HeatMap
MPS provider investment teams are asked how they expect to change their asset allocation over the next quarter.
Markets enter 2026 with confidence bordering on complacency. Equity indices remain close to record highs, volatility is subdued, and investors appear comfortable looking through geopolitical risk, fiscal slippage and late-cycle signals.
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Macro & Policy Environment
Global growth continues to decelerate modestly rather than collapse. The US economy remains resilient, supported by strong corporate balance sheets and earnings growth, while Europe shows tentative improvement after a prolonged period of stagnation. China remains the outlier, with policy support cushioning downside risks but failing to deliver a decisive cyclical rebound.
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Equities
Equities continue to grind higher, led by the US, although leadership has broadened beyond the narrow mega-cap dominance, whilst earnings growth has been sufficient to justify current valuations. Outside the US, relative performance has improved, particularly in Europe and selected emerging markets, as valuation gaps and currency dynamics become more supportive. Equity returns look to be increasingly driven by earnings delivery rather than multiple expansion.
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Fixed Income
Fixed income remains attractive from an income perspective, but duration risk is asymmetric. The front end of the curve offers compelling yield with improving visibility on policy easing, while long-dated bonds remain vulnerable to fiscal concerns and supply pressures. Credit fundamentals remain broadly sound, though spreads offer less compensation than earlier in the cycle.
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Alternatives, Commodities & Currencies
Gold and other precious metals continue to act as a strategic diversifier, supported by central bank demand and persistent geopolitical uncertainty. The US dollar has come under a lot of pressure as a function of US policy rather than reflecting relative growth resilience and interest-rate differentials. While this may moderate over time, it remains an important consideration for global asset allocation and emerging market exposure.
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Key Risks
• A re-acceleration in inflation that delays or limits expected rate cuts
• Fiscal stress pushing long-term yields higher and tightening financial conditions
• Geopolitical escalation disrupting energy markets or global trade
• Valuation risk in equities if earnings momentum weakens
Building on a strong 2025, our outlook for 2026 places capital markets on the front foot, supported by favourable economic conditions for growth. We expect the US economy to continue outperforming other major regions, alongside strong performance across most advanced economies, supported by higher government spending and rising AI investment.
As a result, the global outlook for equities in 2026 is constructive, with U.S. equities standing out as particularly attractive. Leading companies, and particularly the “Magnificent Seven”, are well positioned to translate AI and other technological advances into profits. Structural advantages such as scale, competitive moats, loyal user bases, and financial strength position them to perform strongly in year ahead.
In the UK, we expect growth to slow but remain positive. Softening business investment, subdued household spending, and easing labour demand may restrain wages and increase unemployment, helping inflation move lower. This strengthens the case for multiple Bank of England rate cuts, though the UK represents less than 4% of global equity markets, limiting its impact on the broader investment outlook.
Elsewhere, we expect corporate bonds to remain relatively stable, supported by strong company finances and steady economic growth. However, increased borrowing to fund AI investments may put mild upward pressure on yields, limiting returns compared with equities. High-quality corporate bonds are expected to offer moderate returns above equivalent government bonds, while we remain slightly cautious on developed market high-yield debt.
Interest rate paths are likely to differ across regions. In the US, robust growth may limit Fed cuts, whereas weaker growth and low inflation in the UK could lead to larger-than-expected rate reductions, making gilts relatively attractive. Japan has moved short-term rates out of negative territory, with further tightening likely due to inflation and a weaker yen.
Whilst our outlook is largely positive, we still see several key risks: a weakening US labour market that could reduce household spending and slow US growth, slower AI adoption or lower monetisation of AI investments that may derail the boom, and a worsening of geopolitical relations. Market concentration is notable, with the “Magnificent Seven” comprising more than a third of the US market, but historically, such concentration has not reliably predicted weaker returns or higher volatility.
Overall, global markets enter 2026 with supportive conditions, led by strong US growth, ongoing AI investment, and major tech companies driving earnings. Whilst there are of course potential risks, we believe remaining invested and maintaining a diversified portfolio continues to be the most sensible approach to navigating uncertainty while participating in long-term market growth.
