True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
True lifelong financial planning for the serious business of life.
True lifelong financial planning
for the serious business of life.
Category: Financial Planning, Investment management
UPDATE: This latest commentary was written before this weekend, and we will shortly send an update regarding the unfolding events in the Middle East.
“The times I have been most wrong are the times I thought I was most right.” – Peter L Bernstein (1919-2009), American financial historian, economist, and investment manager, and one of the most influential interpreters of modern financial theory.
“Best of times; worst of times!”
“In the best of times and the worst of times, markets remind us that euphoria and fear are fleeting – only discipline endures.” Aurelius Grant (1943-), former investment strategist turned essayist, known for his work on the psychological tides that shape risk, prosperity, and resilience.
With echoes of early 2025, global stock markets outside the US have enjoyed a strong start to the year. There is certainly a plausible bull story. Resilient economic growth, a rate-cutting cycle, fiscal easing, a continuing AI capex boom, and a US-China trade detente are all tailwinds as inflation continues to drift lower.
Interest rates are being cut to levels not seen since before the credit crunch. With private-sector balance sheets in much better shape than their public-sector counterparts, a new credit cycle is possible. This would unlock growth in economies and markets. A goldilocks scenario, some would say, although the unpredictable Daddy Bear Trump and his ongoing threat to impose tariffs at whatever cost may yet again spoil the party.
The front pages of the daily papers continue to serialise the Donald Trump show, as he flexes every political muscle he has, both at home and abroad. His limitless ambition makes it clear that one thing won’t change. Populism doesn’t come cheap; wide deficits will remain a feature of his administration, and the money supply will keep growing. Business sections debate the raging bull market and the fuel that this liquidity brings.
Columnists are fighting to distinguish between AI “winners” and AI “losers”, without much clarity. With €3 trillion in value destruction in recent weeks, obituaries have been written for media, finance, legal services, and software companies around the globe. The ghost of Joseph Schumpeter presides over the funeral processions through Silicon Valley and elsewhere, as firms in excellent health only a year ago are deemed redundant today.
They are survived by many “old economy” stocks, which are in good health as their genuine competitive advantages are revalued in this new world.
The investment world echoes the real world in its increasing polarisation, yet we believe the middle ground is the most fertile. Equities have been the primary driver behind the Clarion Portfolio Funds, with our decision to underweight US tech stocks being vindicated. Our ambition is to build portfolios that will protect and prosper over time, even amidst the rapid market disruption and dislocation which we are currently witnessing.
The best of times; the worst of times
“AI offers extraordinary potential to augment human capabilities, yet we should remain mindful of the very real threat it may pose to humanity.” – ChatGPT.
AI is rapidly embedding itself across nearly every industry, so avoiding it entirely is neither realistic nor desirable.
But it isn’t necessary to invest in pure AI companies to benefit from AI. It is increasingly becoming a tool rather than a product. It is being integrated into drug discovery, logistics, network management, fraud detection, marketing, customer service, and supply chain optimisation. That means many companies will benefit quietly, without ever being labelled an ‘AI stock’.
The internet did not just reward web browsers and telecom firms. The biggest long-term beneficiaries were retailers, travel companies, media firms, and service businesses that learned how to use it well. AI is expected to follow a similar path.
Stock markets tend to oversimplify big technological shifts. At the moment, much of the AI story is being funnelled through a small group of mega-cap US technology companies. That concentration brings three clear risks: valuation risk, concentration risk, and timing risk.
The dotcom era remains a helpful reference point. The internet changed the world, yet the Nasdaq still fell close to 80% from peak to trough in 2000. Microsoft took 16 years to recover from the wrong entry point! Being right on technology did not protect investors who overpaid or concentrated too heavily. Our diversification and valuation discipline are designed specifically to avoid repeating that experience.
AI is a genuine ‘game changer’, but that cuts both ways. Some companies will become extraordinary winners while others will struggle or fail entirely. Many will sit in the middle, benefiting incrementally. Our approach avoids making binary bets on a small number of perceived champions.
The Clarion Portfolio Funds do have AI exposure, but at significantly lower levels than global equity indices, and spread far more widely across sectors and geographies. This balance is intentional.
We also have holdings in the largest AI-associated technology firms (albeit these are spread globally). These are among the most profitable businesses in the world. Ignoring them entirely would mean stepping away from a powerful earnings engine. At the same time, we do not want our Portfolio Funds to be a one-way bet on the US.
For some time, we have been reducing exposure to US equities in favour of Emerging Markets, Asia, Europe, and the UK. We still own US equities, but we are more selective. Other regions, by contrast, trade at a meaningful valuation discount to the US and offer stronger long-term growth potential. Many Emerging Markets and Asian central banks are also earlier in the easing cycle, which historically supports local markets.
Rising tides tend to lift many boats. Investors can benefit from AI through its knock-on effects across the economy. For example:
If AI works as expected, productivity will improve, and margins will expand across many industries. We do not need to own only the most expensive AI stocks for that to show up in returns.
