The year started with a geopolitical bang as the US initiated a series of aggressive foreign policy moves focusing on Venezuela, then Greenland followed by Iran.
Despite citing geopolitical risk in our annual outlook just a few weeks ago, the speed and scale of these interventions have been unexpected, while the consequential market reactions have been varied.
The US military intervention in Venezuela was broadly shrugged off by markets given the rogue nation’s relative economic isolation and long-time horizon for new oil production to be brought online.
However, the US president’s announcement of tariffs on European partners over Greenland was more substantial and sparked a fresh “Sell America” push. Despite the situation de-escalating, the headline announcements resulted in equity market volatility, further declines in the US dollar, and a surge in the price of gold.
The US is now looking to Iran for ways to force a more comprehensive deal on its nuclear programme. While a military escalation in the Middle East may have less of a direct impact on the US dollar, a rising oil price over the last month reflects growing angst over how geopolitics may affect oil flowing through the Strait of Hormuz, the world’s most important sea passage for oil transportation.
Elsewhere, Japan’s Prime Minister, Sanae Takaichi, announced a snap election for February 8th to capitalise on her popularity and generate a clear mandate for her party. At the time of writing, we now know this gamble paid off and her LDP party secured a supermajority to roll out their conservative agenda.
This is positive news for equity investors as Takaichi can govern with stability over her term, stimulate domestic investment and continue improving Japan’s corporate governance regime to enhance shareholder value.
Outside geopolitics, the AI revolution continues to reshape market dynamics though not always in predictable ways. Having been initial winners last year, major software companies in the US are now seeing share price falls as the risk of AI disruption spreads.
The fear is that traditional software providers will face pressure on margins and growth as AI-enabled competitors offer potentially comparable products at lower costs. This trend is now extending into industries such as legal services, financial services, real estate, and logistics.
The market often tends to over-react, but it is becoming increasingly clear that every sector will have winners and losers from this revolution.
As we progress through 2026, we continue to believe geopolitics and AI will influence markets, but without any major shock, economic growth looks on track to deliver a strong year for markets.
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