Nostalgia is not an investment strategy

To paraphrase Canadian Prime Minister Mark Carney’s Davos speech, we live in a world of increasing Great Power rivalry. Nostalgia for the old international order is not an investment strategy. 

So what is?

With political slogans dominating the headlines, it feels only fitting to borrow from the rhetorical toolkit of the day. So in the remainder of this letter, I’ll discuss why we believe that tactically, it is time for “One Big Beautiful Broadening”—where market leadership expands beyond a handful of stocks. Strategically, it is time to “Make Portfolios Diversified Again.”

The US administration’s new “Donroe Doctrine,” strained relations between China and Japan, violence in Iran, and fractures within the NATO alliance over the future of Greenland and Ukraine all point to a more volatile world, with geopolitical blocs seeking greater strategic autonomy.

Meanwhile, the Trump administration’s heightened focus on “affordability”—including potential regulation of credit card rates and intervention in the mortgage and real estate markets—and questions about the future direction of fiscal and monetary policy around the world have also drawn investor attention.

For governments everywhere, the challenge of funding strategic autonomy and delivering on voters’ priorities—despite aging populations, rising electricity demand, resource scarcity, and labor market disruptions—will ensure that debates over fiscal and monetary policy, as well as rising government intervention in markets, remain prominent features of the investment landscape for years to come.

In the near term, we believe it’s important not to overreact to political headlines. We retain a positive stance on markets as resilient economic growth, low or falling interest rates, and structural tailwinds from artificial intelligence should all provide support and more than offset the volatility, in our view.

To position for further upside potential, we recommend investors broaden market exposures. The bull market so far has seen relatively concentrated gains favoring a few “AI leaders.” From here, we expect growth-friendly policies in the US to lift cyclical sectors and AI trade leadership to shift from the “enabling layer” to the “application layer.” Beyond US stocks, we also see appealing and reasonably valued opportunities in Asia and Europe.

Strategically, we think geopolitical polarization and government intervention in markets increases the imperative to diversify. While there will be some outperformers from these trends, they will also heighten risks for certain countries, sectors, and companies. And because governments picking winners and losers in markets can lead to a wider range of outcomes, the changing environment underscores the importance of building well-diversified core portfolios, incorporating effective portfolio hedges, and taking a thoughtful approach to currency allocation.