Richard Bonnor-Moris

As we move towards the final quarter of 2025, the investment landscape presents a complex mix of opportunities and pronounced risks. Global asset prices have continued their climb since the tariff induced lows of April, largely driven by expectations of imminent interest rate cuts from the Federal Reserve and other major central banks. Yet, beneath this bullish momentum, a disconnect is growing between market optimism and a deteriorating macroeconomic backdrop, urging us at Rivers Capital Management to maintain our cautious and disciplined investment approach.

The global economy is displaying classic signs of a late-cycle slowdown. Unemployment rates are ticking upwards, a reliable indicator of weakening labour markets, while key leading indicators such as manufacturing data and consumer confidence metrics are trending downwards. These signals align with business cycle models that suggest a recession is a looming probability. Inflation, while off its peaks, remains stubbornly above central bank targets. A concerning possibility is that policymakers may become more tolerant of this persistent inflation as a mechanism to erode the real value of historically high debt burdens.

Indeed, the unprecedented level of global debt is a primary anchor on growth and a significant source of risk. In the United States, government debt stands at $37 trillion, or roughly 120% of GDP. For the first time, the nation’s interest payments on this debt have surpassed its defence spending, severely limiting fiscal flexibility. This challenge is not contained to the US. France, the Eurozone's second-largest economy, exemplifies the global nature of the problem, with its own debt-to-GDP ratio near 120% and bond yields recently spiking due to political uncertainty. This serves as a stark warning that even major developed economies are vulnerable to a sudden crisis of confidence.

Consequently, we anticipate that the effectiveness of monetary easing will be limited. While rate cuts may provide a short-term boost to market liquidity, they are unlikely to significantly reduce long-term borrowing costs in a world demanding a higher premium for holding debt. This creates a critical tension: the world’s debt balloon cannot expand indefinitely in a low-growth environment without consequences. Policymakers may attempt to inflate it away, which could support asset valuations for a time but risks triggering a sharper market correction and forced deleveraging.

In this complex environment, the Rivers strategy prioritises resilience and diversification. We have recently made tactical adjustments to position our model portfolios accordingly. Allocations to direct equities have been trimmed to manage exposure to potential volatility. Within fixed income, we have reduced duration risk by lowering the holding of longer-term bonds, which are highly sensitive to inflation and interest rate shifts. These steps are balanced by a maintained, material allocation to diversifier assets. This bucket includes alternative strategies and inflation-resistant securities designed to provide a non-correlated return stream, offering a buffer against economic uncertainty while still allowing for participation in market gains.

We believe that navigating the remainder of 2025 will require a dynamic and vigilant approach, favouring value and robust risk management over chasing stretched valuations.

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