Commentary for January 2026

Market Overview

January saw strong returns across global equities outside of the US, as investors returned to their desks and bought back into many of the same themes that worked well in 2025. Emerging markets led the way, with an impressive 6.7% gain, closely followed by Asia and Japan, rising 5.5% and 4.5%, respectively. UK equities advanced 3.1%, with small caps gaining 4.2%, while Europe closed 2.4% higher. In contrast, US equities fell 0.7%, dragged lower by a further decline in large cap technology stocks. Overall, global equities closed 0.2% higher over the month.

2026 has seen an eventful start on the political front, with the US intervening in Venezuela to remove its president from the country by special forces. President Trump sparked further international unrest with talk of acquiring fellow NATO country Greenland. Back in the US, a criminal investigation was opened into Federal Reserve chair Jerome Powell over his testimony to congress on the central bank’s $2.5 billion refurbishment. Tensions between the US and Iran also reignited, sending the oil price higher. Brent Crude closed up 16.2%, its strongest monthly rise in four years. Safe haven demand also surged, with gold and silver gaining a further 13.3% and 18.9%, respectively.

US corporate earnings grew 14.4% in the fourth quarter, the best in four years. However, several technology giants were punished despite beating forecasts, as they laid out aggressive spending plans. Investors reassessed whether the economics of AI adoption would justify such extraordinary upfront costs. Microsoft, Alphabet, Amazon, Apple and Oracle all saw sharp declines. Only Meta received a positive response. The reaction illustrates how elevated expectations can limit upside even when fundamentals remain strong. Another area of significant weakness was software, which sold off on growing concern that AI would disrupt many traditional software products.

As technology stocks retreated, capital rotated decisively into other areas of the market. Value stocks extended their outperformance for a third consecutive month, led by cyclical areas such as energy, materials and industrials. Small caps also saw strong performance. The move reflects a broader rotation that has been gradually building in recent months.

US macro data started the year on a positive note. GDP growth remained robust, driven by resilient consumer spending and a boost to exports. Jobless claims remained near historic lows, with the unemployment rate edging down to 4.4%. The inflation reading also showed progress, with the rate of increase slowing to 2.6%. These data points reinforced the ‘soft landing’ narrative for the US economy. The Federal Reserve chose to keep interest rates on hold in it’s January meeting, following three consecutive cuts in prior months. However, policymakers left the door open for further easing later in the year if inflation continues to ease and economic activity slows. Later in the month, President Trump revealed Kevin Warsh as his nomination to become the next head of the Federal Reserve to replace Jay Powell when his term concludes in May. This was greeted positively; relative to other potential candidates, Warsh is perceived as one of the more market friendly choices.

In the UK, the FTSE 100 broke through the 10,000 level for the first time in history, helped by positive earnings from M&S, Lloyds, Barclays, BAE Systems, Glencore and Rio Tinto, among others. The UK economy grew by a meagre 0.1% in the final quarter of 2025, ending the year on a sluggish note. However, it looks to have got off to a stronger start in 2026. There has been a strong bounce in both manufacturing and service sector leading indicators, a pick-up in retail sales and a materially better outcome to the public finances in December. Unfortunately, just as the economy appears to be recovering some momentum, political risk has reemerged, with talk of a leadership challenge to Kier Starmer. Whether or not he can survive the fallout of the Mandelson scandal, the likely loss of the forthcoming Gorton and Denton by-election and a pending disaster in the May local elections remains to be seen.

Politics also featured in Japan, where Prime Minister Sanae Takaichi dissolved the lower house of parliament and called a snap election, seeking a renewed mandate just months into her term. Markets interpreted the move as supportive of continued fiscal stimulus, helping propel equities further into record territory. The Nikkei 225 climbed above 53,000, a milestone few would have thought possible even a year ago.

