March 2026
Market Update
Market Rotation is Well Underway
(3 min read)
3rd March 2026
Update 3/3/26: the current news from the Middle East conflict does not change our views in this article. We will be publishing a separate note on this topic as events evolve.
For some time, global equity market returns have been driven by the mega cap technology stocks as AI has been the focus for growth and corporate profits. With policymakers firmly in expansionary mode, equity performance is now spreading and rotating into the broader market benefitting from strong economic growth the prospect of AI induced productivity.
Diversification
We have expressed many times over the last year the importance of diversification, particularly when it comes to market capitalisation and style within equity markets. For years investors have focused their risk appetite on large cap growth companies and particularly the US ‘mega cap’ Magnificent Seven which have been responsible for the lion’s share of index returns. Growth companies have performed well, driven by impressive cash generation, and helped by a more benign interest rate environment. However, the narrowness of the markets was always unhealthy while small and mid-cap value companies delivered poor returns reflecting the economic uncertainty.
Rotation
Digging into the subcomponents of the global markets we can now see that a market rotation is well underway, a process that started about a year ago. US policy makers have pulled the monetary and fiscal levers into expansionary mode which is supportive of economic growth and reflected in the performance of small and medium sized companies.
Chart 1
MSCI World indices comparing Small Cap, Value and Large Cap over 6 months and 5 years.
Source: FE Fundinfo
Long-term themes
The charts above illustrate that over the medium term, 5 years, large cap growth has produced superior returns but in the shorter term over six months, small, mid-cap and value have outperformed as anticipation of robust economic growth is priced into markets and valuations are re-rated relative to mega cap companies. That being said, we remain committed to long-term themes such as technology and robotics, as expressed in our holding of Polar Capital Technology Trust and Pictet Robotics, but we have also reflected our positive economic outlook and consequent market rotation view with investments in Dimensional Global Small Companies, Guinness Global Quality Mid Cap and exposure to value stocks via BNY Mellon Global Income and JPMorgan Global Equity Income.
Chart 2
MSCI UK ‘All Share’ compared to the World index over 6 months and 5 years
Source: FE Fundinfo
UK
In the UK sentiment for the economy has been poor for some time. The stock market has been unloved and cheap relative to other markets and to its own history with domestic outflows over ten years. Last year saw a positive turnaround for the broader UK market, and returns are now more in line with the global index over the longer term, possibly helped by global investors questioning US exceptionalism and finding the UK equity market to be a cheap diversifier. See chart above.
However, the outperformance has been focused on the large cap sector of the market with smaller cap equities lagging and reflecting negative domestic economic sentiment following two poorly received budgets. Recent survey data suggests UK activity has turned a corner with stronger business confidence, retail sales and better than expected GDP numbers all exceeding market forecasts. This would be consistent with UK smaller companies now starting to keep up with the overall market, if not slightly outperforming.
We have positions in BNY Mellon UK Income and Artemis UK Select to capture returns from the broader market but also Whitman UK Small Cap as rotation leads to an outperformance of smaller companies reflecting improving UK productivity and economic growth.
Update 3/3/26: the current news from the Middle East conflict does not change our views in this article. We will be publishing a separate note on this topic as events evolve.
Peter Geikie-Cobb | Head of Investment Research
Montgomery Associates
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This article and other articles on www.MontgomeryAssociates.co.uk does not constitute an offer or invitation in respect of investments described, nor should it be interpreted as advice or a recommendation. You should contact your financial adviser or accountant for advice relating to your circumstances. The opinions and information in this article have been prepared from sources believed to be reliable at the time and are given in good faith. The information and opinions expressed in this document represent our views at the time of preparation and may be subject to change. The value of an investment and any income from it can fall as well as rise and you may not get back the amount you originally invested.
Past performance is not a guide to future performance.
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