CIO Lens Q4 2025: Seeking resilience as clouds form
In this quarter’s CIO Lens, our investment experts reflect on how some of the prevailing trends that have boosted markets this year are now becoming extended and consider the risks that may lie ahead.
Authors
In this quarter's CIO Lens:
- Johanna Kyrklund, Group Chief Investment Officer, reflects on three risks that cloud the horizon as prevailing trends in markets become extended. Watch Johanna’s latest video by clicking the link above.
- Our multi-asset investment team give an update on their public market asset allocation views, including why they have downgraded their view on government bonds and where their preferences lie within equities.
- Nils Rode, Chief Investment Officer, Schroders Capital, discusses the importance of sourcing resilient return opportunities in the current market - and why private markets may offer attractive relative value across select asset classes and strategies.
- Andy Howard, Global Head of Sustainable Investment, reflects on the backlash to sustainable investing and the importance of distinguishing between social challenges and investment drivers.
- The Schroders Economics Group outlines their current baseline forecasts and risk scenarios. US inflation is expected to remain elevated while risks include a soft patch in US data and a weaker dollar.
"Market trends are becoming extended" by Johanna Kyrklund, Group Chief Investment Officer
As we head into the final quarter of this year, it’s instructive to look back over the trends that have unfolded as we expected, and those that have come as a surprise.
US economic growth has held up well, as we anticipated, and this underpins our positive view on equities. Some recent labour market data has been soft, but wage growth is still solid and the level of layoffs is low. We continue to view the risk of US recession as being low. As we’ve said before, expansionary fiscal and monetary policies are supportive of equities, as long as the bond market is stable (more on this later).
Gold has been our preferred choice of diversifier and this is another trend that is playing out as anticipated. Gold offers protection against concerns over government debt sustainability and central bank independence.
We also expected a broadening out of equity returns and, while the US remains dominant in technology, we have seen markets outside the US attract attention due to their relative value, such as China for example, which has been the best performing market this year. Geographical diversification has been helpful this year.
So for now the “populist playbook” is intact. Benefit from higher nominal growth by owning equities and own gold as the diversifier. However, we need to recognise that some of these trends are now extended and there are a few clouds on the horizon:
First, the equity market is becoming increasingly bifurcated into AI winners and losers and we are seeing some signs of froth in the market. The AI bulls will point to unprecedented capital spending. At the same time, even AI leaders are talking about bubbles, technology is now 40% of the S&P 500 and a rising share of AI capex is debt-funded.
We have repeatedly argued that this risk needs to be managed at stock level and our stockpickers still like the hyperscalers while monitoring the capex binge closely for any signs of deterioration in returns. This vigilance is particularly warranted given the high weight of some of these stocks in the index. I know I am biased, but I am concerned about passive exposures to this space given the high level of stock specific risk.
Second, I am concerned about the extent to which President Trump may be undermining the independence of the Federal Reserve. The Fed has recently turned more dovish, cutting interest rates in September and signalling more cuts to come. Trump has made no secret of his desire for lower rates, and it could be that monetary policy is eased beyond what is warranted by economic conditions. The risk is that this stokes inflation in 2026, especially as companies will also be passing on the cost of tariffs to the consumer
The third worry is the sustainability of government debt. So far, the overall level of yields has been contained but we are seeing some signs of increased volatility at the longer end of yield curves in countries such as France, the UK and Japan.
In France, yields for some French corporates have fallen below those for French sovereign bonds. It’s a sign of the times that luxury goods group LVMH is seen as a safer bet than the French government. We need to continue to monitor the impact of populist policies on bond markets, particularly if inflation picks up again in 2026.
Investing is never easy, and there are signs of over-exuberance in AI, but we stay constructive on equities as we expect growth to be positive and interest rates, for now, are low.
Public markets asset allocation views, by the Multi-Asset investment team
Equities (+) +
At the start of the quarter, we were positive on the outlook for equities. Although uncertainty over tariffs persisted, we continued to see a low probability of a near-term recession in the US. Consumption data was resilient and supported by low energy prices and a stable labour market, which together provided a solid buffer against external shocks.