 

 

Looking Forward

As 2026 begins, equity market leadership looks notably different from what investors have grown accustomed to over the past several years. Instead of mega-cap technology stocks dictating the market’s direction, economy-sensitive sectors and small caps have emerged as the primary drivers. The move signals increasing confidence in the broader economy, domestic demand and cyclical momentum, with gains spread across a wider range of sectors. It is significant because broader rallies supported by many stocks tend to be more durable than those dependent on a few dominant names.

The global macroeconomic backdrop helps explain why this shift is occurring. Monetary policy has clearly pivoted in favour of lower interest rates while, at the same time, governments are increasing their fiscal spending plans. This is a positive backdrop for risk assets and equities have responded accordingly. As uncertainty around rates has diminished, investors have become more willing to reallocate capital toward economically sensitive areas of the market. Small caps are likely beneficiaries of this environment.

Given the sheer scale of the US market’s asset size and its heavy weighting towards major technology names, only a small change in allocation can lead to trillions of dollars being reallocated elsewhere. Flows of this size are likely to have a disproportionate impact on other global markets, with the potential to lead to some significant moves in both relative and absolute terms.

 

Our Strategy

Our current allocation to US equities is significantly lower than a passive index market capitalisation-weighted approach. Looking forward, we believe that other markets offer a better long-term return and risk profile. Our preferred regions are the UK, Japan, Asia and emerging markets.

For the UK, the good news is that the market has many of the ‘old economy’ companies that are suddenly coming back into vogue. Our UK exposure is biased towards cyclical, domestic and value-orientated sectors, along with small and mid-cap companies. Sticky inflation has meant that the UK has lagged many other regions in easing monetary policy over the past year. This is now easing and there will likely be two or three cuts in interest rates this year. A falling rate environment has typically favoured these areas of the market.

Emerging markets also look well-set to extend 2025’s outperformance, as an improving domestic outlook draws attention to the combination of higher earnings growth and lower valuations in the region. The fundamental backdrop is improving for Chinese equities, powered by the technology sector where earnings growth is above 30%. The Chinese equity market remains just 3% of the total All-World index, which is less than the current value of Apple.

While equities remain our preferred asset class, the prospect of lower rates means that bonds should continue to outperform cash. From an income perspective, yields are now attractive in both absolute and real terms (relative to the level of inflation). Bonds also provide diversification in the case of slower growth but will not protect portfolios from the possibility that inflation remains higher for longer. Upside may also be capped by concerns over the sustainability of government debt, as policymakers lack the will to cut spending. Our focus is therefore on shorter-duration bonds.

The current environment argues for broader diversification, including inflation hedges such as energy and commodities and geopolitical hedges such as gold, alongside core holdings in equities. As well as reducing risk, incorporating additional asset classes allows us to capitalise on wider opportunities that exist outside of traditional equities and bonds.

Our positive view on gold and silver remains unchanged. However, position sizes have been reduced following outsized gains as part of our risk management process. We continue to view gold as an essential diversifier in an environment characterised by geopolitical uncertainty, concern over the level of government debt and questions over the long-term role of US Treasuries and the dollar. For precious metal mining equities, current prices are having a transformative effect, translating into record profit margins and the highest growth rate of any sector.

For much of the past decade the rest of the commodity space has been uneventful. This may now be changing as a growing body of evidence suggests that commodities are entering a far more constructive phase. Shifting inflation expectations, rising geopolitical risk and new sources of demand from AI that are increasing supply-chain constraints are converging in a way that has historically favoured hard assets.

Exposure to the energy sector has been increased in recent months, where oil stocks look to be the best contrarian bet for 2026 after a long period of underperformance. Compared to other commodities, oil is extraordinarily cheap; relative to the metals it is at multi-year extremes. In terms of the overall index, energy stocks have fallen to just 2.5% from above 15% on a historic basis. A reversal of this trend is likely.

Overall, we continue to manage investments in a manner that allows us to capture the upside in financial markets while also effectively controlling risk to dampen volatility and smooth the path of returns.