View From The Top: Stories that make sense

View from the very top: investors are hyper-sensitive to anything that is perceived as unknowable, especially given the relentless recent upward rise in most asset classes. Drawdowns are therefore inevitable. Geopolitical conflict in the Middle Eastern constitutes a major source of near-term uncertainty. The disruptive impact of AI and constant Trumpian policy shifts remain other significant risk factors. Our counsel is to look beyond the noise. Focus on the bigger picture – macro and micro dynamics both remain attractive for now, even if further progress may be non-linear. The economy is expanding, helped by productivity-driven gains. This is being reflected in accelerating corporate earnings growth. Additional fiscal, monetary and deregulatory stimulus measures could act as further positives. Continue to allocate proactively and diversify wherever possible.

Asset Allocation:

Equities: 2026 looks set to be the year of the stock picker. The MSCI World Equal Weight Index is up 7.8% year-to-date versus a 2.9% gain for its market capitalisation weighted equivalent (per Bloomberg). Robust earnings have supported ever higher moves in equity markets globally, but these mask the abrupt rotations that are occurring below the surface. Value is outperforming growth, small caps are beating large and almost every region is outperforming the US. These dynamics should continue, particularly given the S&P 500 Index’s c40% valuation premium on forward earnings relative to the MSCI World ex-US Index. Continue to buy on the dips, diversify and favour truly active strategies.

Fixed income/ Credit: Part of the equity market rotation is also playing out in fixed income. Falling government bond yields – US ten-year Treasuries are close to 4% - can be explained by shifts in capital towards safety and relative value. Nonetheless, with inflation at c3% and c90% of all developed market public bonds yielding less than 5%, the implied real yield is a modest 2%, which limits the attraction of these assets (data per Bloomberg). We remain highly selective in our credit allocations. Focus on shorter duration, higher quality credit. Also be mindful of potentially growing risks in private credit, especially given elevated opacity and illiquidity levels.

Currencies: Sentiment is too negative on the US Dollar, in our view. The currency has witnessed marked declines in the past year and consensus has positioned strongly against the Dollar, especially versus the Euro and Yen. Relative Dollar strength could emerge from the outperformance of the US economy versus its G7 peers. Productivity growth and fiscal expansion may also drive Dollar appreciation. Mean reversion remains a powerful force too.

Gold: The precious metal has returned more than any other major asset class since the start of this decade, according to recent work from Bank of America. We have been long-standing gold bulls and continue to have a positive stance on the asset class. Gold’s role in portfolios is less about momentum and more about its safety and diversification benefits. Gold should continue to act as a hedge against military conflicts, geopolitics, fiscal dominance and inflation.

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

It was ever thus. Humans are drawn to stories. Negative narratives have a particular tendency to resonate, especially in the world of investing and after most asset classes have enjoyed a recent run of strong performance. What stands out most to us is just how resilient equity markets have been, with the MSCI World Index having enjoyed 11 consecutive months of gains, a pattern last seen in 2017. Markets continue clearly to climb a wall of worry.

Against this background, two things ought to be clear. First, do not be surprised if a drawdown occurs. These are normal and to be expected. One could occur at any time. Second, setbacks create opportunities. Lean into any weakness. Buying the dip has consistently worked as a strategy. More fundamentally, there is almost zero correlation between an equity market’s worst intra-year peak to trough drawdown and where it ends the year. Throughout, continue to diversify. To our mind, this is the best way to preserve and grow capital.

Over the past month investors have seemingly been hyper-sensitive to anything that is perceived as unknowable, whether it be Trumpian policy shifts, the impact of AI or the shifting plates of geopolitics. Perhaps such sensitivity can be explained by underlying unremitting bullishness. Sentiment is the most positive since 2021 and Fund Manager cash levels are at their lowest since 1999, according to Bank of America’s most recent survey (admittedly carried out before the very end of the past month). Anything that potentially alters meaningfully the positive narrative may provoke near-term panic.

Before reminding ourselves of the logic for being constructive, it behoves us to address the topics du jour provoking most concern. Have no doubt, the Supreme Court’s decision on tariffs constitutes a clear rebuke to Presidential over-reach. Nonetheless, it is fair to recognise that Presidents typically face a growing number of constraints in their second term of governance. At the same time, investors have learned to live with the economic uncertainties that have been wrought by the Trump administration. That US Treasury yields have fallen and inflation forecasts have barely moved since the November 2024 election result constitutes a remarkable achievement.

