Thanks Staci.

DM: Thanks Staci. Thanks Jules.