Geopolitics at center stage again.

January 19, 2026

Thoughts of the Week

The world is becoming increasingly more volatile and President Trump more aggressive. His first year was all about tariffs. His second year has started with a clear willingness to demonstrate power (and use tariffs...) And although the "James Bond like" kidnapping of Venezuela's dictator was cautiously celebrated by most western leaders, Trump's aggression towards Greenland has raised eyebrows in Europe and beyond. Last but not least, the US could get involved also in Iran, looking to grab the opportunity to topple the existing regime, now that a mini revolution seems to be under way. In case it hasn't crossed your mind, the US administration is only interested in Iran's vast proven oil reserves of 210bn barrels, the third largest behind Venezuela and Saudi Arabia.

Geopolitics rarely have a lasting effect on markets but they do create opportunities. Leaving aside the potential loss of life and the short-term disruption, there are definitely beneficiaries of such geopolitical uncertainty. Needless to say, if the US attacks Iran there will be a short-term spike in oil prices and having a little position in Energy stocks does not hurt, as we have mentioned a few times in the recent past. Now, in the case of a regime change and Iran's oil being available to international companies again, there are enormous opportunities for the likes of TotalEnergies, for example, who has significant experience in the region and access to large-scale offshore gas reserves (South Pars Phase 11 project). Chevron appears to be the clear beneficiary of Venezuelan oil flowing again. It is no surprise that the Energy sector is among the best performing in the US. The same could take place in Europe as well in the next weeks. The "cherry-on-the-pie" is that positions in this sector come with a very nice dividend yield.

Volatility in the oil markets could also cause concern, however. But the implications for inflation and the global economy should be minimal, unless we enter a multi-month long type of conflict. In that case, defense stocks will continue to rally. Gold and long-term high quality bonds should also behave well, and shares of defensive sectors (food, household products, telecoms) usually outperform during turmoil, so a basket of all these can be considered a "protracted war" hedge.

But perhaps there could be a most profound, seismic change as a by-product of Trump's aggressiveness. We have been talking for some time about the willingness of international investors to reduce US exposure, something that first became evident in 2025. The fact that US equities reached an almost 70% weight in the MSCI World index at the end of 2024 was obviously not sustainable and given the local market's underperformance last year, this percentage has already dropped to about 65%. A return to the 35-40% weight of the early years of this century is for most younger asset managers un-imaginable. We, of course, have no idea how low the US exposure in global indices can drop. But a trend might have started establishing. Trump's aggressiveness and potential international isolation could become the catalyst for a "chain reaction", in which case Emerging Markets and Europe will handsomely outperform, during Trump's second term in office.

What caught our attention

US headline inflation was unchanged at 2.70% in November. However, we should note that the inability of the BLS to collect prices during the government shutdown in October and early November has likely created a downward bias to inflation. This downward bias will persist until all the prices that would have been collected during that period are revisited, which is estimated to be by end of March. According to economists this could add 0.1% to 0.2% to the annual inflation rate, which means that it will be still hovering around 3%.

The German annual GDP grew 0.2% in 2025, after two consecutive years of declines (-0.7% and -0.5% in 2023 and 2024, respectively). Real GDP growth has hence turned mildly positive again and expectations are for acceleration in 2026. Government spending is expected to boost growth by 60bp in each of 2026 and 2027, lifting GDP growth to 1.1% and 1.7%, respectively. As such, Germany would move from growth laggard in 2025 to growth leader in the next two years.

European luxury was in focus, because of the superb sales figures of Cartier-owner Richemont. The company's important jewelry division posted a 14% sales growth vs consensus of 10%, while at the group level organic sales growth came in at 11% vs expectations for 7%. Having rallied into the results, the stock was under profit taking, but for us it is more important to see confirmation and justification of the recent rally by solid results, than enjoy more immediate share price gains. The company remains our top pick in the luxury industry and is to be bought on weakness.

European defense continued to creep higher, as the year has started with turmoil (Venezuela, Iran, Greenland). Trump's willingness to increase spending by 500bn$ in the next two years, although far from what can really happen, has sparked enthusiasm among their investors, who had been rather disappointed during the previous few months.

Markets' reaction

Global equities were mixed. The main US indices finished negative (S&P500 -0.4% and Nasdaq -0.7%) but Russell 2000 posted another positive week (+0.8%) and is now almost +8% on a year-to-date basis. Financials were a drag (-1.5%), with profit-taking in the major US banks' shares after their Q4 results, but Energy (+3.7%) was strong. Europe outperformed with mild gains of about 0.5% for the broad indices, with Energy (+3.5%) also topping the list of sectors. Consumer Discretionary (-3%) was under profit taking after the recent rally. The threat of more tariffs by Trump over the weekend could result to further pressure on the sector. Hang Seng still has momentum left from last year, adding 2.3% for the week and is now up by 4.5% since the start of the year. A word of caution on European indices as the technical indicators show that they are now in very overbought territory, which in the past has coincided with mild corrections and/or consolidation.

The bond market was also mixed, as EUR yields fell slightly but USD yields moved higher. It is important to note that the market has changed its mind about how aggressive the FED will move, at least in the first half of the year, and now only 45bp are now priced in for 2026. As a reminder, a few weeks ago market expectations were for 100bp and more. The US 10yr yield rose to 4.25%, while the German equivalent remained in a tight range (2.80-2.85%). This change in the bond market pricing could have consequences on US equities too.

Precious metals continued to attract interest and speculation. Silver registered a new record high above 90$, gaining 15% in the last five days, while Gold reached 4600$, where it got stuck.

The dollar strengthened further during the week, the result of less cuts now expected. The EURUSD returned close to 1.1600, while the USDJPY is approaching the 2023 high of 161, which is the record low for the Japanese currency.

Chart of the week:

Europe continues to be in 2025 mode. When will this change ?

The above chart shows the year-to-date performance of the European sectors. Although we are just two weeks into the year, we can see that the market has been focusing again on the same themes of last year, namely defense (found in Industrials), Technology and electrification/data centers (also in Industrials). Utilities are in third place, as the sector is also related to higher power demand for the AI theme. At the same time, in the US there has been a clear rotation out of last year's winners and into more "value" sectors such as Energy and Materials. Interestingly, Consumer Staples are also doing well in the US, a traditionally defensive sector, but still a laggard in Europe. Seeing the above chart and taking into account that many names in the top sectors appear overbought, it could be beneficial to buy stocks in the bottom sectors (Telecoms, Staples and Discretionary), now that they seem abandoned. If the US continues to rotate, then the same will eventually happen in Europe too.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

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• Sources: Chart of the Week :