In the final quarter of 2025, global equity markets experienced further advancements, characterized by a broadened leadership as investors pivoted from dominant U.S. technology firms to cyclical sectors. Canadian equities outpaced their U.S. counterparts, propelled by robust commodity price surges, particularly in gold. European markets also demonstrated significant gains, buoyed by semiconductor industries, banking sector benefits from steeper yield curves, and mining operations capitalizing on a strong commodity market. Despite the market's bullish trend, Mawer Investment Management's investment approach, centered on sustainable cash flow, diversification, and risk mitigation, initially lagged benchmarks due to an underweight position in gold stocks. However, strategic adjustments were made throughout the year to align with evolving market dynamics, focusing on gold-related companies with differentiated business models and increasing U.S. equity exposure while reducing emerging and international allocations. These changes reflect an ongoing commitment to quality, balance, and durability in a shifting economic landscape driven by technological innovation and evolving fiscal and monetary policies.
Looking ahead, the investment environment is marked by a complex interplay of optimism and skepticism. Artificial intelligence continues to be a central theme for productivity and portfolio construction, yet its financing and valuation are drawing increased scrutiny, particularly regarding debt funding for data centers and the potential for expectations to outstrip economic realities. Fiscal policies, originally designed for crises, have become entrenched features of the modern economy, with expansive spending and tax incentives fueling growth while raising questions about debt sustainability. Monetary policy, instead of acting as a counterbalance, continues to support this fiscal momentum, maintaining abundant liquidity. This environment necessitates a continued focus on assets exhibiting genuine scarcity, robust margins, and disciplined capital allocation. Mawer Investment Management remains steadfast in its philosophy of prioritizing quality, balance, and durability, recognizing that companies with stable cash flow and prudent capital management are best positioned to navigate cyclical market turns and policy shifts, ultimately providing a valuable advantage in an unpredictable world.
Shifting Market Dynamics and Investment Performance
In the final quarter of 2025, global equities witnessed further growth, with leadership expanding beyond the previously dominant U.S. mega-cap AI stocks towards more cyclical sectors. Canadian equities outperformed U.S. markets, largely driven by strong commodity gains, particularly in gold. Similarly, European equities excelled, supported by semiconductor industries, banks benefiting from steeper yield curves, and mining companies. While AI remained a central market theme, increasing concerns over data center profitability and power supply sparked discussions about a potential bubble, drawing parallels to historical tech booms. Mawer Investment Management’s quality-focused portfolios faced a challenge in keeping pace with benchmarks, primarily due to their long-standing underweight in gold stocks, which became a significant driver of the Canadian market. This underweight position was strategically narrowed throughout the year in response to geopolitical uncertainties, de-dollarization trends, central bank gold purchases, and declining interest rates, focusing on gold-related companies with resilient business models. On a positive note, strong performances from Canadian financial sector holdings like TD, RBC, Scotiabank, and Manulife contributed positively, along with global heavy equipment distributor Finning and underwater vehicle technology company Kraken Robotics. Conversely, holdings in Constellation Software and its spin-off Topicus detracted from performance amid concerns about AI's impact on their software offerings.
In the U.S. market, Alphabet continued its robust performance, bolstering its position as a key portfolio contributor, as did Amphenol, driven by high demand for AI-related interconnect products. Both companies were top performers and significant contributors to the portfolio's overall results. Waters Corporation reported solid growth, particularly in Asia, and Mawer increased its position after the acquisition of Becton Dickinson's biosciences and diagnostics business. Danaher saw margin expansion and strong forward guidance, while pharmaceutical distributor Cencora reported solid growth. In contrast, insurance brokers Marsh & McLennan and Arthur J. Gallagher faced pressures from a softer insurance market. Microsoft experienced a pause after a strong run as investor sentiment cooled regarding AI spending, and Aptar saw reduced demand due to inventory normalization. International equities experienced pullbacks, notably defense contractors like BAE, Leonardo, and Thales, due to speculation about a diplomatic resolution in the Russia-Ukraine conflict, although earlier geopolitical events had boosted their shares over the year. Chinese internet companies like Tencent and Tencent Music also saw advances partially reversed amidst broader weakness in Chinese stocks, despite their strong overall performance in 2025. Partially offsetting these declines, SK Hynix nearly doubled, driven by explosive demand for high-bandwidth memory, alongside other AI-linked companies such as TSMC, Kokusai Electric, King Slide, and Hitachi, which benefited from fundamental strength and rising demand.
Strategic Adjustments and Future Outlook
The balanced strategy maintained a neutral asset mix, reflecting growing concerns over valuations amidst persistent uncertainties about the economy's true health. Recent portfolio adjustments included a modest reduction in overall equity exposure due to these valuation concerns. This was accompanied by a strategic shift from Canadian small-cap equities to larger-cap Canadian equities, recognizing a broader opportunity set within high-quality businesses at the larger end of the market. Additionally, Mawer increased its allocation to U.S. equities, sourcing this from emerging markets and, to a lesser extent, international equity allocations. The net outcome of these portfolio changes was a slightly lower overall equity weight and, at the margin, a reduced direct exposure to AI-related themes, reflecting the underlying equity strategy. Fixed income remains an attractive asset class, driven by global central banks pivoting towards easing monetary policies, persistently elevated yields compared to historical averages, and softer labor market data, which increases the likelihood of interest rates trending lower. These factors collectively suggest a supportive environment for bond returns, reinforcing the strategic importance of fixed income in the overall portfolio.
As 2025 concluded, investors faced a familiar blend of optimism and uncertainty. The potent combination of AI innovation, continued fiscal expansion, and gradually easing monetary policy sustained both economic growth and market confidence beyond many expectations. However, the underlying dynamics of this expansion are undergoing significant shifts. Global economies are being reshaped by policy decisions, technological advancements, and the rise of populist politics. Artificial intelligence remains pivotal for productivity aspirations and portfolio positioning, but the methods of financing and valuing AI-related promises are becoming more stringent. Debt funding plays an increasingly prominent role in the expansion of data centers, and while corporate balance sheets generally remain robust, investors are scrutinizing the rising debt levels of some technology companies. The confluence of industrial-scale investments, still-unproven economic models, and elevated valuations amplifies the risk that market expectations could outpace reality. On the policy front, what began as emergency stimulus measures have now become permanent fixtures of the economic landscape, with extensive fiscal support continuing into 2026, even as concerns about debt sustainability grow. Monetary policy, rather than acting as a check, continues to accommodate this fiscal momentum, maintaining abundant liquidity. This environment leads to elevated long-term yields as investors anticipate persistent deficits and a gradual erosion of money's real value. If AI-driven productivity gains exceed expectations, the primary challenge may shift from economic stagnation to overheating. For investors, the combination of political ambitions and ample liquidity has kept markets buoyant but reliant on continuous policy support. While credit spreads are tight and risk appetite is strong, loose financial conditions still tend to reward speculation over discipline. As the economic cycle matures, assets characterized by genuine scarcity, resilient profit margins, and prudent capital allocation are expected to become leading performers, reinforcing Mawer's enduring focus on quality, balance, and durability.