However, tariff rates started to trend above our baseline scenario, and unreliable labour data was making it more difficult to assess the impact on the consumer, which was increasing the risk of near-term growth surprises. Inflation risks were also mounting due to fiscal stimulus, political pressure on the Federal Reserve (Fed), and potential tariff passthrough. Against this backdrop, we downgraded equities to neutral.
Whilst payroll data in the US has continued to deteriorate, broader measures of employment have remained positive. This has led to a repricing of interest rate cuts from the Fed. While we still believe that the risk of recession in the US is low, we recognise that the Fed is leaning in a more dovish direction than we had previously expected. This implies lower real yields, which, combined with decent corporate earnings and looser fiscal policy, resulted in an upgrade of the outlook on equities to positive at the end of the quarter, with a preference for US and emerging markets.
Government bonds (0) -
We started the quarter with a neutral stance on government bonds. While yields had risen and valuations had improved, medium-term concerns remained due to increasing debt levels and lingering inflation risks in the US. We subsequently downgraded our outlook on government bonds to negative mid-quarter. The recent rally after weaker-than-expected US payroll data has pushed valuations into more expensive territory. The risk of inflation also continues to be mispriced by markets.
Commodities (0) 0
We have retained our neutral view on commodities overall. Over the quarter, we maintained our positive stance on gold, despite its recent strong performance. We continue to see gold as a valuable diversifier in an environment of policy volatility, fiscal fragility, and growing investor uncertainty regarding the long-term role of Treasuries and the US dollar. We upgraded our view on energy to neutral. Additional buying from China to build inventories has kept the market balanced. However, further supply increases from OPEC and non-OPEC countries could push the market into surplus.
Credit (0) 0
We maintained a neutral stance on credit throughout the quarter. The cyclical backdrop has remained positive on the growth side, supporting corporate earnings and fundamentals. Overall, fundamentals are stable and debt costs appear to have peaked. Financials’ earnings have also been strong, which is a supportive factor for investment grade credit. However, valuations remain expensive relative to historical levels, so we remain on the sidelines for now.
Private markets investment outlook Q4 2025: focus on resilience, by Nils Rode, Chief Investment Officer, Schroders Capital
On the face of things, the investment environment currently can appear benign. In recent months, public equities have broadly rallied, bond markets have stabilised, and expectations of further rate cuts in the US have fuelled investor optimism.
However, dark clouds are forming on the investment horizon. Concerns about the ripple effects of tariffs, uncertainty around central bank policies and inflationary risks – particularly in the US – as well as questions of fiscal sustainability, are being temporarily eclipsed by the current wave of valuation euphoria, especially surrounding areas such as artificial intelligence.
Yet this exuberance only adds to a growing list of risks, given the historical pattern of boom-and-bust valuation cycles following major technological breakthroughs. At the same time, geopolitical risks stemming from ongoing conflicts in Ukraine and the Middle East, alongside persistent uncertainty over US policy, remain elevated.
Diversification and return opportunities
Set against this backdrop, select private market strategies can offer a degree of insulation from some of these prevailing macroeconomic and market risks. The breadth and diversity of the asset classes provide exposure to differentiated sources of risk and return that, in combination, can enhance portfolio outcomes.
As an example, renewable infrastructure offers exposure to energy prices, which tend to show limited correlation with broader economic growth. In general, strategies such as infrastructure and real estate, including both equity and debt exposures, are typically backed by tangible assets, which can support a more resilient return profile during periods of elevated volatility.
Elsewhere, our research also shows that private equity – particularly in the lower-mid-market segment – has historically delivered its strongest relative outperformance during periods of heightened public market volatility.
At the same time, private markets more broadly are currently benefiting from a convergence of cyclical and structural tailwinds that are catalysing compelling opportunities for return generation and portfolio diversification. Structural tailwinds include the global energy transition and the broader technological revolution, which are reshaping industries and capital flows.
