Turning Turbulence into Opportunity

Written by Damian Barry, CFA

Reflection on 2025

As 2026 begins, it’s worth pausing to reflect on a year that surprised even seasoned investors. In 2025, the US doubled down on protectionism, imposing punitive levels of tariffs on nearly all its trading partners. Conventional wisdom might suggest that international equity markets would suffer as a consequence. Yet, the best returns, in US dollar terms, came from elsewhere. That’s not to say that the US equity returns were shabby. The S&P 500 delivered its third consecutive year of double-digit gains (+17%). But non-US equities stole the show: MSCI World ex US climbed 32%, and MSCI Emerging Markets surged 34%, marking the strongest outperformance for non-US markets since 2009, helping reinforce the case for global diversification. Ironically, in a year when Washington was laser-focused on “America First,” the real story was about looking outward. Diversification turned out to be the hero of 2025, delivering a welcome boost to USD-based portfolios.

What drove this shift? The US dollar’s sharp decline was the linchpin. Trade policy shocks, slowing growth, anticipated interest rate cuts, widening fiscal deficits, and global capital reallocations all conspired to weaken the greenback. That slump made currency a critical factor in returns: MSCI All Country World Index posted 14% in GBP, 8% in EUR, and 22% in USD. For US based investors, foreign exposure proved particularly rewarding as stronger currencies amplified equity gains.

Valuations and Market Breadth

Importantly, 2025 also marked a widening dispersion in equity valuations across regions, sectors, and individual companies. While US mega-cap equities continued to command premium multiples, many non-US markets began the year trading at historically attractive discounts. This valuation gap helped set the stage for international outperformance. A key message in 2025 was that diversification wasn’t just prudent, it was powerful.

Source: Bloomberg. Net total return. International equity represented by MSCI World ex US. International small- and mid-cap represented by MSCI World ex US SMID. Emerging markets represented by MSCI EM. The local currency index refers a very broad basket of International and EM currencies. Past performance does not guarantee future results.

Liberation Day and Market Volatility

2 April will go down as one of the most dramatic days of 2025. Dubbed “Liberation Day,” it marked the moment the US administration unleashed sweeping tariffs on nearly all imports, a move that sent global markets into a tailspin. The reaction was swift and brutal: US equities plunged almost 20%, while Asian and European markets followed suit. Investors braced for a full-blown trade war, triggering a broad risk-off stampede across every major asset class. But the story didn’t stop at market volatility. Economists warned that these tariffs were effectively a tax hike, slashing global GDP forecasts and raising recession odds for the rest of the year. Inflation was expected to spike as import prices soared. Yet, reality diverged from expectations, inflation remained subdued. Why? A cocktail of front-loaded inventories, clever trade diversion through lower-tariff countries, and repeated delays or rollbacks in tariff implementation softened the blow. It was a reminder that policy announcements do not always translate neatly into economic outcomes.

Episodes like “Liberation Day” also served as a reminder that volatility, while uncomfortable, often creates opportunity. Periods of indiscriminate selling can allow long-term investors to rebalance, add to high-quality assets at more attractive prices, and reinforce portfolio resilience. Our disciplined approach seeks to take advantage of these moments rather than react emotionally to them.

Technology and AI Disruption

While global trade dominated headlines, a quieter but potentially more profound shift was unfolding in technology, specifically artificial intelligence (AI). The pace of disruption by AI is staggering, yet its future remains as hard to picture today as the smartphone-driven internet era seemed in the 1990s. Who will emerge as winners and losers? That’s anyone’s guess. History suggests these transitions take decades, not years, and rarely happen in a straight line. For now, the questions are piling up. Infrastructure spending is exploding with analysts estimating $3 trillion will pour into AI between late 2025 and 2028. ¹

Yet tangible productivity gains and monetisation of this investment seem elusive. Companies once prized for being “capital light” are now issuing 30-year debt to fund AI ambitions – Oracle, Meta, and Alphabet among them. Lending money for three decades of technological uncertainty at yields barely above US Treasuries demonstrates an interesting pricing of risk relative to reward.

AI presents both opportunity and risk. The so-called “Magnificent 7” (largest AI companies) now represent roughly 35% of the US equity market and are increasingly active in credit markets. But defining an “AI stock” is far from straightforward. Some of the strongest AI-related returns in 2025 came not from technology firms, but from utilities supplying power to data centres.

Diversification and Market Leadership

It is impossible to forecast in advance which individual stocks will deliver the strongest returns in any given year, or over an entire market cycle. History consistently shows that a relatively small number of stocks account for a disproportionate share of overall market returns. Because those winners are difficult to identify ahead of time, maintaining broad diversification is critical. By owning the market rather than attempting to predict its leaders, investors increase the likelihood of capturing the returns generated by the companies that ultimately drive long-term market performance.

The reality is simple: no one yet knows who the ultimate winners will be. That is why our portfolios maintain exposure across much of the AI ecosystem, while moderating overall risk through an emphasis on valuation, profitability, and balance-sheet strength. This approach allows participation in upside while avoiding the most speculative corners of the market. Regular rebalancing helps ensure that risk remains aligned with long-term objectives. AI may be the story of the decade, but the final chapters have yet to be written. We are staying diversified, disciplined, and focused on fundamentals.

Outlook for 2026

Our optimism for 2026 is grounded in fundamentals, not wishful thinking. Economic growth remains resilient across most regions. Even Europe, long stuck in neutral, is showing renewed momentum. Germany, in particular, is ramping up investment in defence and infrastructure in response to shifting geopolitical realities. Globally, governments appear more willing to deploy fiscal stimulus, while interest rates are falling in most regions (Japan remains a notable exception as it contends with inflation). These forces should provide support for growth.

Corporate profitability is holding up better than anyone expected. Faced with rising tariff costs, companies have protected margins by trimming labour compensation rather than letting profitability erode and with AI tools increasingly deployed to boost efficiency, there’s potential for even greater gains ahead.

As we step into 2026, we remain broadly optimistic but not naïve. Geopolitical developments may dominate headlines from time to time, as recent events in Venezuela remind us. These dynamics can introduce bouts of market volatility, and history suggests that markets rarely move in a straight line. In fact, the US market typically experiences a 10% pullback at some point in a year, and there’s no reason to believe 2026 will be any different. Through diversification, a focus on company fundamentals, and disciplined execution, we’ve navigated countless periods of turbulence and 2025 was a testament to that approach.

In Closing

Last year, our assets under management topped $5 billion, a milestone that reflects not just our investment philosophy, but the trust and support of our clients. We do not take that confidence lightly, and it continues to guide every investment decision we make. Should you have any questions, we are always delighted to hear from you. Please contact your wealth manager to discuss your portfolio further, or contact me directly.

Key Takeaways:

• AI is a long-term theme offering both opportunity and risk.
• Stay disciplined, avoid speculation, and prepare for volatility.
• Diversification was the defining strength of 2025 and remains essential.

References

1. https://www.msn.com/en-us/money/technology/morgan-stanley-sees-3-trillion-in-ai-investment-through-2028/ar-AA1OsNmq

Information contained on third party websites that MASECO may link to are not reviewed in their entirety for accuracy and MASECO assumes no liability for the information contained on these websites.

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