The Great Rotation Continues
Emerging markets and Europe continue to outperform the US.
A very positive start to 2026, even if markets generally stepped back a little in the last two weeks of January:
Precious metals and miners take a break
The big momentum story last month was precious metals, but after silver’s parabolic rise (short covering?), Gold and silver have both had a correction. Gold spiked and stabilised, so did silver.
The funds have been flat or slightly down on the month.
This month’s top 10
Source: SaltyDogInvestor.com
Japan Takaichi and the market are both winners
On Monday 9th Takaichi’s landslide win was announced.
The downside to markets we had talked about previously was the end of the Yen/$ carry trade threatening the US treasury market. For the Japanese market, the election has been catnip. The market’s rise has continued and the yield on the 10 yr JGB has stabilised.
No Panic.
The yen has suffered somewhat from promises of more Government spending and tax and potential interest rate cuts, but the Nikkei has accelerated up.
USD/JPY
Emerging Markets – still progressing but more slowly!
Like precious metals, emerging markets has largely dropped out of the news, but its momentum has been maintained if at a slower pace. The Rotation from the US continues.
Performance of the funds has been good.
Korea is the “Emerging market” story in the month as it reaches a new record.
It is an interesting contrast to the US market: US investors are seeing disruption as markets are concerned about the impact of AI, with SAAS stocks suffering badly, and with problems in the private debt markets. The latter caused in part by concerns over leveraged loans to SAAS and other leveraged companies heavily represented in Private Equity portfolios: The fallout from:
Blue Owl gating one of its funds sets off retail-investor panic, while listed European Private Lending funds have seen their shares sold off in turn.
The market doesn’t even like good news, like NVIDIA’s record results. The market also worries about AI induced white collar unemployment:
Korea’s surge is being led by the “picks and shovels” and AI winners trade – with semiconductors and automotives winning, in the latter case as investors pivot towards asset heavy “AI -proof stocks”.
Oil and Gas – Another AI Beneficiary?
This is an interesting development, and it will be interesting to see if the trend continues. Why are oil majors going up? The S&P 500 Energy Select Sector Index has risen about 20-21% YTD as of mid-February.
The obvious answer is the military build-up in the Gulf and the threat of the closure of the Gulf of Hormuz and/or war with Iran.
This has led to an increase in the oil price up $6-10 from year end levels.
A new theme emerging in the press is a rotation not just into Emerging markets but also “hard assets,” the HALO effect. Capital light tech businesses are potentially easy for AI to disrupt. Capital intensive businesses are more difficult.
This aside, there is not a clear picture on oil and gas prices going forward: data centre energy demand is a positive, but gas supply, with new liquefaction capacity coming onstream in the Gulf of Mexico will potentially push down LNG prices internationally.
Could this be a flash in the pan for Energy stocks, rather than a new trend?
Our Portfolios
So how have the portfolios performed?
The great relative performance has continued. We’ve beaten SWDA in five out of the last six months! This month, all of the last 6 portfolios outperformed.
Is there value in the strategy? The following tables shows 1) cumulative returns of the SWDA Index and 2) the relative cumulative performance of each fund over the same horizon in each case. As you can see five out of 6 portfolios have outperformed on a cumulative basis.
I think it’s worth repeating the commentary from last month: “Why so successful? The argument against active managers is that “on average they don’t beat the index. Why pay the Fee?” Our benchmark index, SWDA, is heavily US and heavily tech and “Magnificent 7” weighted. While the US and the Mag-7 lead the world, this index is hard to beat. Our outperformance reflects the fact that investors are allocating to emerging markets, which are consequently outperforming the US. Investors are also turning from the Mag-7 which is also fracturing: performance of these companies is diverging and so is sentiment towards them.” Concern about the impact of AI is making the US market as a whole volatile with different potentially AI affected sectors coming under attack.
In short – momentum following is going to get you the best out of your index, or out of it! Maybe there is value in a manager!?
How Have the Individual Portfolios Performed?
The Best Portfolios
The best portfolios are consistent in their themes – Gold, EU, Japan, and Asia Pacific ex Japan (with big exposures to Asia tech in Korea and Taiwan. An interesting story is portfolio 17 which includes the Stoxx 600 European Banks index. This isn’t covered in the SaltyDog data but has been a sterling performer rising 43% in the last twelve months.
2026 has started strongly with a favourable regulatory and economic outlook. European banks are still cheap.
Momentum in February and a New Portfolio Twenty
Staying with the pure momentum approach, if we continue, then the 6-month data suggest:
- Gold and gold miners
- South Korea
- Emerging markets
- Energy, tech, or Latin America
If we look at the four-week momentum, then the ranking is different:
- Korea
- Japan
- Energy
- Asia ex Japan
I think it is likely that the Energy sectors good month has a high probability of not continuing, unless there is a war with Iran. The market is largely acting as though this is another “TACO” situation – “Trump always chickens out.” Gold and precious metals will continue to perform, but their momentum may be more subdued for now.
I will go with the four-week momentum as my guide and take the top four sectors, BUT I will substitute European banks for Energy; the trend that I think has legs.
This Month’s Portfolio