Cyclical drivers stem from the lower transaction activity and subdued fundraising over recent years that we have discussed previously. This has created favourable capital supply-and-demand dynamics that are supporting more attractive entry valuations and improved yield potential. Some areas, such as commercial real estate, have even corrected further, creating selective opportunities for disciplined investors.
Overall, and in contrast to public markets – where indices in many regions are at or near record highs and valuations appear stretched – we believe private markets currently offer attractive relative value across asset classes, with the notable exception of AI-related late-stage venture investments, which also show signs of exuberance.
Together, these factors not only increase the relative attractiveness of private markets but also strengthen their resilience by restoring healthier valuation levels and creating a more solid foundation for long-term growth. Bottom-up allocation applying high selectivity and targeting transformative value add are crucial to capture the most attractive opportunities and drive sustainable long-term performance.
Focus on resilience
As we look ahead to 2026, resilience will remain the defining quality for successful investing. In an environment marked by ongoing macroeconomic uncertainty and geopolitical tension, maintaining a steady investment pace, prudent risk management, and a focus on long-term value creation will be essential.
Private markets – with their long-term capital, active-ownership approach, and emphasis on bottom-up value generation – are well positioned to navigate this complexity and continue contributing meaningfully to diversified, resilient portfolios.
Taking into account the characteristics outlined above, we believe that the most attractive private market opportunities today are characterised by the following fundamental features:
- Balanced capital supply/demand, supporting attractive entry valuations and yields.
- Domestic exposures that help mitigate geopolitical and trade-related volatility.
- Access to differentiated risk premia via innovation, complexity, transformation, or market inefficiencies.
- Downside resilience through lower leverage or underlying asset backing.
- Reduced correlation to public markets through idiosyncratic drivers or uncorrelated risk exposures.
Private equity: Backing transformation and innovation
Private equity remains in a period of recalibration, with fundraising, deal activity, and exits still below pre-2022 levels. This environment is creating pricing dislocations and reduced competition, particularly in less efficient segments where capital is scarce.
We see opportunities in strategies that back local champions, drive transformational growth, and harness multi-polar innovation. Small and mid-sized buyouts, continuation vehicles, and selective early-stage venture investments are especially well positioned to capture value as markets adjust and as active ownership becomes an even greater driver of returns.
Private debt and credit alternatives: Income and protection
Private credit continues to show resilience, supported by solid corporate and consumer balance sheets and higher risk premiums and yields that provide meaningful income potential.
Bank regulation–driven inefficiencies and lower commercial real estate valuations create attractive opportunities in real estate debt. Infrastructure debt also remains compelling, particularly where revenues are inflation-linked or backed by essential assets.
The focus on collateral, security and diversification supports opportunities in asset-backed and asset-based finance, while diversifying strategies such as insurance-linked securities offer resilient income and uncorrelated returns.
Infrastructure: Energy transition remains key, long-term mega-theme
The energy transition remains the leading global infrastructure theme, though investment momentum in the US is moderating amid a shifting policy landscape. The segment continues to offer attractive inflation linkage and stable, long-duration income.
In Europe and much of Asia, supportive policy frameworks and strong pipelines in wind and solar projects continue to drive investment activity. Beyond core renewables, higher-return strategies are emerging that take measured development risk and invest early in new technologies such as battery storage and green hydrogen that are powering the next phase of the energy transition.
Real estate: Repricing sets the stage for strong near-term vintages
After a period of price discovery, prospects for global real estate markets are much improved. Investment volumes remain below pre-2022 levels but are stabilising, rental income is being supported by low new supply and elevated construction costs, and there is evidence that transaction pricing is recovering.
Amid these dynamics, we believe the coming several years are shaping up to be strong vintages. We are particularly drawn to sectors where operational improvement can unlock alpha – such as logistics, living, storage formats and hospitality.
