View From The Top: Get diversified

View from the very top: The best form of defence is diversification. Investors need to recognise that the old world order is being undermined and that new and unpredictable geopolitical rules of engagement are being formed. However, capital will continue to flow to where returns are highest. Heightened geopolitical tensions have not shown any sign of derailing the US productivity-driven economic boom. Fiscal stimulus combined with abundant liquidity will provide extra support. These factors should help drive profit margins and earnings growth higher while corporate buybacks remain active. Investors can participate in an investment bubble without it bursting immediately. However, accept that risks remain elevated and that corrections will be inevitable. Intra-year drawdowns have little correlation to where equity markets typically end the year. Lean in to weakness and continue to diversify proactively.

Asset Allocation:

Equities: Global equities have continued their almost relentless rise, with the MSCI World Index up 2.2% year-to-date. However, the broadening of the rally has been the most important market dynamic. We expect this trend to endure too. Equal-weighted indices have meaningfully outperformed market cap-weighted benchmarks over the last three months, with mega-cap tech has lagged both metrics. Emerging markets have outperformed their developed market counterparts, value is beating growth, and small caps lead relative to larger names. Ongoing earnings momentum (Bloomberg consensus assumes 13.4% growth for the MSCI World Index in 2026) should be supportive for equities overall, but we expect investors to become increasingly discerning in their selections. Active managers should outperform.

Fixed income/ Credit: 10-year US Treasury yields have risen to their highest level in almost six months. While yields could remain elevated amidst more heightened geopolitical uncertainties, our strategy would be to avoid longer duration debt, particularly in fiscally unconstrained countries. At the same time, global corporate credit spreads are trading at their lowest in almost 20 years (using the Bloomberg Global Index). Some investors may be seeking to lock in yields at current levels, but it is important to remain mindful of increasing supply coming. 2026 has already seen record year-to-date issuance. It remains important to monitor growing risks in private credit.

Currencies: With the US Dollar trading at close to a four-year low, an increasing consensus has developed that Dollar weakness could endure. It may be hard for the Dollar to trend much lower, in our view, given the current strength of American economic growth and the fact that the Federal Reserve is unlikely to cut interest rates imminently. The Yen, however, may continue to strengthen should Japan remain on a path of fiscal expansion combined with tight money.

Gold: The precious metal has been a core part of our portfolio allocation strategy for some time. While there may be a tendency to take profit, the case for owning gold is not just based on its potential returns but also founded in its diversification benefits. Gold acts as a hedge against geopolitics, fiscal dominance and inflation. Elevated currency volatility also reinforces the importance of having exposure to this asset class.

Alternative assets: We believe that alternative assets should continue to prosper in a world where regime change and uncertainty remain at the forefront of many investors’ minds. Hard assets can exhibit resilience as well as offering both portfolio diversification and income-generating characteristics. We favour selective investments, particularly in uncorrelated strategies.

It wasn’t supposed to be like this. Few of the 2026 outlook notes published towards the end of last year would have foreseen the exfiltration of Venezuela’s leader, a criminal investigation launched against Fed Chair Jerome Powell and a brazen attempt by the US President to claim Greenland – all in the first month of the year. Yet despite the above, global equities and gold have made new highs. Focus on the bigger picture and follow the money. Most crucially, continue to diversify.

Diversification is the best defence in a world where there is structural change underway. Long standing conventions have been shattered. A metaphorical Rubicon has been crossed. There is no going back to the prior rules-based order any time soon. Mutual mistrust and geopolitical fragmentation have become the new normal. With this, a transition towards spheres of influence appears to be emerging. Countries are prioritising self-reliance in defence, energy and supply chains.

We should not expect any immediate reversal of this trend, particularly in a year when US mid-term elections are due. A President as bombastic as the current White House incumbent is likely to continue with his deafening barrage of noise. Donald Trump does not want to be a constrained (or ‘lame duck’) President in a gridlocked Congress. Hence, he needs to win and will seek policy victories that will increase his chances. National security as well as affordability have become central policy priorities.

