How we are positioning our portfolios for long-term growth

In today’s rapidly evolving investment landscape, navigating the market requires both strategic foresight and disciplined execution. To do this, we carefully analyse current economic conditions, market trends, and emerging opportunities to optimise our portfolio positioning for sustainable long-term growth. While financial headlines often focus on short-term movements and sensational stories, our approach remains grounded in fundamental analysis and diversification principles that have consistently delivered value over time.

Here we outline our current investment strategy and explain some of the interesting opportunities we’re utilising to protect and grow your wealth through these ever-changing market conditions.

The resilient US economy

The United States has emerged as a standout performer on the global stage in recent times. While many feared a recession, the US economy has demonstrated remarkable resilience and continued growth. This stands in stark contrast to countries like the United Kingdom, which have struggled with slower growth and more persistent economic challenges. This divergence has naturally made the US a primary focus of our investment strategy.

The strength of the US economy has created an interesting dynamic for monetary policy. The better economic momentum, and higher wages has meant, while inflation has come under control, progress has slowed and remains ‘sticky’. This has led to a reduction in interest rate cut expectations. At the start of 2024, the market anticipated six rate cuts, but we ultimately saw just two by year’s end.

Despite these adjusted expectations, two positive factors have supported market sentiment: the underlying strength of the economy, and the fact that central banks finally began cutting rates after two years of the most aggressive hiking cycle in decades. These developments helped propel the S&P 500 to more continuous all-time highs throughout the year.

Beyond the Magnificent Seven

Of course, we can’t overlook AI, which has been a major driver of market performance. Much of the excitement has centred around just seven tech companies – the ‘Magnificent Seven.’ These companies have reached remarkable valuations, but this creates significant pressure for them to continue beating market expectations and to maintain extraordinary growth rates.

Recent market volatility, particularly Nvidia’s share price fluctuations, illustrates the precarious position of stocks trading at such high multiples. Even the slightest disappointment can trigger substantial corrections.

In response to these dynamics, we’ve adopted a disciplined approach by systematically locking in profits and reducing our exposure to these large-cap names. Instead, we’re redirecting our focus towards sectors with more attractive valuations and strong growth potential.

Our tactical shift

One key adjustment in our strategy involves a new position to the equally weighted S&P 500 index. Unlike the traditional S&P 500, where larger companies have proportionally greater influence, the equally weighted version gives each company the same importance regardless of size. This approach provides more balanced exposure across all sectors and greater access to mid and smaller-cap companies that might otherwise be overshadowed by the giants.

By broadening our exposure, we position our portfolios to benefit from earnings growth across a wider range of companies, not just the largest firms that have already experienced significant appreciation.

And of course, Trump’s return to the White House, with his pro-business focus, is expected to give domestically focused businesses a meaningful boost. The two largest sectors in the Equally Weight index – Financials stand to benefit from greater deregulation, while Industrials may benefit from increased tariffs and support for US manufacturing. Additionally, small businesses generally face higher compliance costs relative to their size, so cutting back on red tape will free up more capital for growth initiatives. By making imports more expensive, we could see domestic products become more competitive, increasing market share and profitability. Moreover, domestically oriented companies tend to pay closer to the full corporate tax rate than large multinationals, whose tax structures are often more complex. Any tax cuts would therefore make a substantial difference to their bottom line. Overall, a more diversified exposure to the US seems to be the sweet spot, offering relatively attractive valuations while capitalising on the strong domestic economy and policy shifts that favour domestically focused businesses.

We’ve also been adding to European equities as we see inflation nearing its target and interest rates on a downward trajectory, alongside attractive stock valuations. Similarly, we’ve increased our exposure to better-valued Japanese equities, as Japan is well-positioned to benefit from corporate reforms that are improving capital efficiency, boosting shareholder returns, and attracting more foreign investment. The shift from deflation to inflation in Japan’s economy should also support growth, making Japan a compelling opportunity in the current environment.

Fixed income

Turning to fixed income, volatile yields have been a defining feature of the past year. As investors have adjusted to the idea that rate cuts may take longer to materialise, yields have risen. And now, the potential impact of Trump’s tariffs and fiscal stimulus is further pushing yields higher, putting downward pressure on bond prices.

For those less familiar with bond dynamics, it’s worth explaining that as yields rise, bond prices fall because future cash flows are discounted at a higher rate. Understanding this relationship has allowed us to capitalise on this by steadily increasing our bond exposure over the past year, taking advantage of increasingly attractive valuations.

These bonds now offer two potential benefits: first, they provide attractive income, and second, they stand to gain from capital appreciation as central banks eventually lower rates. This contrasts with cash holdings, where falling interest rates simply result in a lower income.

Credit risk

Within fixed income, we’ve also been selective. We have been enjoying taking on more credit risk by adding a new holding in US high-yield bonds. While these instruments carry a higher default risk compared to investment-grade bonds (which is why they offer higher yields), the current environment makes this calculated risk particularly appealing.

Today’s combination of low default rates, stable economic activity, and diminishing recession fears in the US creates a favourable risk-reward profile for high-yield investments. Beyond return potential, our fixed income positions continue to serve as a cornerstone for portfolio diversification and protection, offering resilience during market fluctuations and helping to balance overall portfolio risk.

Looking forward

Despite the strong growth we’ve witnessed in markets – much of which is fundamentally justified by economic conditions – we maintain a cautiously optimistic outlook. The resilience of the US economy provides genuine reasons for optimism, but we remain disciplined and selective in our approach and when identifying new opportunities.

By focusing on areas with attractive valuations, strong fundamentals, and diversified growth potential, we aim to position our clients’ portfolios for long-term value creation regardless of short-term market fluctuations. This balanced approach reflects our commitment to sustainable growth rather than chasing momentary trends.

For more information, please contact your private banker.