The shape of things to come

2025 was a contrasted year: a noisier political backdrop under Trump 2.0 with more volatility and, ultimately, another strong year for equities. Global markets are up 18.3% in dollars[1], powered by the AI boom and a capex cycle that continues to redefine global growth. The key question now is whether markets can sustain momentum into 2026 as expectations rise.

A resilient growth engine takes shape

The engine of this cycle remains intact. The AI capex boom is supported by strong balance sheets and real profitability rather than leverage or narrative alone. Hyperscalers continue increasing investment budgets, and AI adoption is translating into earnings. China, meanwhile, is accelerating with extraordinary speed: domestic AI models, semiconductor expansion and a vast electricity generation build-out are pushing it close to energy self-sufficiency. While the US leads in chip design, China controls most physical inputs, from rare earths to manufacturing capacity, and is now less than a year behind in capex pace.

These dynamics intersect with a broader macro backdrop that remains supportive. Fiscal and monetary policy are aligned across major economies. We expect two more Fed cuts; looser financial conditions and a gradual easing of tariff drag. Global money supply is expanding again, historically a good lead indicator for manufacturing PMIs and equity performance. Earnings should take over from liquidity as the primary driver, particularly in Europe, where easier comps, operating leverage and fading FX headwinds support high single-digit EPS growth in 2026.

Equities: a broadening opportunity set amid rising dispersion

All of this informs our constructive stance on equities for which we maintain a diversified regional allocation. For the first time in many years, the global equity story is no longer exclusively about US exceptionalism— even if America remains the undisputed leader in technological innovation. Valuation dispersion across regions and sectors is vast, providing fertile ground for active allocation. Yes, the US trades at a premium, but justified by tech earnings. Europe offers compelling valuations and the prospect of investment-led recovery. Japan remains a structural overweight for us, supported by sustained corporate reforms, improving governance, rising ROE and strong buyback momentum. Emerging markets, especially in Asia, benefit from lower valuations, a softer dollar, and participation in the AI supply chain.

Markets are gradually shifting from a macro-led environment to a micro-driven one, where sector positioning, thematic exposure and stock selection matter more than broad regional calls. The AI-driven capex super-cycle remains our central equity theme, still in its early stages. US hyperscalers continue to raise investment budgets, with capex growth exceeding 25–30% through 2025–26[2]. Valuations are high but anchored in earnings growth rather than speculative multiple expansion.

We pair this with exposure to Chinese technology, which offers a cheaper entry point and rapid progress across semiconductors, AI models and energy infrastructure. China is roughly 18 months behind the US but closing the gap fast, making it a valuable diversifier away from crowded US mega-caps. China’s approach to AI is more pragmatic, treating AI as an enabling technology rather than a singular end goal, embedding it into a broader industrial strategy— EVs, batteries, clean energy, robotics and advanced manufacturing—where it already demonstrates global leadership.

A second theme is the electrification bottleneck. AI-related power demand is accelerating sharply, while electricity generation and grid capacity lag. This creates long-term opportunities across utilities, grid infrastructure, storage and electrification metals such as copper. Electrification is both a constraint on the AI cycle and one of its most interesting second-order investment opportunities.

Risks remain. AI progress may eventually face physical, data or energy constraints, raising the possibility that today’s front-loaded spending proves excessive. While the upside case remains compelling, the downside scenario would involve disappointment and higher volatility rather than a clean continuation of recent trends.

Alongside technology, we remain constructive on healthcare and biotech, which offer idiosyncratic growth and diversification at a time when much of the market is increasingly cyclical and AI-dependent. Innovation pipelines are strong, valuations have reset and M&A activity is picking up as large pharmaceutical companies seek to replenish portfolios.

In a market environment defined by rising dispersion, we believe thematic exposure and disciplined stock selection are the primary drivers of alpha.

Fixed Income: selectivity in a maturing cycle

Rates & Sovereigns: Duration as Insurance

Global rates markets are transitioning from synchronised easing to more differentiated normalisation. The Fed is likely to settle near neutral, with modest curve re-steepening as front-end yields fall and term premia rebuild. The ECB should move cautiously, while Japan normalises. In this environment, we use duration primarily as a hedge, focusing on relative value and curve positioning rather than outright duration risk.

Credit: rising supply, selectivity required

Credit markets are clearly late cycle. Rising tech capex, easier financial conditions and a revival in M&A point to higher supply and greater dispersion, with limited scope for further spread tightening. While large spread widening is unlikely, risk-reward is now asymmetric, especially in US investment grade. We prefer European credit, where hedged yields are now competitive with the US and fundamentals are improving, as reflected by a favourable balance of rising stars over fallen angels.

Emerging debt: carry with a softer dollar tailwind

Emerging market debt remains appealing, though returns should moderate after 2025’s strong performance. A softer dollar, easing emerging market (EM) central banks and still-compelling carry continue to support the asset class. We maintain a positive stance on EM debt, particularly in local currency, where valuations and income continue to compensate for risk in a late-cycle environment.

Currencies: dollar down, Asia in focus

We are broadly negative on the US dollar over the coming months. Narrowing rate differentials support a more normalized EUR/USD range of 1.15–1.20. After the euro’s adjustment, Asian currencies are likely to drive the next phase, where depreciation pressures persist amid trade tensions and policy uncertainty. USD/JPY has already begun to disconnect from fundamentals. Overall, we favour selective Asian currencies as part of a gradual USD weakening trend.

Commodities: supply matters

We remain constructive on gold, supported by strong physical demand, renewed ETF inflows, central bank buying and demand for real assets. Pullbacks are viewed as buying opportunities. Silver retains upside due to persistent supply deficits and limited production flexibility.
In base metals, we favour copper and aluminium, where structural supply constraints dominate. Copper deficits are widening due to production disruptions and tariff-driven demand distortions, while aluminium supply is capped by power constraints and capacity limits. Elevated prices raise demand-destruction risks, particularly in China, which we monitor closely.
We are more negative on oil as oil markets are moving into a well-flagged surplus. Slowing demand growth, strong non-OPEC supply and higher OPEC output point to sustained excess supply in 2026.

Conclusion: a measured but genuine sense of confidence

This is how we approach 2026 as the forces that shaped markets in 2025 remain in place. The cycle is evolving, not ending: AI investment, improving productivity and supportive policies continue to provide a solid foundation for global markets.

Our approach is to stay invested, but with greater discrimination—favouring equities with clear structural momentum, being selective in credit as supply rises, and using duration, currencies and real assets to shape portfolio balance. In this phase of the cycle, returns will depend less on market direction than on the quality of decisions within portfolios.