The biggest constraint to increasing lawlessness remains long bond yields. Higher yields raise government borrowing costs, making large-scale or more extreme policies harder to pursue. Nonetheless, it is simply not realistic to assume that either nations or investors will dump US assets on a wholesale basis. America’s capital markets remain the deepest and the most liquid in the world. Forget TACO (‘Trump Always Chickens Out’) and consider TINA (‘There Is No Alternative’) – albeit with the caveat that investors should diversify at the same time.

Capital will continue to flow to where returns are highest. US corporate earnings growth is forecast to run at more than double the pace of any other region over the next five years. Share buybacks in America surpassed $1.5tr in 2025. Expect a similar figure for 2026 (sources: Goldman Sachs and Bloomberg respectively). Markets have exhibited a persistent ability to digest uncertainty without panicking. Investors seemingly want to continue to lean in to any form of price weakness.

Furthermore, heightened geopolitical tensions have shown no sign of derailing the US productivity-driven economic boom. The American economy remains in great shape. The Atlanta Fed’s GDPNow tracker is pointing to 4.2% economic growth for the final quarter of 2025. This follows from an official print of 4.4% expansion in the prior quarter. The number of new business applications in the US stands at an all-time high, according to Bloomberg. America’s economic strength can also be the rest of the world’s gain. The IMF raised its forecast for global GDP growth in 2026 by 20 basis points to 3.3% last month.

The boom may continue. Joblessness in the US is rising simply because American businesses are getting more out of each worker. Productivity growth is running ahead of GDP growth (output per hour was 4.9% in the third quarter of last year) and is expanding at its fastest pace in more than two years. Efficiency gains are also helping to suppress inflationary pressures. 5-year inflation breakevens (or the difference between nominal and inflation-linked bond yields) remain anchored below 2.5%. When the benefits from AI become even more tangible, all these metrics can show further improvement (figures sourced from Bloomberg). The productivity boom supports disinflation and equities, though it may be less favourable for labour markets.

All this implies that the double-digit earnings growth discounted for the US (and global) equity market is more than achievable in 2026. It is a rare set up for investors to enjoy this growth accompanied by the prospect of stimulative policy action, especially at this stage of the economic cycle. A triumvirate of positive fiscal, monetary and deregulatory policies will also help shape the investment narrative over the next 12 months. Beyond the US, fiscal policy and abundant liquidity will be supportive to other countries across the world, including Germany and Japan.

If anything, there is a possible risk of the economy overheating during the year. Consider a scenario of ongoing elevated spend on AI and data, high share prices continuing to boost the consumer wealth effect and both the above being buttressed by a weak Dollar and cheap oil. This perhaps explains the current reticence on the part of the Federal Reserve to cut rates. What happens when Jerome Powell is replaced as Fed Chair in May remains to be seen.

The most important thing for investors to recognise is that there will inevitably be a correction, even if it is hard to know exactly from where it will come, or when. Geopolitical miscalculation or over-reach, the potential return of inflation, or a possible tension between abundant liquidity and stretched valuations represent a plausible list of candidates. Then there are the possible ‘grey swans’ or known unknowns. Any of the following – action in Iran, a Chinese move on Taiwan, a severe compromise of western infrastructure, or marked advances in Chinese AI capabilities at the expense of the US – could prove severely disruptive to the bullish investment narrative.

An investment bubble can persist without bursting immediately. Drawdowns are not abnormal phenomena and have little correlation with where equity markets typically end the year. The average intra-year drawdown for the MSCI World Index is 15%, according to JP Morgan. Don’t ignore the risks, face up to them and accept that anything can be upended at any time, particularly in a world where there are three more years of Trump Presidency. All the above simply reinforces the case for proactive diversification.

Alexander Gunz, 

Fund Manager