These forces, combined with divergent economic trajectories and a surge in AI-related capital expenditure, created challenges but also distinct opportunities for agile managers.
The US economy demonstrated resilience, growing modestly above trend despite tariff-related volatility and a prolonged government shutdown. Across the Atlantic, growth in Europe and the UK hovered near trend levels, while China met its 5% growth target, driven by strong exports, even as domestic consumption remained subdued.
As inflation moderated globally, central banks proceeded with policy normalisation, although their paths diverged notably. The Federal Reserve continued its gradual normalisation amid growing concern over softening labour market dynamics. In contrast, the ECB cut rates towards neutral, responding to a benign mix of growth and disinflation, while the Bank of England maintained a restrictive stance to combat persistent inflation. The Bank of Japan extended the tightening cycle it began in 2024, reintroducing volatility to the long end of the Japanese government bond curve.
Long-term yields rose modestly, driving a steepening of yield curves in most major markets. This trend was most pronounced in German Bunds and Japanese government bonds, where expectations of fiscal expansion and increased issuance pushed term premia higher.
This backdrop of resilient consumption, robust capital expenditure, and shifting policy expectations fed directly into positive risk sentiment. Equities, credit, and emerging market debt performed strongly, weathering brief bouts of volatility following the April tariff announcement and tensions in the Middle East. Credit spreads compressed to near-historical tights, supported by solid fundamentals and low default rates, with subordinated debt and high yield sectors outperforming amid strong risk appetite.
Emerging market local currency debt also delivered robust returns, driven by contributions from both rates and foreign exchange. However, performance varied widely across countries, reflecting the broader global divergence in policy and growth fundamentals observed throughout the year.
In currency markets, the US dollar weakened notably as investors diversified away from US assets and increased FX hedging ratios. The trade-weighted dollar declined by 7% over the year, with the sell-off intensifying after the April tariff announcement. In this environment, precious metals and commodity-linked currencies outperformed, while the Japanese yen lagged.
During the year, the Fixed Income Department continued to strengthen its analytical and investment capabilities, placing a strong emphasis on technology integration. It significantly enhanced insight generation and decision-making through its continued development of AI-driven research platforms. In parallel, the Department expanded its talent pool across FX, credit, and quantitative strategies, while further broadening its investment universe.
