SMF - 2026 Update

Top 3 investment themes – 2026                

1. Growth extends beyond the Magnificent Seven

January saw equity leadership broaden meaningfully. The equally weighted S&P 500 outperformed the market‑capitalisation‑weighted index by +1.9%, indicating wider market breadth. The US earnings season is now close to a third of the way through and so far is supporting the view of a broadening out of equity market earnings and performance, with all sectors in the US delivering earnings above analysts' expectations. The hyperscalers capital expenditure is increasingly flowing downstream, benefitting other sectors of the economy, most notably industrials. 

2. Geopolitics lift demand for precious metals  

Geopolitical tensions around Venezuela, Greenland and Iran dominated headlines in January, though the broader market impact was largely confined to commodities. Brent crude saw its biggest monthly jump in 4 years (+16.2%). Across all three episodes, investors increased allocations to safe‑haven assets, driving a sharp rally in precious metals. Gold finished the month up +13.3%, and silver rose 18.9%, despite a sharp pull back in both at the end of the month. The US Dollar failed to exhibit its traditional safe‑haven characteristics, declining -1.4% over the month against a basket of developed market currencies.

3. Japan's policy shift 

Japan emerged as a key market driver in January as aggressive fiscal proposals triggered sharp volatility in long‑dated Japanese government bonds, pushing yields to multi‑decade highs. The 40‑year Japanese government bond yield rose above 4% for the first time on record, while the Yen came under sustained pressure. As the world’s third‑largest economy and home to the third‑largest bond market, at over $10 trillion, the scale of Japan’s market raised concerns over potential global spillovers.

January 2026 market performance (GBP Terms¹)                                                                                                         

Past performance is not a reliable indicator for future performance.

_{Source: Morningstar as at 31 January 2026. ¹Equity returns are in GBP, commodity is GBP hedged and fixed income is GBP hedged.}

How did SMF perform?

Growth assets

Global equity markets had a resilient start to the year, delivering positive returns across most major regions in GBP terms. Asia Pacific ex Japanese and Emerging Market equities in particular had a strong month up +6.1% and +4.0% respectively, supported by continued optimism around AI and commodities demand that had carried over from last year. A softer US Dollar added further tailwinds. More broadly, strong macro data helped underpin sentiment with US services activity climbing to a 14 month-high, unemployment edging lower and softer inflation in Europe fuelled expectations for an interest rate cut. Beneath the strong headline returns, geopolitical shocks injected bouts of volatility. The threat of new US tariffs briefly pushed the S&P 500 down -2.1% mid‑month, sparking concerns over a renewed escalation in global trade tensions. However, markets stabilised as political rhetoric softened and a “framework” agreement on Greenland was announced, providing investors with some relief. By month‑end, US equities had fully recovered, pushing to all‑time highs in Dollar terms. Our overweight position in European Basic Resources was a standout contributor this month, benefiting directly from the copper rally. Overweight positions in European Financials, UK mid‑caps and the NASDAQ all also performed well as risk appetite improved and earnings momentum remained supportive. Regionally, our overweights to Emerging Markets, Europe and US equities further added to returns.

Defensive assets

Fixed income markets also posted a strong start to the year, with performance shaped largely by geopolitical developments and shifting central bank expectations. The most pronounced moves came from Japan, where government bonds sold off sharply after a snap election announcement and campaign pledges for consumption tax cuts. This led the 30-year government bond yield to reach its highest level in history at+3.9%. US fixed income was largely influenced by geopolitical uncertainty, compounded by renewed scrutiny of the Federal Reserve following the Department of Justice’s criminal investigation into the institution. The combination spurred a flight to safety that powered precious metals higher, and coincided with a meaningful weakening of the US Dollar, which experienced its sharpest four‑day decline since Liberation Day. European sovereign bonds also delivered positive returns, up +0.7% over the month, supported by inflation readings surprising to the downside. Our underweight position to the US Dollar continued to offset a weak dollar, whilst our overweight to Australian government bonds slightly detracted. 

Alternative assets

Our allocation to Aviva Investors Multi Strategy Target Return fund (AIMS) added to performance, as it continued to provide a diversified source of returns and downside protection amidst the volatility. This was driven by overweight positions to Gold and Emerging Market equity exposure. The UK Property fund also performed well given the falling interest rate environment, which improved investor sentiment. 

Key active management themes in January 2026

1. Long-term structural themes in Europe 

• Europe is undergoing a once‑in‑a‑generation fiscal reset after years of subdued growth. Leading this shift, Germany has moved to loosen its constitutional debt brake and exempt defence spending above 1% of GDP - marking a significant policy departure. In addition, Germany has proposed around €500 billion in infrastructure investment over the next decade, underscoring the scale of this structural change.
• In response to these structural trends, we have opened an overweight equity position in European defence companies.
• We have also initiated an underweight position in German 30‑year government bonds, reflecting the long‑term fiscal pressures that are likely to accompany elevated spending commitments.

