Volatile geopolitics and markets reinforce the case for diversification

Recent events in Greenland show how unpredictable geopolitics can be. Hours after ruling out a military option in Davos, President Trump announced a “framework for a future deal” after talks with NATO Secretary General Mark Rutte. The plan reportedly links a pause on new US tariffs on Europe to expanding US military bases in Greenland and giving the US President a say in major investment decisions there. While trade tensions appear to be de-escalating, these measures might challenge Denmark’s sovereignty, so renewed tensions remain possible. 

The broader lesson is that these sharp shifts in political views, policy events and geopolitical considerations reinforce one of our core principles: don’t trade headlines. We stick to a broadly diversified portfolio because we believe it is the most resilient way to manage short-term volatility in today’s geopolitically fragmented world, as outlined in our Counterpoint 2026 Investment Outlook. 

Despite geopolitical noise, the global economy is gaining momentum. The International Monetary Fund raised its 2026 global growth forecast to 3.3%, driven by stronger expectations for the US and China. This supports our constructive view: the skies are clearing, even if geopolitical clouds linger. 

We remain slightly overweight equities, focusing on emerging markets including China, the US and, more modestly, Europe. Recent data backs this stance. Eurozone purchasing mangers’ indices (PMIs) held steady in January with some strength in Germany, while UK PMIs surprised to the upside. UK inflation ticked up to 3.3%, but core inflation stayed at 3.2%, the lowest figure in a year. This eases pressure on the Bank of England to cut rates this quarter. 

Bond markets told a different story. Longer-term yields rose sharply, led by Japan. The Bank of Japan kept rates unchanged, yet the two-year yield climbed above 1% for the first time since the global financial crisis. The 30-year briefly spiked by 27 basis points to nearly 4% after Finance Minister Satsuki Katayama’s comments on cutting consumption tax raised fiscal concerns. Against this backdrop, we keep our underweight in bonds and have recently closed our Japanese government bond position. 

The market expects the US Federal Reserve (Fed) to hold rates steady on Wednesday as inflation remains above target and the economy resilient. Markets see the next cut in June. By then, Jerome Powell will have been replaced as Fed Chair. According to Treasury Secretary Scott Bessent, President Trump may nominate Powell’s successor as early as this week or shortly after. 

Beyond geopolitics and corporate earnings releases, including from some of the largest US tech companies, sentiment data takes centre stage. We expect US consumer confidence to trend slightly higher, while Eurozone confidence will likely stay flat.