Executive Summary: Global Macro Narratives
The global investment landscape is currently defined by a sharp divergence between resilient corporate fundamentals and shifting structural narratives. While headline growth remains sturdy, several "elephants in the room" are forcing a repricing of risk across multiple jurisdictions.
Geopolitical Fractures
A "trust deficit" is widening between the US and Europe, leading to an independent European defence identity and decoupled funding for Ukraine. In the Middle East, while regional powers appear to be in a pragmatic "survival mode" regarding nuclear negotiations, the risk of unilateral US military action remains an unpredictable "game theory" variable.
The "Takaiji Trade" in Japan
A structural shift is emerging in Japanese markets. New supply-side economic initiatives are challenging the traditional inverse correlation between the Yen and the Nikkei, creating a rare environment where both the currency and the equity market can rally in tandem.
The AI "Terminal Value" Debate
A significant rotation is underway within the technology sector. While AI hardware and infrastructure remain supported by massive capital expenditure—often exceeding 90% of free cash flow for major players—software and data-intensive services are facing "terminal value" uncertainty. This mirrors historical disruption cycles where near-term earnings growth failed to protect against long-term existential risk.
Fiscal and Macro Stability
Global growth forecasts for 2026 suggest a "sturdy" expansion (~2.8%), outstripping consensus. However, concerns regarding US fiscal balances and the expiration of pandemic-era tariff structures are introducing new layers of volatility into the sovereign bond and credit markets.
Evaluation Against NJR Partners' Investment Principles and Portfolio Positions
1. Primacy of Risk (Adherence: High)
The current strategy maintains a constant risk budget of 0.75 Equivalent Equity Exposure (EEE). This core discipline deliberately rules out market timing and contains possible responses for when "credit volatility" flashes warning signs or when sentiment is too sanguine about the recent behavior of risk assets.
2. Diversification by Economic Driver (Adherence: Moderate)
The portfolio’s overweight position in US assets (equities and credit) is being challenged by market concentration in AI-exposed names and the strength of the AUDUSD. Our principles dictate a move toward "broadening", probably best achieved through US index exposure, middle-market US private market exposure and geographic diversification.
3. Asymmetric Return Focus (Adherence: High)
The strategy’s overweight positions in Gold and Tail Risk align closely with the current "extreme left tail" risks identified in the macro outlook, but they also benefit from the "melt-up" scenario. Explicit protection against a systemic regime shift remains a core requirement when equity and credit valuations sit at historical extremes.
Proposed asset allocation rebalance actions
- Overweight Japan Equities: Capitalise on the structural "Golden Age" narrative and the supply-side reform impulse.
- Global Software/Services: Review exposure to sectors facing AI-driven disintermediation and terminal value erosion.
- US Cyclicals: Add middle market exposure.
- Reduce US Dollar Exposure: Moderate overweight USD positions through asset diversification and USD funding.
- Maintain Overweight Tail Risk & Gold: Maintain active overweight asymmetric defense exposures to manage the risk budget and hedge against geopolitical shocks and fiscal instability.
- Credit: Continue to avoid investment grade credit where valuations are at the 2nd percentile of historical tightness noting that our current high-yield and private exposure is primarily to middle market US corporates.
- (Inflation Linked) Government Bonds: Maintain underweight
Quotes we liked this week
- There is something comforting about a model of behaviour that is based on how people actually behave. Convex Strategies
- “Why bring this particular set of charges? Of all the sins for which the Federal Reserve stands culpable, the government has chosen the equivalent of a municipal ordinance against public spitting. The Fed has suppressed interest rates. It has inflated asset bubbles, facilitated the accumulation of a $38.4 trillion gross public debt and financed a multiyear crisis of “affordability.” Its preoccupation with asset values and “smooth functioning markets” has inflated stock and bond prices and thereby exacerbated class divisions. It waited a full year, 2021–22, before lifting its policy rates to beat back the inflation that its 400 doctors of economics somehow failed to recognize, let Convex Strategies 6 Convex Asia Fund | Monthly Update January 2026 alone to predict. It has rung up operating losses of $243.1 billion, 5 times its stated book capital and surplus and 405 times the reported $600 million of cost overruns on its office-remodelling project. If it ran its business according to GAAP, it would be as broke as Silicon Valley Bank.” Jim Grant, Grant’s Interest Rate Observer. January 2026.
- “…granting boundless power to government agencies to solve the world’s problems does not square with my disposition…some may believe the biggest threat to our economy comes from outsiders who seek to change the status quo—I don’t agree…I believe the predominant risk come from choices made inside the four walls of our most important economic institutions.” Kevin Warsh, April 2025.
- “…the future arises from what I’m calling sequential disclosure, not revelation…the future is not hidden, it is unfinished” Richard Brennan, January 2026.