Looking forward, the notion that tariffs will still be used as part of America’s national security and economic policy, as well as tool for negotiating leverage, is simply not going to change. Rebuilding supply chains, let alone generating refunds for businesses and consumers post the Supreme Court’s decision, are complex processes that will take time. Just as tariff threats are not going away, nor are geopolitical uncertainties. Grey swans (or known unknowns) have existed for a long time across the world, whether in Iran, Russia, North Korea or any other region. Uncertainty can create short-term dislocation but rarely has an enduring impact on markets, assuming the current Middle Eastern conflict does not become prolonged.

The biggest unknown with which investors are continuing to grapple remains AI. The impact of artificial Intelligence on real economy and its investment implications continues to dominate the narrative, as it has done for at least the last three years. After the significant rerating in all things AI over this period (for context, JPMorgan estimates that c70% of the S&P 500 Index’s gains in 2025 came from AI-related businesses), a reassessment was always going to be inevitable.

To start, consider just how significant a sum $646bn represents. This is the aggregate sum of capital expenditures that the major hyperscalers (Alphabet, Amazon, Meta, Microsoft) have publicly committed to for 2026. It is equivalent to 2% of US GDP. Seen another way, the sum is more than the combined military spending of Germany, France, the UK, Japan, Italy and Canada (all data per Bloomberg). Little wonder that the largest proportion of Fund Managers on record believe that companies are over-investing, according to the latest Bank of America survey.

Three related questions arise: how will these investments (which will almost certainly continue to increase) be funded; will they generate an appropriate return; and what will be their impact? To the first, some corporate balance sheets are robust, although the growing recourse to raising debt remains a concern to monitor. Next, if AI investments cannot be monetised, then it would only be reasonable to assume a massive adverse repricing. Finally, doomsday scenarios about whether AI will wreck the economy should be thought of as useful thought experiments with some potential relevance.

A more sober assessment might recognise that the range of possibilities remains dizzying, as do the time horizons over which they may play out. Have no doubt, some business models will be rendered obsolete, just as they were during the dotcom era. Creative destruction is a natural part of how economies should operate.

We simply won’t know the answers to many of these questions for some time. If in doubt, then diversify (away from AI investments). Meanwhile, consider a much more realistic outlook for the next 12 months: the global economy continues to experience a ‘Goldilocks’ moment, growing at just the right pace. There is scope for stimulus – in monetary, fiscal and deregulatory formats – to come. Equities typically perform best in environments where interest rates are falling and corporate earnings are growing.

The most recent reporting season in the US was the fifth consecutive quarter in which the S&P 500 Index has generated double-digit earnings growth. A 12.2% annualised growth rate compares to a pre-season assumption of 8.3%. The difference between these two figures is the largest since the fourth quarter of 2021. Look ahead and consensus assumes 13.9% earnings growth in 2026 (all data per Bloomberg).

With the US economy experiencing a productivity-driven, low-inflation expansion, which we believe can endure, these growth assumptions seem reasonable. Think of the current environment as having the hallmarks of a disinflationary boom. GDP and productivity are increasing, without a major negative labour market or inflation impact. Unemployment has not risen above 4.5% and annualised wage growth has remained below 4% for the last 12 months in the US. Inflation is at its lowest since May 2025 and longer-term expectations across different surveys continue to edge down. This pattern should endure, assuming oil prices do not stay elevated for a sustained period. With mid-terms due in November, the Trump administration will likely be keen to avoid such a scenario.

Against this background, the Atlanta Fed believes that US GDP is currently running at a 3.0% annualised rate in the first quarter. Bloomberg consensus assumes 2.4% GDP growth for 2026, an acceleration relative to 2025’s 2.2% print. Although this apparent health may not be evident to all – given growing disparities in the economy – the Trump administration will likely make every effort to address affordability ahead of November’s mid-terms. Expect more stimulus. Potential overheating (not to mention unsustainable debt levels) are an issue for another day.

Investing is rarely simple, but it helps to remove complexity by stepping back from the noise. Progress from here should be upwards, but it will also be non-linear. Position proactively and continue to diversify.

Alexander Gunz,

Fund Manager