Our approach accepts AI exposure where it is justified, avoids overpaying, and focuses on the quieter, longer-lasting beneficiaries across the global economy. That balance is designed to participate if AI continues to drive growth, while remaining resilient if enthusiasm cools.
“High rates of inflation create a tax on capital: the average investor is now running up a down escalator”. Warren Buffett, age 95. American investor, businessman and philanthropist, widely regarded as one of the most successful investors in history.
The UK has been experiencing higher levels of inflation than in both the US and the Euro area for much of the last four years. Over the last year, prices rose in the UK by 3%, down from 3.4% in the year to December but still faster than in any other G7 economy. But things are beginning to change. Inflation is already falling and is forecast to drop like a stone in April to around 2.0%, at or near the Bank of England’s target rate.
Three factors are at work.
First, economists expect a significant reduction in energy bills. Cuts announced in the November budget, alongside lower wholesale gas prices, are expected to reduce the Ofgem price cap by around 7% in April.
Second, regulated service prices, many of which are updated annually in April, are set to rise at a much slower pace than last year. Last April’s 26% increase in water and sewerage bills, needed to fund investment, will fall out of the annual inflation numbers. So too will last year’s much smaller rise in vehicle duties, which will remain unchanged this April. Last March’s rail fare rises and last January’s VAT rise on private school fees will also fall out of inflation calculations by April.
Third, with agricultural commodity prices falling, food price inflation, which has run well above general inflation in the last three years, is expected to moderate.
But this isn’t just about lower energy, food, and regulated prices driving headline inflation down. Underlying, or core, inflation, which strips out food and energy, should also fall in the coming months.
Higher national insurance contributions, rises in the minimum wage, and strong earnings growth seem to be taking their toll, with employment services showing low levels of labour demand. The unemployment rate has risen from a low of 3.6% in mid-2022 to 5.2% and economists see it rising to 5.7% later this year. Earnings growth is likely to slow markedly this year, helping to push core inflation lower.
With inflation expected to hover between 2% and 2.5% for the rest of the year, real wages should keep rising throughout 2026. Much lower inflation creates room for further interest rate cuts, and financial markets are now forecasting three 25-basis-point cuts between now and autumn, taking Bank Rate down to 3% – a significant reduction in borrowing costs for households and businesses.
Lower inflation and lower interest rates, coupled with continuing growth in real pay, are good news for consumers. This might just mark the beginning of a broad-based recovery in consumer spending that so far has eluded the UK.
“The mind is a machine for jumping to conclusions” – Daniel Kahneman (March 1934-March 2024), Israeli-American psychologist best known for his work on the psychology of judgement and decision making as well as behavioural economics.
A book earmarked for my easter and/or summer holiday reading is Thinking Fast and Slow, written by the Nobel prize-winning economist Daniel Kahneman. This is a book about how people make decisions, and particularly the distinction between fast, almost automatic System 1 responses, and much slower, more considered System 2 responses, which require considerably greater thought and effort.
I first came across Kahneman’s work some years ago when reading his book “Prospect Theory”. It is a powerful paper and provides an in-depth study about why stocks and shares and other investments, driven by human behaviour, are prone to mispricing and large over- and undervaluation. “Prospect Theory” analyses how people often make illogical decisions when it comes to investing their money. It cites now well-known phenomena such as “loss aversion”. In specific situations, people typically prefer to receive a good payout, rather than take a likely better payout but with a small chance of a big loss.
Thinking Fast and Slow builds on that work but is much broader. It is full of examples of how System 1 responses can be misleading. One interesting example is called the MPG Illusion, from psychologists Richard Larrick and Jack Soll. Consider two car drivers switching cars to save money. Adam switches from a gas-guzzler running at 12 miles per gallon (mpg) to a new car at 14mpg, whilst Beth switches from a more environmentally friendly car running at 30 mpg to an even better one at 40mpg. Who saves the most money if they drive the same distance? The almost instinctive (System 1) answer is Beth, as she gets a third more miles for every gallon used, whereas Adam only gets a sixth. However, with more careful thought (System 2), the answer is Adam. Adam uses so much more petrol on every journey that he actually saves more money over the same distance by switching cars.
Happy reading!
As always, we thank you for your continued support and we look forward to updating you regularly throughout 2026.
Please click here to access The Clarion Investment Diary for February with full details of the Clarion Portfolio Funds.
Keith W Thompson
Clarion Group Chairman
February 2026
Any investment performance figures referred to relate to past performance which is not a reliable indicator of future results and should not be the sole factor of consideration when selecting a product or strategy. The value of investments, and the income arising from them, can go down as well as up and is not guaranteed, which means that you may not get back what you invested. Unless indicated otherwise, performance figures are stated in British Pounds. Where performance figures are stated in other currencies, changes in exchange rates may also cause an investment to fluctuate in value.
The content of this article does not constitute financial advice and you may wish to seek professional advice based on your individual circumstances before making any financial decisions.
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