- Read the full Q4 private markets outlook here
Sustainable investment at a crossroads: beyond ESG, by Andy Howard, Global Head of Sustainable Investment
Talk of the “ESG backlash” has dominated sustainable investment circles over the last year or two. It’s tempting to treat the shift in headlines, fund flows and focus as a pause, or as growing pains, which will reverse once political winds change and common sense prevails.
Such simplifications – of the challenge or the solutions – miss the mark in our view. Sustainable investment faces more existential questions. While a lot of the sustainable investment field is focused on terminology – re-assigning the meaning of E, S and G or re-labelling “sustainable” to “resilient” – re-badging the field is less important than being clear about objectives and approaches to delivering those objectives.
At Schroders, our purpose is to “create prosperity together”, which means working with our clients to deliver the investment outcomes they expect, using our commitment to interrogating key investment challenges. In sustainability terms, this means looking past superficial screens for “good” investments.
Three key areas stand out:
1.Differentiating between issues
The finance industry has not always found it easy to be clear about the distinction between social challenges and investment drivers, or between investing to manage risks and investing to promote positive change. The business and investment case for tackling many social challenges is clear and strong. For example, the policy support for clean energy technologies, and the ~90% and ~70% declines in solar and wind generation costs over the last decade1 as their use has expanded, has led to renewable energy becoming the lowest cost source of new power capacity. As a result, 91% of all new renewable projects in 2024 delivered electricity at lower costs than fossil fuel alternatives2.
Across the Schroders group, our emphasis is on the areas of greatest investment importance. In 2021, we announced that all the strategies we manage across Schroders had established and documented their approaches to integrating sustainability factors into investment decisions3.
In practice, this means each team can articulate how they identify issues they consider relevant, examine them, apply that analysis to investment decisions and engage with portfolio investments. We emphasise casting a wider net of analysis, rather than restricting investment, integrating structured analysis with the judgement and collective insight of our investment teams.
Many investors will continue to prioritise investment in the most socially important areas, and we have worked with many clients to help them do so, through analysis of how that prioritisation can affect investment performance, and by designing strategies to mitigate trade-offs.
2. Investing in change and improvement
Sustainable investment has largely been defined as a characteristic, rather than an outcome which is unlocked over time. Regulation has largely pushed the industry further in this direction in recent years, typically demanding that sustainable portfolios focus on companies or investments which are already sustainable, rather than on the improvement they deliver.
Our focus is also turning increasingly to transition over leadership – identifying the companies or assets in the strongest position to improve in the future, and using our voice and influence to encourage and support that change. While the market does not reward improved performance in all areas equally, in most common areas of sustainability it has rewarded improvement more richly than sustained leadership. For example, whereas companies with the lowest carbon emissions have slightly underperformed the market over the last five years, those which have decarbonised most quickly have delivered close to 4% annual outperformance over that period4.
Improving companies also deliver the strongest and most value real world outcomes. Building a portfolio of companies with already-low carbon emissions, or strong sustainability practices provides an optically “sustainable” portfolio but does little to contribute the transition needed in so many areas of society and its impact on the environment.
3. A web of change
Perhaps the biggest challenge of all is that disentangling the myriad structural trends driving global economies, industries and investment portfolios into individual issues which can be examined in isolation risks missing key risks and opportunities.
For example, the growth of AI presents significant opportunities, not least in delivering innovations to tackle environmental challenges. However, that growth also places huge stress on energy infrastructure and represents over 10% of annual greenhouse gas emissions growth. There is also the threat of social impacts as the most highly valued skills change more quickly than workforces can adapt. Examining any of these issues in isolation, without considering its impacts and causes, risks missing an important part of the picture.
Tackling this is clearly challenging. While it is instinctive to try to distil complex challenges into simplified views – focusing on one issue at a time and considering a limited number of potential scenarios – in practice systems thinking is becoming increasingly important.
By prioritising a comprehensive view of long-term sustainability factors in our investment processes, we aim to cast a wider net, encompassing causes and consequences, in our analysis. But advances in technology promise opportunities to bring a more structured lens to this holistic view of the world and the spectrum of futures it holds.
