Monday Digest

Posted 19 January 2026

Are markets right to be relaxed?
Markets kept up their strong start during last week, shrugging off growing political worries. This week begins with the startling escalation in “the grab for Greenland”. Both bonds and equities are under pressure and, although the US is on holiday, US assets are weaker than European assets, with the US dollar also slipping slightly.

Under pressure from low approval ratings, the Trump administration is in a more reactive policy mode now and that raises risks. The goals appear to be less obvious, the policies and potential consequences not well thought through.

Markets barely reacted to Trump’s attack on Fed independence, in the belief that US institutions can withstand the pressure. The backlash, from global central bankers and Republican senators, seems to have softened Trump’s stance. The attack is oddly timed, considering the President wants lower rates and, regardless of political threats, the Fed is likely to deliver them. The latest data show little US inflation pressures, reduced tariff effects and weak employment. 

US bank stocks sold off, partly because of ‘disappointing’ earnings (profits were reasonable but loan growth could have been stronger), but also due to Trump’s threat of a 10% cap on credit card rates. The White House has no legal power to enforce that, but that’s besides the point: banks are now in Trump’s sights. Affordability is now Washington’s top priority and the administration has no qualms about using price caps – so hated by markets – to achieve it. The flipside of affordability, in some cases, is the profitability that has attracted global capital into US stocks. If the administration cracks down, it could be a bad phase for consumer-sensitive US companies. 

PIMCO is reportedly diversifying its vast holdings away from the US, due to uncertainties around the administration. Is this a sign of capital outflow? It would take a lot for investors to actually sell US holdings, considering the continued profitability of US tech stocks. By comparison, European profits for Q4 are being downgraded by analysts. Clearly, though, investors see US assets as riskier than they were. We see this in higher US bond yields, despite benign inflation, and those yields not tempting traders into dollar assets. The dollar will be a key risk signal this year.

Japan’s snap election rumour weakened the yen but didn’t stop Japanese stocks gaining. France’s failed budget hurt its assets but not wider European markets. US stocks edged forwards – led by previously unloved sectors. 

How strong are Chinese exports really?
China’s trade surplus (exports minus imports) reached a record $1.2tn in December, and its exports were 6.6% higher in dollar terms year-on-year – despite US tariffs. The “in dollar terms” part is doing a lot of heavy lifting, with the dollar 5% down against the renminbi since April’s ‘Liberation Day’. Chinese trade figures show only modest growth in local currency terms. Beijing has been deliberately pushing the renminbi stronger, despite a weak domestic economy that many expected would require a weaker currency. But Beijing’s currency strategy is about long-term status, not growth. 

China’s export numbers are still decent in renminbi terms, considering US pressure and currency moves. Exports to the US fell 20% year-on-year, but increases elsewhere (Africa, Asia, Europe) more than made up the difference. Unlike Trump’s first term, this doesn’t seem to be just rerouting either; the biggest export growth came from sectors not reliant on US demand. Chinese exporters are concentrating on higher value goods – evidenced by BYD outselling Tesla worldwide in 2025. 

Export resilience is good news, but it also lays bare the weakness in domestic demand. Beijing has been stimulating its economy for over a year, but tariff-compressed trade is still contributing more to growth. The communist party’s upcoming five-year plan will reportedly put more emphasis on supporting businesses – but actually achieving that is difficult. There are both ideological and structural barriers to pro-consumption policies, which often leaves China reliant on exports. That reliance is a problem. China is growing its trade surpluses with various countries, but populist movements in Europe and Asia are no happier with China’s trade practices than the Trump. China cannot keep exporting its way to growth forever. 

FOMO and diversification
How much diversification is enough? A well-known rule of thumb (originating from a 1987 Meir Statman paper) suggests 30-40 stocks is enough to protect your portfolio from idiosyncratic risk, but a recent paper titled “FOMO in equity markets?” suggests the right amount is much higher, somewhere between 100-750. The authors reach this conclusion by simulating performance with random stock sampling (within various portfolio construction rules) from 1985 to 2023. They bring this up in the context of ESG investing – where stock concentration is typically higher – but the basic idea is broadly applicable. This is because stock market returns are highly concentrated on a few winners. The fewer stocks in your portfolio, the more likely you are to miss out on the winners – which they call FOMO risk. 

Of course, this is using random sampling, and the whole point of active investment management is to be better than random. Joachim Klement, in his blog, points this out as a benefit of selective stock pickers: you can easily see how good a manager is at weeding out idiosyncratic risk. Active managers have struggled in recent years, though, because following the big stock names has been highly profitable (and stock pickers tend to avoid the biggest names with the highest valuations). We’ve argued before that 2026 could be better for active managers though, as we expect a fair amount of dispersion in global markets. 

The point here isn’t to disparage selective investors. Taking on extra idiosyncratic risk can pay off – but you should always be aware that you are taking on extra risks. The ’30-40 stocks is enough’ adage obscures those risks, making investors feel like they can have their cake and eat it. 

The best stock pickers are rare, so we always prefer well diversified portfolios, in line with our long-term guardianship principles. That’s also why we prefer fund-based investment structure in our portfolios, allowing us to build holistic and well-diversified portfolios with some funds riskier – and potentially more rewarding – than others.