By the numbers, November was an unremarkable month for equity markets, with the global index roughly flat and volatility below the long-term average. Below the surface, there were shifts in the currents that caught our attention. At the sector level, the largest tech stocks took a few steps back as concerns of an AI bubble were raised more loudly, but more interesting for us was the divergence between higher quality stocks and lower quality speculative stocks. Since President Trump changed his mind on tariffs in April, the broad market had risen by 35% by the end of October, while some speculative areas had risen by 100% or more1. For us this was a sign that markets were getting too excited and disregarding common sense, so we were relieved to see these stocks pull back. We were also encouraged that their decline didn’t significantly impact the broader market, as third quarter earnings again surpassed expectations and reassured us that market irrationality was localised in these areas and not widespread.

Figure 1: Recent reversals in speculative assets

Source: MSCI, Goldman Sachs, UBS, Bloomberg. Based on price returns in US dollars.

The reversal in lower-quality stocks was part of a broader discussion within the Investment Team in November. As outlined often before, our preference is for higher quality companies, and we also have a valuation discipline. In practice, this means that whether we are selecting stocks or fund managers, we are unlikely to own the most speculative companies or the most expensive companies. While we believe this is the best approach for long term capital growth, there are times like this year when markets run hot on enthusiasm, and our core equity allocation under-performs the index which is dominated by US tech stocks. Given that this exuberance has lasted on and off for 3 years now, we are naturally questioning our approach.

The good news is that we have other drivers of return that have more than made up for the lag in our equity allocation. Our strategic (long-term) allocation to alternatives, especially gold, has been highly additive this year, and our tactical calls to own less in the US and more in Europe and emerging markets have added value too. However we are conscious that these won’t work every year, and so we are currently re-examining our stance on equities. Although the price / earnings ratios for mega-tech companies are unusually high and are built on highly ambitious earnings expectations, they are not as egregious as in the late 1990s period, and their spectacular growth could continue into 2026 or even further. While we are hesitant to compromise our discipline, we must also examine whether shifts in the economy or investor behaviour could allow these companies to maintain their dominance and make elevated valuations the new normal. Expect to hear more from us on this next year.

Figure 2: GDP2 growth forecasts for 2026

Source: Bloomberg. Topix index is in Japanese yen.

Finally, November is the month when most major banks and research houses publish their outlooks for the year ahead. Cynics will scorn the value of market forecasts, with some justification, but reading and writing outlooks is a useful exercise to test our thinking and compare our views with the expectations that are embedded in market prices. Bearing in mind that the direction of change is more important than actual point forecasts, it is encouraging to note that economists have generally gotten more confident in the growth prospects for 2026. Tariffs have been less impactful than anticipated, fiscal and monetary policies are easing, particularly in the US, and the AI-related investment boom is making up for slower personal consumption. We will continue to work on our views and look forward to sharing our investment outlook with you in the new year.

1 For example, see the ARK Innovation ETF, UBS AI Winners index, or Goldman Sachs Non-Profitable Tech index.

2GDP is Gross Domestic Product, the standard measure of economic activity.