2 IRENA report: 91% of new renewable projects now cheaper than fossil fuels
3 Schroders Completes ESG Integration Process
4 Based on our analysis of MSCI ACWI constituents, ranking companies annually according to their scope 12 carbon intensity and selecting either the companies with the lowest average intensity over 2019-24 relative to sector peers, or those with the fastest reduction relative to peers.
Scenario analysis from the Schroders Economics Group
Economic and policy uncertainty remains elevated.
Baseline
Summary
We remain relatively optimistic on the global outlook and expect growth of 2.5% in 2025 and 2.7% in 2026. Tariffs may be higher than we originally expected, meaning that export-driven economies could face a soft patch. But the US labour market remains in good shape, while evidence of a cyclical pick-up continues to emerge in Europe. Export-driven economies may face a soft patch as trade flows normalise.
Macro impact
Inflation in the US is likely to remain elevated at 2.8% this year and 3.3% next year. The Fed is expected to cut rates three times this year and keep rates on hold next year. In comparison, we think the ECB and BoE are already at the end of their policy easing cycles.
Higher tariffs
Summary
Trade negotiations with China could fall apart meaning that the 145% tariff on goods is reinstated in Q4 of this year. At the same time, the deal with the EU falters before it is signed, while the US imposes more levies on certain sectors. The US effective tariff rate rises much further than in our baseline, while trading partners respond with retaliatory tariffs.
Macro impact
Deflationary: A sharp slowdown in global trade, aggressive cuts in capex and a collapse in confidence result in a global recession. Higher tariffs cause goods inflation to surge, notably in the US, but weaker growth and lower commodity prices eventually pull inflation down. Against this backdrop, the Fed keeps interest rates on hold while central banks elsewhere deliver more easing than our baseline forecast.
Aggressive rate cuts
Summary
Intense political and market pressure forces the Fed to cut interest rates aggressively despite the US economy remaining robust. In this scenario, the Fed is assumed to cut rate more aggressively than the baseline from Q3 onwards.
Macro impact
Reflationary: Global growth is boosted as rate cuts increase US demand. But further stimulus into an economy that already faces capacity pressures means that rate cuts fuel higher inflation rather than stronger real growth in the US, eventually forcing the Fed to hike rates again in 2026.
Dollar down
Summary
Investor concern over Trump’s policies reduces the demand for US assets which, against a backdrop of large twin deficits, leads to a further 20% depreciation of the dollar by the end of 2026. This causes increased borrowing costs in the US as investors require a higher term premium to hold US debt.
Macro impact
Productivity boost: Tighter financial conditions lead to weaker US growth relative to the baseline, while inflation rises due to higher import costs. However, other parts of the world benefit from the disinflationary impulse from the weaker dollar. In particular, emerging markets benefit from lower inflation and interest rates that result in stronger growth.
US soft patch
Summary
Uncertainty over the business environment causes US companies to stall hiring and capex spending plans in the second half of this year. At the same time, the slowdown in the labour market results in consumers saving more and a stagnation in the US economy and fears of a recession.
Macro impact
Deflationary: A soft patch in the US economy from Q3 onward leads to a slowdown in activity to ease capacity constraints. As inflation falls back, central banks have scope to ease monetary policy. With the Fed cutting rates more aggressively than in our baseline, this leads to a recovery in US growth in the second half of 2026.
Global fiscal crisis
Summary
While Trump’s large fiscal package turned out to be less damaging than the market had feared, weaker demand for US Treasuries causes long-term yields to rise sharply. Contagion pulls yields higher globally, exacerbated by concerns about debt sustainability in markets such as the UK, France and Japan.
Macro impact
Deflationary: Higher term premiums across the global economy cause financial conditions to tighten, which reduces household disposable income and corporate capex spending. This results in a decline in growth and inflation, which allows some central banks to cut rates in 2026.
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