When looking back over the last 12 months it should be said that it’s been a relatively good year for investors, especially for those who have a diversified global portfolio. The financial markets have experienced some significant turbulence, marked by a mix of global economic challenges and opportunities, however for investors who do adopt the principle of having a well-diversified global portfolio, the last twelve months has been a testament to the power of diversification in managing risk and capturing growth across various markets and asset classes.

Tatton Investment Managers recently reported how the US was a clear standout, with its overall stock market up 22.4% in sterling terms, and its dominant tech sector again up 23.8%. China was the only major disappointment, losing 12.1% in sterling terms after significant ups and downs. UK government bonds grew in price, and corporate credit improved dramatically.

We have seen some heightened market volatility that has been driven by geopolitical tensions, inflationary pressures and some ongoing supply chain disruptions and it’s these factors that can lead to some uncertainty in the markets. However, this is where a well-diversified global portfolio, which includes a mix of equities, bonds, real estate, and other asset classes across different regions, has provided a buffer against these market swings.

By spreading investments across various sectors and geographies, investors have been able to mitigate the impact of localised downturns. For example, while some markets, particularly in emerging economies, faced significant challenges, stronger performance in developed markets like the U.S. and Europe has helped balance overall portfolio returns.

It was in response to persistent inflation that central banks around the world raised interest rates, which has had a mixed impact on different asset classes. Approximately 12 months ago the markets started to believe that interest rates would be cut in early 2024, however, it took a lot longer than expected for the rate cuts to materialise. It is now pleasing to see that some interest rates have eventually fallen in United Kingdom and Europe, and the US central bank has now given an indication that they will potentially follow a similar path in the next couple of months. The outlook for further cuts is uncertain, even though rates remain restrictive.

Bonds, particularly long-duration bonds, have faced headwinds as yields rose, leading to price declines. However, equities in certain sectors, such as financials, have benefited from the higher interest rate environment, which typically boosts profit margins for banks and other financial institutions.

For those investors who have a diversified global portfolio, having some exposure to a variety of fixed-income securities, including short-duration bonds and inflation-linked bonds, has helped manage interest rate risk. Additionally, international diversification has provided access to regions where monetary policies differ, offering further opportunities to balance portfolio returns.

A well-diversified global portfolio would typically include investments in multiple currencies, therefore again helping to spread currency risk. This approach will enable investors to capture opportunities in regions with weaker currencies while benefiting from the relative strength of the dollar and other major currencies.

When we look back over the last three months, we noticed how May reversed April’s losses and pushed stock indices to new all-time highs. The predominant factor for this was strong US tech profits, and the realisation that rate cuts might not be needed to support growth – at least in the United States.

June was a month of cautious optimism in the investment markets, with equities generally performing well, particularly in the U.S., while fixed income markets faced pressure from ongoing concerns about interest rate hikes. Commodities and currencies reflected the broader uncertainties in the global economy, with some sectors benefiting from safe-haven demand. As always, investors remain focused on central bank policies, inflation trends, and economic data as they navigate these complex market conditions.

July completely reversed the market concentration narrative, however. US tech stocks had their first rough patch of the year, losing 2.3% through July in sterling terms. Losses were concentrated on the ‘Magnificent 7’ (Apple, Amazon, Alphabet, Meta, Microsoft, Nvidia, Tesla), while smaller caps – both in the US and around the world – had their best performance for some time. Market rotation from large to small caps is a healthy sign for markets, but the sheer weight of the Mag7 within the US and global stock indices means losses to the big guns could hurt more.

Looking forward, it is felt that sectors such as healthcare, renewable energy, and technology may provide the prospect of future growth, and having some diversification across these areas ensures that investors can participate in these opportunities.

The past 12 months have reinforced the importance of diversification in investment strategy. A well-diversified global portfolio has provided investors with the ability to navigate market volatility, manage risks, and capture opportunities across different regions and sectors.