Jeremy Harding, Head of Wealth Management at Norman K., provides a global market round-up amid renewed geopolitical tensions and what this means for asset allocation.
January saw a moderate uptick in volatility, with increased geopolitical pressure from the United States on Venezuela, Greenland/Denmark and Iran. However, these risk factors did not dampen investors’ overall appetite for risky assets. Global equity markets continued to rise, buoyed by macroeconomic indicators that were generally better than expected.
The earnings season got off to a solid start. Initially driven by technology stocks, the earnings momentum gradually spread to a wider range of sectors, contributing to more widespread market support.
Small and mid-cap stocks, emerging markets and the Japanese market benefited from this renewed optimism. Commodities also got off to a good start to the year, buoyed by higher energy prices linked to winter conditions in the northern hemisphere and ongoing geopolitical tensions.
In this uncertain environment, assets traditionally perceived as geopolitical hedges reacted strongly. Gold rose by more than 10% in January, before falling back in early February following the appointment of Kevin Warsh as head of the Fed.
European defence stocks also reacted strongly at the start of the year, in response to rising international tensions and the growing importance of strategic autonomy.
In the bond markets, improved growth prospects, combined with persistent concerns about public deficits, continued to weigh on prices. US Treasury yields rose, particularly on short maturities, as investors pushed back their expectations of Federal Reserve rate cuts.
In Japan, government bonds had their worst start to the year since 1994, against an electoral backdrop and amid fiscal concerns. This led to a steepening of the yield curve and a depreciation of the yen.
The global economy appears to be continuing its transition towards a multipolar model, structured around several poles – notably the United States, China and Europe – each seeking to strengthen its strategic autonomy. This development reinforces the need for greater portfolio diversification, both geographically and monetarily, as well as across commodities.
In the United States, economic indicators published at the beginning of the year were surprisingly positive, buoyed by resilient consumption, continued momentum in AI and solid corporate earnings. While the labour market is still showing some signs of slowing down and tariffs are beginning to weigh on activity, growth is nevertheless expected to remain positive.
Inflation remains a key concern for the Fed, particularly given the potential impact of tariffs, and remains above the central bank’s target. In this context, it is likely to keep its key interest rates unchanged at its next meetings. Monetary easing may be considered later in the year, after Kevin Warsh takes over from Jerome Powell in May.
In Europe, fiscal stimulus measures and renewed interest in strategic autonomy from the United States could create investment opportunities. These prospects would be reinforced if China managed to stabilise its economy through targeted measures supporting domestic consumption.
On the monetary front, the European Central Bank is likely to remain cautious: with inflation having reached or even exceeded its target, there appears to be limited scope for further rate cuts, especially as the strength of the euro could weigh on export-oriented economies.
On both sides of the Atlantic, corporate earnings should continue to support investor sentiment, with earnings growth forecasts being regularly revised upwards for the coming quarters.
However, high valuations, concentration risks and record investment spending on AI by Alphabet, Amazon, Microsoft and Meta call for caution and increased diversification. Geopolitical risks also remain a source of uncertainty, particularly in the run-up to the US mid-term elections.
In this context, our allocation remains balanced and selective. In the equity markets, we are maintaining a neutral position, favouring diversification beyond large US technology stocks. The shift towards a multipolar world reinforces the appeal of regional and currency diversification, with strategic exposure to gold in a context of gradual de-dollarisation in certain emerging countries.
In the bond segment, we favour investment grade bonds in the United States and Europe, which offer an attractive risk/return profile compared to riskier segments.
Private debt is included in portfolios as an alternative to high yield, with rigorous selection of operators. Finally, unlisted assets continue to play a key role in diversification and decorrelation, while cryptocurrencies are approached selectively, given their high volatility.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The writer’s views are their own and do not constitute financial advice.
This information should not be relied upon by retail clients or investment professionals. Reference to any particular investment does not constitute a recommendation to buy or sell the investment.
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