by Henry Cobbe CFA, Head of Research, Elston Consulting
When we read the financial news, much of the commentary is around what is impacting different sectors. A commodities rally is good for Materials sector. Higher interest rates are bad for the Real Estate sector. Consumer Staples fare better during recessions. Rising oil prices is positive for the Energy sector. And of course valuations being stretched in the Technology sector. And so on. Yet when it comes to asset allocation, financial advisers and discretionary investment managers are anchored into countries/regions and try to get a look-through sector perspective as an afterthought. This is paradoxical. 
The US equity market dominates market-cap weighted indices. A market-cap weighted approach results in a concentration in the tech sector. Whilst this has helped US equity performance historically, it has held it back - in relative terms in 2025. So where should investors allocate if they wish to diversify away from the US?
Equities have recovered strongly from the tariff shock earlier in the year. Dollar weakness vs Sterling has weighed on the relative performance of US equities; however, this was a step-change and there are concerns for Sterling too. Gold has continued to perform very strongly on the “debasement trade” and Central Bank buying. Within Bonds, Emerging Markets are in better shape than Developed Markets, in our view.
 Henry Cobbe shares Elston’s annual fund wishlist with Professional Adviser, looking at which ideas have been granted, which remain outstanding, and how collaboration between advisers and fund houses can lead to better outcomes for portfolios.
Read more: https://www.professionaladviser.com/opinion/4522770/dear-santa-henry-cobbes-festive-fund-wish-list  What is Deepseek?
The new Chinese AI tool is the most downloaded app in the US and claims to be able to operate quicker and more cheaply than Chat GPT. By requiring fewer chips and smaller server farms, DeepSeek can deliver its AI generated results, which incorporates self-corrective learning, at lower cost. The arrival of DeepSeek in the AI field creates a challenge to Chat GPT and also means more could potentially be done with fewer advanced chips. The DeepSeek app is free, and its code is open source, which means companies in the US can easily create similar copycat versions of it. Its AI model is called R1 which has some 670 billion parameters, making it the largest open-source LLM (large language model) yet. The R1 is unlike traditional models that immediately generate responses. The R1 are trained to think extensively before answering. Its approach is similar to how a human carefully considers a complex problem before answering it. The method is known as test-time compute and requires the model to spend up to minutes working through its chain of thought. The company estimates it has cost $6 million to train the model compared to other AI models which cost over a $100 million each. The app challenges the notion that the only way of building better AI models is by spending large amounts of money buying high powered processing chips. What happened to NVidia stock? Lower potential demand for chips has led to a rapid sell-off in NVidia shares, which declined -17% in 1 day on 27th January 2025. Because of NVidia - and the broader technology sector's high exposure within the S&P 500 this led to a US equity market sell off, dragging down market-cap weighted world equity indices too. Other stocks which suffered similar down moves were Oracle (-13.79%), Cisco (-5.06%), Broadcom (-17.40%). These companies along with Nvidia provide important components in building data centers and digital infrastructure to support training AI models. NVidia released a statement saying "DeepSeek’s work illustrates how new models can be created using that technique, leveraging widely-available models and compute that is fully export control compliant." While President Trump said the breakthrough in technology is a positive for America and that it is a wake-up call for US tech firms to not rest on their laurels. Elevated concentration risk in the US equity market is well-documented and one of the reasons we recommend advisers we work with to balance traditional S&P500 market-cap weighted exposure (which was down -1.46%) with S&P500 Equal-Weighted exposure (which was up +0.03%), and also for active selections within Sectors and Styles. How much NVidia is in a portfolio? For a balanced, well diversified portfolio built with funds, direct exposure to NVidia should not be more than 2% or so. This reflects the importance of diversifying away from stock-specific "idiosyncratic" risk. Creative disruption requires diversification As with any paradigm shift, it's hard to identify clear-cut winners in advance. We welcome the AI revolution as a broader technological innovation theme to consider within portfolios. But this episode emphasises the value of having a diversified approach.  [5 min read, read as pdf]
