October 2025 Review

• UK Consumer Price Inflation (CPI) remains at 3.8% year-on-year but better than forecast of 4.0%. The Bank of England has room to reduce base rates by 0.25% to 3.75% when its Monetary Policy Committee (MPC) meets on November 6^th given increasing unemployment. Also helping the argument for a base rate reduction is the decrease in average earnings growth from a high of 5.9% in February to 4.7% in August
• Despite concerns over the size of UK government borrowing, UK government bond (gilt) yields fell (prices rose) with ten-year yields falling by 0.30%
• Japan elects its first female Prime Minister, Sanae Takaichi. Her stimulative agenda for the Japanese economy proved to be a boost for Japanese equities which led equity market returns in October
• A weaker than anticipated US CPI report lifted expectations of two official 0.25% rate cuts in the US which proved to be a boost for US equities. The US Federal Reserve duly reduced its official Fed Funds rate by 0.25% on October 29^th
• A further cut in December is expected by financial markets but according to Federal Reserve Chair, Jay Powell, “is not a forgone conclusion”
• US company earnings announced so far for the third quarter of 2025 have surpassed estimates – helping the equity market to continue its positive momentum
• Nvidia, buoyed by artificial intelligence (AI) related capital expenditure (capex) is now valued at over USD5 trillion (£3.865 trillion), more than the gross domestic product (GDP) of Japan, Germany and India
• A US Government shutdown (now a month old) failed to unnerve financial markets

Reasons to be Careful

As AI capex heads towards full throttle, it’s imperative to assess funding for the enormous capex. Even the most cash-rich companies are now taking on debt, raising fears about their health if returns on investment are subdued in the coming years. Debt to equity ratios (aka leverage) are something investors should keep an eye on. As the chart below from Marquee Finance by Sagar illustrates, some companies like Apple, IBM and Oracle have high debt to equity ratios. As an analogy, think of a £1.2 million pound home financed by borrowing of £1 million, five times the equity component. That’s fine if house prices stay the same or rise over time as they tend to do but, while equity prices as a whole rise over time, they are more volatile than UK house prices and companies like Oracle carry company specific risk.

Banks will finance $38 billion for Oracle’s data centres, despite Oracle having the highest Debt/Equity ratio among large tech companies.

Furthermore, as the private credit ‘cockroaches’ emerge, below is the exposure of individual banks to the private credit universe, again sourced from Marquee Finance by Sagar. As a further example, Meta raised USD60 billion in debt recently, USD30 billion via the corporate bond market and the same amount via the private credit market. Meta is one of the better borrowers in the private credit marketplace.

While we are not suggesting there is anything to worry about in the near term, the risks are rising in the banking sector and in some elements of the AI story. AI remains a gamechanger for many including those companies who have been early adopters of it to streamline their businesses. Lay-offs have increased sharply in the US in 2025, as illustrated by the following chart sourced from Bloomberg. 2025’s job cuts have already surpassed each full year back to 2009 with the obvious exception of 2020. How much of this year’s lay-offs are down to AI as opposed to a weaker US economy and Trump-induced government lay-offs?

Your Money

Pier Portfolios continue to be conscious of high valuations in certain US equities and the associated risks from investing in them. Pier has exposure to AI in both active (Plus) and tracker form through all three Pier portfolio solutions and diversification ensures no one company represents an outsized risk. Pier continues to favour reasonably priced global equities and a more balanced approach that dilutes the impact of a few large companies.

To mitigate the risks of rising bond yields (falling prices) in long-dated government bonds, bond investments have been kept in shorter maturities where there is less price volatility.

As an illustration of AI’s influence in October, the Polar Artificial Intelligence Fund (held in Plus) rose by 11.75% in October, 4% higher than the next best provider.

Portfolio Performance