LO Funds
All Roads Conservative

Macro and Market Review

January 2026 fitted into a pattern observed repeatedly since 2023, marked by notable US equity underperformance. This extended December's trend whereby American assets faltered while geographic diversification was distinctly rewarded. Several factors help explain this evolution: investor consensus remains heavily concentrated in American technology despite recurring calls for diversification, making US markets structurally vulnerable to rapid repositioning; European macroeconomic prospects have gradually improved, with eurozone leading indicators maintaining slow but steady progress, contributing to European asset revaluation; and the US political climate continues weighing on investor sentiment, from diplomatic tensions over Venezuela and Greenland to growing questions about Federal Reserve independence.

We seem to be witnessing a gradual erosion of American financial market dominance month after month, a trend January reinforced through relative performance. This rising uncertainty is also reflected in currency markets, with the dollar declining despite the US term premium – the gap between long-term rates and future policy rate expectations – remaining elevated. The US political risk premium is also evident in gold's trajectory, where price increases were accompanied by heightened volatility, a phenomenon observable across precious metals. January thus began with pronounced market movements consistent with 2025 patterns, suggesting a more durable regime shift may be underway rather than merely the tactical adjustments typically seen at the start of the year.

In this environment, global equities posted a 2.2% gain, driven by emerging markets (+8.8%) and value stocks (+4.6%), while growth stocks registered a slight decline (-0.3%). European indices outperformed their US counterparts, with the Eurostoxx 50 appreciating 2.7% compared to just 1.4% for the S&P 500 and 0.9% for the Nasdaq. Perhaps most notably, US small caps (Russell 2000) experienced a significant 5.3% rebound, illustrating rotation toward market segments neglected in recent years in favour of large technology stocks. In fixed income, the US 10-year yield rose 7 bps, while the 2-year yield increased 5 bps. Europe displayed the opposite dynamic, with the 2-year rate declining 3 bps and the 10-year rate down by 1 bps. This transatlantic divergence contributed to dollar weakness, with the currency declining 1.4% over the month. Credit spreads generally tightened, particularly in the US high-yield segment (-20 bps), indicating renewed risk appetite. Commodities shone in January, posting an overall 10.0% increase, driven by energy (+20.3%) and precious metals (+10.7%), with gold appreciating 13.3%.

Portfolio Activity

Portfolio exposure remained relatively stable over the month, closing at c.155%. Allocation marginally rotated towards hedging assets, remaining well balanced between cyclical (c. 45% allocation to equities, credit and commodities) and defensive assets (c.55% on inflation swaps, sovereign bonds and long-volatility strategies). Our volatility estimates remained stable for fixed income assets but increased at the end of the month for equities and commodities, while momentum signals remained positive across all cyclical assets (commodities, equities, HY credit). Additionally, our aggregate risk-appetite indicator remained in risk-on territory, although its more reactive component inflected and deactivated during the second half of the month. On the macro side, our growth signals continue to indicate a Goldilocks period, although the recent dynamic of the data points to a period of stabilisation. Our inflation nowcasters indicate that inflation pressures continue retreating, with this disinflation signal being stronger for Europe. Finally, our monetary policy signal indicates a period of accommodative monetary policy, which is positive for cyclical assets as long as growth itself is not at risk.

Performance

In January 2026, LO Funds–All Roads was up 2.2% (EUR NA share class). Over the month, equities and commodities were the top contributors, each contributing 90 bps. Fixed income’s contribution was marginally negative as sovereign bonds detracted 10 bps and corporate credit’s contribution remained negligeable. Finally, our overlays contributed 30 bps, with trend and macro strategies up.

Outlook

February marks the beginning of a new chapter as Kevin Warsh succeeds Jerome Powell as Fed Chair. This transition may hold profound significance for financial markets, as Warsh does not have a principally accommodative profile but rather is seen as a central banker skilled in monetary realpolitik. In the coming months, the tandem of Scott Bessent and Kevin Warsh is likely to aim to foster US rate stabilisation, a necessary condition for public debt sustainability. Against this backdrop, sustained global growth, rebuilding US monetary policy credibility and a generally robust earnings season could create favourable conditions for risk assets in February, provided exposures remain diversified and selective, both geographically and sectorally.