As we look forward to 2025, it is worth revisiting the themes and predictions of our 2024 outlook “turning the corner” to get a sense of what we anticipated at the time, how this informed our recommendations to UK adviser firms’ investment committees. Asset class performance for 2024 is summarised in the chart above. Our 2025 outlook is published separately. Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only) Steady as she slows In 2024, we anticipated a gradual deceleration in the U.S. economy, with markets pricing in the likelihood of a slight recession. In the event, the U.S. economy surprised on the upside. Growth forecasts were upgraded from 1.15% at the start of the year to an impressive 2.6% by year-end. This revision supported robust equity market returns and served as a reminder of the resilience of U.S. economic fundamentals. In summary, a resilient US economy defied expectations. What did we recommend to our clients at the outset and during the year? We took a balanced view between accepting concentration risk (traditional S&P 500) and diversified (active, sector exposures). We also recommended clients lean in to broader US equity corporate landscape via 1) Equal Weight and 2) US Small Caps exposures. By contrast, the UK had that shrinking feeling as regards economic growth, and although out of a technical recession, we are not confident of its prospects relative to the US. Pause before pivot At the close of 2023, we were focused on the Federal Reserve’s pause in interest rate hikes, noting that a rate cut was a question of when, not if. While the consensus view was that the first cut would be announced by mid-2024, we anticipated that the timing would hinge on the performance and strength of the U.S. economy. Indeed, the economy’s resilience delayed the start of what we anticipate to be a rate-cutting cycle to September 2024, when the Federal Reserve finally delivered a significant 50-basis-point cut. In fact, the eventual BoE Fed pivot came a month or two later than we had estimated at the start of the year, but we recommended our clients remain dynamic with regards to duration management. We recommended clients go strongly overweight duration in June as a good time to extend duration ahead of BoE cuts, with Fed following suit, and we saw the additional duration deliver returns on the bond side of the portfolio before attention shifted to debt supply and the UK budget later in the year, which led us to recommending to move back to neutral. The importance of portfolio resilience Our focus on resilience proved vital when it came to navigating the key macro factors in 2024: Growth, Inflation and Interest Rates. For Growth, anticipating a soft landing for the US economy, we highlighted the potential outperformance of cyclical sectors, and momentum, yield and size factors. In the event, momentum emerged as the best-performing factor, with yield and size also delivering strong returns. For Rates, we adjusted duration exposure mid-year to capture the effect of falling policy rates, aligning portfolios with a changing interest rate environment. For Inflation, which remained above target, the inclusion of liquid real assets (but to a lesser extent than in 2022) and shorter duration inflation-linked bonds, ensured continued portfolio resilience. We continue to emphasise the importance of a diversified alternatives exposure from a correlation perspective, not just in name. Our recommendation to consider Private Market Managers and Gold & Precious Metals paid off during the year – as these were the best performing asset classes for the year, outperforming world and US equities. Political and Geopolitical risks In a year of elections, we saw a change in government in the UK and in the US following Trump’s Presidential win. Both have a greater impact on bond yields and currency dynamics than equity markets, in our view. Geopolitical risks remain elevated with the Russia-Ukraine war continuing to grind, escalating conflict and contagion in the Middle East – all at tragic human cost. Conclusion Markets did indeed turn a corner in 2024, with economic growth, earnings and equity market returns outperforming expectations. With 2024 in the rear-view mirror, it’s time to look ahead to 2025. Our 2025 outlook is published separately. Henry Cobbe, CFA Head of Research, Elston Consulting  For investors wanting a differentiated approach to implementing a global equity exposure, what are the options?
Read the full article in FT Adviser  [5min read, open as pdf]
 Central Banks' policy rates are expected to pivot towards cuts in 2024 with a material impact on asset class perspectives.
 [5 min read]
2022 was a reminder of the importance of dispersion within equity markets. It turns out this lesson remains relevant in 2023 but with very different - almost opposite - themes. Read the article in FT Adviser  [5 min read, open as pdf]
This CISI-endorsed CPD webinar provide an introduction to Sector-based investing as an alternative approach to world equity implementation.
 [3 min read - open as pdf]
 [5 min read, open as pdf]
 [5min read, open as pdf]
 NMA speaks to investment consultant Henry Cobbe about positioning equities for higher inflation using sector and factor equity investing.
Listen to the podcast  [5 min read]
1. Yield is back: for equities, bonds and alternatives - the yield drought is over 2. Selectivity matters more: within and across asset classes 3. Inflation is getting stickier: getting past the peak, but still a problem Read the summary article Find out more:
 [5 min read, open as pdf]
 [3 min read, open as pdf]
|
ELSTON RESEARCHinsights inform solutions Categories
All
Archives
July 2026
|
RSS Feed
|
Company
|
Our Solutions
|
|