2. Opened an underweight to US Treasuries

• With US growth momentum supported by robust labour market data and both fiscal and monetary stimulus, upward pressure on yields remains a risk. To position for this, we opened an underweight in 10‑year US Treasuries, expressed against an overweight in Australian government bonds.

3. Opened an underweight to Sterling relative to Euro 

• Expectations of a disappointing set of local election results for the Labour Party could intensify discussions around fiscal risks and potentially raise questions around future leadership.
• Against this backdrop, we opened an underweight position in Sterling relative to the Euro, reflecting the potential for renewed political uncertainty to weigh on the currency.

January 2026 Performance

Past performance is not a reliable indicator of future performance

_{Source: Morningstar as at 31 January 2026. Performance is shown net of fees.} 

The launch date of SMF (pension) was 11/12/2017, SMF (bond) 18/02/2019, SMF II (pension) 30/06/2021 and SMF II (bond) 30/06/2021.

SMF Strategic Asset Allocation

^{Source: Aviva Investors. This diagram is for illustrative purposes only, asset allocations are subject to change. The reference fund is SMF, based on its strategic asset allocation as at 31st August 2025.This diagram is for illustrative purposes only, asset allocations are subject to change. The reference fund is SMF, based on its strategic asset allocation as at 31st August 2025.} 

Market outlook and positioning: what do we believe happens next?

We expect the global economy to strengthen through 2026 as the tariff-driven headwinds of 2025 begin to fade and a combination of easier monetary policy, modest fiscal support, rising real incomes, and a powerful AI driven capex boom lifts growth. After a period of weakening momentum, activity should accelerate as the year progresses. With underlying inflation converging toward central bank targets, we expect rate cutting cycles to conclude around mid-2026; given limited spare capacity and improving growth, some central banks may even begin raising rates again in the second half of the year. This is a supportive backdrop for risk assets. 

In terms of equity regions, we have diversified our overweight exposure across US, European and Emerging Market equities. We maintain a moderate overweight to US equities, against the backdrop of strong corporate earnings - especially within US tech - and resilient macro data. Our overweight positions in European equities, including European financials and basic resources, and Emerging Market equities, allow for diversification within our equity sleeve. The outlook for both regions has also strengthened due to signs of improving trade relations with the US. We also retain an overweight position to European defence, given the structural increase in European spending on defence. 

In fixed income, we remain overweight Australian 10-year government bonds relative to US 10-year Treasuries given the pressure on US yields. Given the changes to the German debt brake last year, which facilitates greater levels of spending, we hold an underweight position to long-term German government bonds. We retain our underweight US Dollar position, which is relative to overweight positions in Euro & EMD Local Currency. We also remain underweight the Pound given political risks surrounding the government with the upcoming local elections. 

Any companies, or markets, mentioned are for illustrative purposes only, not intended to be an investment recommendation.

Key risks

• Investment/Objective risk - The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.
• Currency risk - The fund is exposed to different currencies. Derivatives are used to minimise, but may not always eliminate, the impact of movements in currency exchange rates.
• Derivatives risk - Investments can be made in derivatives, which can be complex and highly volatile. Derivatives may not perform as expected, meaning significant losses may be incurred. Derivatives can have some degree of unpredictability (especially in unusual market conditions), and can create losses significantly greater than the cost of the derivative itself.
• Emerging market risk - Investments can be made in emerging markets. These markets may be volatile and carry higher risk than developed markets.
• Fixed Income risk - Investments in fixed interest securities are impacted by market and credit risk and are sensitive to changes in interest rates and market expectations of future inflation. Bonds that produce a higher level of income usually have a greater risk of default.
• Specialist Funds risk - Some funds invest only in a specific or limited range of sectors. This will be set out in the fund’s aim. These funds may be riskier than funds that invest across a broader range of sectors.
• Suspension of trading risk - Fund managers are often able to stop any trading in their funds in certain circumstances for as long as necessary. When this happens, cashing in or switching your investment in the fund will be delayed. You may not be able to access your money during this period.
• This is a summary of the key risks. For further information on the full risks and risk profiles of the fund, please refer to the relevant Fund Factsheet.

Important information

THIS IS A MARKETING COMMUNICATION

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited (AIGSL). Unless stated otherwise any views and opinions are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. Information contained herein has been obtained from sources believed to be reliable but, has not been independently verified by Aviva Investors and is not guaranteed to be accurate. Past performance is not a guide to the future. The value of an investment and any income from it may go down as well as up and the investor may not get back the original amount invested. Nothing in this material, including any references to specific securities, assets classes and financial markets is intended to or should be construed as advice or recommendations of any nature. This material is not a recommendation to sell or purchase any investment.

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