Economic outlook
The contradictions that are surfacing in equity markets over whether optimism is outstripping reality also seem to be playing out in the economy in general. Looking at the US economy – it is, after all, the engine of global growth – it appears relatively benign at present. Interest rates have been falling and, no matter the unconventional approach of the Trump administration, there do not seem (as of now) any significant negative effects from these policies.
So, for example, there is little evidence thus far that Trump’s signature tariff policy has accelerated inflation to any great extent. Likewise, the uncertainty that pervades current policymaking isn’t yet slowing the economy – by causing significant job losses, for example.
Yet it’s impossible to put concern about the potential economic damage to one side. The imposition of tariffs cannot do anything other than increase the price of the goods they affect. Similarly, the recent shutdown of the US government, which held up payments to federal workers and interrupted various social security initiatives, will of course take some money out of the economy.
Of course, the disruption in international trade from the US policy won’t help boost growth elsewhere (although there are signs that other non-US bilateral trade relationships may be developing). It’s understandable then that – while the data at present don’t seem to be ringing any alarm bells – there remains a niggling feeling that worse is yet to come.
Equities
Equity performance over the past year
5/12/2024 – 5/12/2025, local pricing
As equity markets have continued their upward march through 2025, there has been increasing concern that we are seeing a repeat of the “dot com” bubble of 2000 (when prices surged on expectations for the benefits that would accrue from this newfound thing called the Internet). An extra headache today is that the rise in markets is attributable to a few very large stocks – all of which are in the tech industry and are those most heavily involved in AI.
From a global economic perspective, what is happening in AI is very positive. There are several large US-based companies large enough to afford to spend the huge sums necessary to take AI forward and realise its potential. These firms are competing with companies in China who, while approaching development somewhat differently, still represent serious competition.
If we look forward five years, AI may well be transformational, but there is a strong possibility that transformation will be slower than expected. Moreover, it is very unlikely that all the players involved are going to be successful. There is no doubt that suppliers like Nvidia (with its dominant market position in AI chips) will prosper in the short term. But the semiconductor industry is cyclical, so we will likely move through periods of oversupply coupled with sharp decreases in demand and pricing. Many competitors are also aggressively developing their own AI chips.
In short, there will probably be some serious winners in the AI game. But there will also be much investment that gets little or no return. Judging which companies are going to be the winners is not easy; taken overall, the average investor return from AI could well disappoint, no matter how successful it is from a general economic aspect.
Bonds
Bond performance over past year
All bonds 10+ years, 5/12/2024 – 5/12/2025, local pricing
The gyrations in interest rates over the last 25 years have seen periods when bonds were effectively uninvestible. This is not the case at present, with positive real yields both in the US and the UK, and even in Germany (where the perceived safety of its investments often means investors get little compensation in the form of yield).
When interest rates were very low, we came to the conclusion that it was difficult not to have a large core holding of equities relative to bonds. This may be changing – assuming that bonds remain investible for a time, there is a strong case to hold a substantial bond holding – the argument being that bonds now look reasonable value while equities look expensive.
Euro cash
The onset of inflation saw the ECB raise its benchmark deposit rate to a high point of 4% in September 2023. This has now reduced to 2%, with further reductions possible. Deposit rates have fallen over the last two years, making cash a less attractive investment.
Irish commercial property
The Irish commercial property market is expected to slowly transition into a recovery phase in the coming years, supported by improved credit conditions. Demand is likely to be focused on properties with strong environmental qualities.
It remains a difficult asset class due to liquidity concerns and the structural challenge that many properties may require retrofitting to remain competitive.
Commodities
Commodity performance over past year against equities
3/12/2024 – 3/12/2025, US dollars
Oil prices began the year at a strong price but declined sharply in the first quarter of 2025, reaching a low in April. Prices have recovered and remained in a range of roughly $60-70 for the rest of the year. Precious metals like gold, silver and platinum have done exceptionally well, with industrial metals also performing strongly. Other commodities have had a more mixed year, with worries over trade tensions and a weaker global economic outlook putting pressure on some markets.
Hedge funds
Hedge fund performance over past year against equities
30/11/2024 – 30/11/2025, US dollars, hedge funds priced monthly
Hedge funds can make an appropriate investment because of their defensive qualities – they’ve disappointed over the longer term but have been better recently.
Currency funds
These funds have shown gains and losses recently. They are useful as a diversifier because of the relative independence from other securities but can experience significant volatility over the short term.
Multi-asset funds
Because of the very wide range of investments they hold, they provide useful diversification, and the ability to dynamically shift asset allocation can provide some protection in times of equity market corrections.
Senior loans
These floating-rate sub-investment rate securities offer a premium over cash and are useful for diversifying a portfolio.
