The latest Financial Stability Report paints a picture of a financial system that's robust yet standing on shifting sands that could give way at any moment. On the horizon are significant global risks associated with geopolitical tensions, market fragmentation, and sovereign debt pressures, which remain material going into 2025. Furthermore, as an open economy with a large financial sector, these risks are particularly relevant to UK financial stability. The report also provides a striking assessment of market valuations, with government bond yields increasing, yet risk premia across several asset classes have compressed further, flirting dangerously close to historical lows.

This suggests a potential disconnect between market valuations and underlying economic fundamentals, exacerbated by a growing shift in monetary policy expectations. Consequently, prudent investors should consider increasing allocations to defensive assets and scrutinising any exposure to highly leveraged corporate borrowers.