Stay in the race: Lessons from the track to the market

It’s fair to say that both fiscal and monetary policy have been a concern in the US. Government spending has surged, and the US federal budget deficit has swelled to levels not seen in decades outside recessionary periods.

One worry is whether political pressures could challenge central bank independence – for instance, might governments lean on central bankers to keep interest rates lower for longer to ease their debt burdens? These are the kind of “red cap” risks (political wildcards) on the horizon that we keep on our checklist.

However, to paraphrase a famous quote, reports of the death of the dollar certainly appear overexaggerated. Despite recent weakness, the dollar remains the world’s dominant reserve currency, as the chart below shows, accounting for nearly 60% of global FX reserves. The euro trails significantly at under 20%, with other currencies such as the yen, pound and yuan comprising much smaller shares. This dominance underscores the US dollar’s structural importance in the global financial system even amid cyclical weakness or political volatility.

We continue to monitor the US dollar. However, a change of this magnitude in the global financial order would occur slowly, even over decades. The US remains our largest equity position, despite our underweight relative to market cap.

Discipline is key

The race is going smoothly. The car is balanced, the tyres are holding, and the strategy is unfolding just as planned. But then, dark clouds gather over Turn 7. A few drops hit the visor. The instinct is immediate: pit now, switch tyres, change everything. Yet the best Formula 1 teams don’t flinch at the first sign of rain. They check the radar, assess the track, and ask the most important question: Is this noise or a signal?

In an age of information overload, not reacting to the “incessant stream” of financial news and emotional triggers can feel almost impossible, as my colleague and Director of Research Joe Wiggins observes. But acting on every market dip or headline is usually counterproductive. In most aspects of life, doing less is easy; in investing, this is surprisingly difficult – and even more so when one feels like one has lost some ground (compared to the friendly uncle next door who bought in some gold or AI lately).

Jumping in and out of the market is a bit like a driver trying to recover lost ground by pushing harder and ultimately putting the car in the wall. Once we start trading on emotion, we tend to reinforce bad habits like chasing performance (buying high) or fleeing at the bottom (selling low). It becomes a vicious cycle that hurts long-term results.

When uncertainty is high, the conviction in making any decision must, by definition, be lower. Therefore, the threshold for making changes should be higher. We have created a geopolitical checklist that helps us navigate world events in a disciplined way. 

The importance of regional diversification

In the current environment, we believe diversification and resilience are key. After a long stretch where US stocks have outshone other markets, many investors have questioned the role and value of diversification. 

But in my last CIO note, I made the argument that US equities were riskier today than historically. This is because of the combination of extremely high US company valuations and the concentration of the US as a proportion of global equities.

Not only is there no guarantee that the US will continue to outperform, but a diversified approach is also crucial when the world is so unpredictable. The chart below shows the makeup of different equity markets across the world. It highlights how global equity markets are heavily tilted towards more cyclical sectors, with technology and media dominating exposures it now takes up more than 40% of the overall US market². This can make markets overly exposed to economic booms and busts. Diversification across geographies and sectors, including defensives, can help smooth returns, preserve capital, and reduce the risk of being overly exposed to rapid market swings.

The eclectic spread of the sectors shows the true diversity of regional equity markets from each other. To put it simply, you get different exposures when accessing different regions. 

This changes over time, of course. To ensure both diversification and resilience to the characteristics of different markets, we carry out thorough analysis for all our managers and the markets in which they invest.

Index Composition: standalone and relative to MSCI World

Our position

Instead of trying to predict every political twist, we focus on making our portfolios resilient. We anchor our strategy in timeless principles, one of which is to be disciplined.

The goal is a balance that can weather different storms. While we can’t eliminate geopolitical or macro risks, we can prepare for them through intelligent diversification and by staying the course rather than making panicked changes.

There’s a famous Warren Buffett adage which captures this tension: “Wall Street makes its money on activity; you make your money on inactivity.” In other words, brokers, pundits and even fund managers profit from convincing us that constant action is required, but as investors, we often profit from patience. As someone who’s followed F1 long enough, I’ve learned that patience isn’t optional – it’s part of the race plan.

Sources:

¹ Trading Economics 
² © S&P Dow Jones LLC 2025. All rights reserved.

This article is a general communication that is provided for informational purposes only. It should not be relied upon as financial advice, and it does not constitute a recommendation, an offer or solicitation. No responsibility can be accepted for any loss arising from action taken or refrained from based on this publication. All information presented herein is considered to be accurate at the time of production, but no warranty of accuracy is given and no liability in respect of any error or omission is accepted.

Please note that past performance is not an indicative of future performance, and the value of an investment with St. James's Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested. 

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.