Multi-Asset Investment Views: It's a wild world (but a wide world)

January’s spike in headlines covering rising geopolitical risks quickly subsided without much impact on risk assets¹. Instead, investors’ attention rapidly moved back to artificial intelligence, this time shifting from selecting winners to avoiding the potential losers. The latter spans software to logistics firms, while there were also concerns for a short time over the impact of AI on banks and financial services. 

The frantic narrative rotation resulted in extreme sector moves and some of the sharpest valuation deratings witnessed in modern history. For example, software companies have suffered the quickest relative fall since the dot-com bubble burst at the beginning of the 2000s, Bloomberg data shows. The so-called ‘Magnificent Seven’ stocks – Apple, Microsoft, Amazon, Alphabet, Meta, Nvidia and Tesla – illustrate this recent dynamic. While they are leaders in AI development, their shares have recently lost ground on concerns over capital expenditure levels and whether this will pay off in terms of earnings potential.

Year to date, US equity indices have been disappointing, in part as these stocks represent a historically significant share of the benchmark. However, 2025’s fourth quarter earnings season saw the Magnificent Seven deliver best-in-class earnings growth once again. The almost unprecedented dispersion in single-stock performance and volatility has been accompanied by very modest volatility at an index level.

Previous instances of such under-the-hood stress (including some of the more modest magnitudes, to avoid drawing conclusions from a single historical precedent) have been generally followed by above-par returns, aided by a subsequent decline in factor volatility. While past performance should not be seen as a guide to future returns, this could provide a more solid foundation for broader risk appetite, in turn inviting new inflows into the equity market.

Equity diversification amid volatility

We have nevertheless modestly reduced our equity risk exposure, mindful that this market structure-driven volatility could soon be fuelled by more traditional macroeconomic and geopolitical volatility. Indeed, the recent US military deployment across the Atlantic has spurred fears of escalating tensions in the Middle East. Markets have already partly priced in this rising risk through a significant jump in oil prices (+11% from mid-January to mid-February). The current and prospective excess oil supply should fundamentally limit this negative price shock, but any longer lasting stress would likely weigh on investors’ risk appetite and, ultimately, on global economic growth.

Meanwhile, US large cap stocks have seen one of their worst starts to a year relative to non-US equities in decades: the MSCI US index underperformed the MSCI World index by more than 2% in only two months. 

We continue to favour diversification in our equity exposure. In the US, we prefer to invest in cyclical sectors benefitting from the overall macroeconomic acceleration, such as industrials and financials (typically via the Dow Jones index), rather than in other risk-concentrated, tech-heavy indices. 

This search for diversification is also true outside the US, where we see a wide world of opportunities, such as in emerging markets with AI-related themes in Taiwan (chips), Korea (memory) and China (inference and robotics). We also see potential in fiscally bolstered equity markets, such as Japan (where newly elected Prime Minister Sanae Takaichi is promising significant stimulus, which is lifting investor sentiment) and Europe. Here we continue to favour European banks, which are benefiting from loan growth, rising interest margins, and improved economic sentiment in the eurozone (see Exhibit 1). This sectoral preference is also reinforced by the early-February price consolidation, where European bank shares traded in a restricted range, which has reduced crowded investor positioning and overbought price conditions.

Macro surprises and Fed expectations driving bonds

On the fixed income side, we were relieved to see US inflation come in below expectations in January (as in December), which moved US Treasury yields closer to 4% and away from what we refer to as the “danger zone”, when higher (real) rates tend to hurt risky assets through derating. 

This is even more impressive given other macroeconomic indicators have been surprising significantly to the upside, also illustrated in Exhibit 1 below. In particular, the US labour market witnessed strong job creations in January (+130,000) and business surveys (e.g. the Empire State Manufacturing survey and the National Federation of Independent Business) indicate continued increases in employment expectations, with the NFIB index jumping to its highest level in more than three years. This could reduce how the market prices in expected US interest rate cuts (the consensus currently expects more than two cuts over the next 12 months) and thus lift long-dated real interest rates (i.e. rates after adjusting for inflation), in expectations of higher growth. 

We suspect two factors have played a role in keeping interest rates contained – first, bond purchases from underweight systematic strategies. Second, expectations that Kevin Warsh will be more dovish on monetary policy when he becomes the next Chair of the Federal Reserve, once his nomination is confirmed. Overall, our portfolios have a neutral interest-rate sensitivity and US dollar stance, in line with their respective long-term exposures as we see government bonds and the greenback offering a degree of equity risk diversification once again.