Macro and Market Review
December is known to occasionally deliver a valuable year-end gift to investors – recall December 2017 and its final rally amid a ‘Goldilocks’ environment. Moderate inflation coupled with accelerating growth propelled markets seeking upward revisions in anticipated earnings. This year, a ‘Santa rally’ seemed highly improbable: as December began, markets had already posted substantial gains, with elevated valuation multiples across many major indices. However, this assessment failed to account for December 2025's decisive factor: the Fed implemented a third consecutive rate cut, despite internal dissent, while simultaneously revising down its rate projections. This provided sufficient impetus for markets to resume their upward trajectory, notably and paradoxically outside the US. The rate cut from 4% to 3.75% was based on a limited set of economic indicators due to the government shutdown, with the Consumer Price Index released on December 16 only later confirming the decision's appropriateness. US inflation is indeed subsiding, fully legitimising the Fed's monetary easing cycle.
Against a backdrop of an ECB maintaining its status quo and the Bank of Japan raising rates to 0.75%, this American monetary easing continued to weaken the dollar, reinvigorating markets sensitive to declines in the US currency. Emerging markets consequently excelled in December, benefiting from several months of a weaker dollar. Europe also capitalised on this environment, with ‘value’ sectors regaining prominence in institutional portfolios: automobiles, materials and financials drove market gains in December. When the technology sector raises concern but short-term rates decline, traditional ‘value’ stocks tend to become attractive to investors – essentially summarising December's market dynamic.
Nevertheless, vigilance is warranted: while recovery gains visibility in Europe and China, real rates remain positive on both sides of the Atlantic, increasing by approximately 15 bps in December. Capital costs are therefore rising, and traditional manufacturing sectors have limited capacity to absorb this phenomenon. December's paradox thus lies in a rally fuelled by short-term monetary easing obscuring the significant rise of long-term rates, particularly real rates – a combination that, it should be noted, generated a difficult period in 2022. While comparisons have their limitations, caution may return to the forefront should signs of economic deceleration emerge. That said, December delivered an appreciable year-end rally, particularly outside American equities.
In this context, global equities were up 90 bps, driven by emerging markets (+2.6%) and value stocks (+1.5%), while growth securities stagnated. The US 2-year rate declined by 2 bps, while the 10-year rate increased by 15 bps. The European dynamic diverged: the 2-year rate rose by 9 bps and the 10-year rate by 16 bps. Yield curves thus steepened globally but more substantially in the US than Europe – hence the dollar's 1.3% decline. Consistent with this bullish trend, credit spreads narrowed, with the Crossover index leading this move with an 11 bps contraction. Commodities experienced a stable month, with declining energy prices offset by appreciating metal prices.
Portfolio Activity
Portfolio exposure increased over the month, closing the year at c.160%. Allocation rotated slightly away from defensive assets (c.-5% allocation to sovereign bonds) towards cyclical assets (equities, credit, commodities). Our volatility estimates decreased slightly across all asset classes bar commodities, while momentum signals worsened across sovereign bond markets but remained positive across all cyclical assets (commodities, equities, HY credit). Additionally, our aggregate risk-appetite indicator remained in risk-on territory over the month. On the macro side, our growth signals still indicate a global recovery. Our inflation nowcasters show that pressures remain higher in the US and Japan, while our monetary policy nowcaster continues to foresee an accommodative stance from the main G10 central banks.
Performance
In December 2025, LO Funds–All Roads was up 0.3% (GBP NA share class), returning a positive performance over the year (6.2%). Over the month, cyclical assets were the top contributors, with equities contributing 30 bps, commodities 50 bps and corporate credit 20 bps. Sovereign bonds however detracted 75 bps. Our overlays detracted 10 bps, driven mainly by our carry strategies (-25 bps), while trend and macro overlays were slightly up.
Outlook
We now enter the strategic first-quarter period, a decisive phase where Europe has consistently excelled over the past four years. This time, it may share this leadership with other market segments – notably the value component of US equities and emerging economies, both supported by a weakened dollar and the anticipation of further rate cuts. Our primary concern remains the continuous rise in real rates, which is difficult to reconcile with elevated valuations. While our investment indicators – macroeconomic, technical, and valuation-related – paint a generally favourable picture, several risk factors could nevertheless converge and trigger episodes of significant volatility.
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