In the UK, the reaction to the hotly-anticipated November budget was more considered than the majority of political comment – with markets responding positively to messages of fiscal prudence. However, global markets closed the year with elevated volatility and uncertainty that defined much of 2025, with the S&P 500 posting a -1.5% return for December. Whilst valuations appear rich, macro indicators are favourable compared to this time last year and investor sentiment appears resilient, particularly amidst ongoing geopolitical developments.
We continue to remain underweight equities versus peers – a stance we believe offers a more favourable risk-adjusted return in an environment where valuations demand caution. The aim is to capture selective upside, while maintaining resilience in what remains a finely balanced global outlook.
Credit market spreads are at near historically tight levels, with ongoing compression driven by strong technical demand and a soft-landing scenario in the global economy. We think the compression of spreads has the most direct consequences for high yield assets and with spreads very tight there is little room for further tightening, leaving limited upside and increasing vulnerability to widening if economic data disappoints. As such, we are reassessing the relative value between high yield and investment grade rated assets.
Looking forward, we maintain our conviction in global small cap equities and we remain overweight EM, where we are positioned for strong global growth and the Fed easing further. We see active fixed income as essential in this current environment and we continue to believe asset-backed securities provide an attractive yield enhancer and portfolio diversifier with minimal interest rate risk.
2026 is promising to be a defining year. Consensus expectations are for another year of resilient global growth and tame inflation. In the US, the AI investment boom is underway and productivity growth appears to be picking up. This suggests a supportive macro backdrop for earnings growth in the year ahead. However, the world is never that simple. Confidence in American Exceptionalism is on the ebb and geopolitical events are now driving the global news cycle. Governments now also face a potential showdown with bond markets as debt levels in the developed world reach record highs. As we look for opportunities, we're attracted to Japan and the wider Asia Pacific region where relative valuations are attractive and earnings upgrades are gaining momentum.
There are opportunities and risks at present. Equity valuations remain attractive outside of the US, but less so than 12 months ago. Spreads remain tight within fixed income, but some areas look compelling. We are likely entering a disinflationary and rate cutting cycle, but cognisant of shocks to the upside.
Tariff uncertainty and geopolitical tensions may continue to sway short-term sentiment, however a fundamental backdrop of positive global economic growth and supportive fiscal policy is still underpinning both equity and fixed income markets. We therefore enter the new year with a full allocation to equities, maintaining a skew to the US and Asia as regions we expect to provide superior economic and corporate earnings growth. We expect key themes such as artificial intelligence (both its adoption and infrastructure spending) to remain, however selectivity is becoming increasingly key, and we also see attractive value opportunities across other, more neglected, areas of global equity markets.
Markets ended 2025 strongly, capping a positive year for most asset classes. There were bouts of volatility in the last quarter, but equity markets, fixed income assets and commodities generally closed out 2025 with positivity. The major themes of 2025 continued into the year end. Rates were reduced in the US and UK. The impact of AI development continues to dominate. Gold and other commodities, with the notable exception of oil, continued to rise on geopolitical issues. We remain positive on risk assets at present. We note increasing risks, particularly geopolitical risks, however we believe that a diversified approach is optimal in this environment. In fixed income, we remain at the short end of the curve, although with slightly more duration than last quarter. In equities, we prefer Asia and Emerging Markets but maintain a strong US, and overall global, exposure. In thematic exposures, we continue to prefer mining and technology allocations.
Looking ahead into 2026, we expect global growth to remain resilient, supported by a combination of fiscal spending and gradually easing financial conditions. While markets may continue to experience short-term swings, these are increasingly being driven by shifts in sentiment and valuation concerns rather than fears of a recession. Economic momentum in the first half of 2026 is expected to be underpinned by government stimulus measures and increased investment linked to technology, infrastructure and business expansion. Measures designed to support households and businesses should provide a near-term boost to demand, while incentives for corporate investment may strengthen growth over time. Globally, trade policy and geopolitics remain sources of risk, but their economic impact has so far been less disruptive than initially feared. Overall, while challenges remain, we believe the balance of risks for 2026 is shifting toward steady growth, rather than downturn, reinforcing the importance of diversification through periods of market volatility.
2025 taught us that overreacting to every seemingly at first glance shocking headline, is perhaps not wise. We therefore take comfort that our systematic approach (both on the sell and buy side of the equation) to investment has served our investors well and while we feel that perhaps 2026 will see a further ratcheting in uncertainties around the globe, that our ability to move away from a more prescribed portfolio allocation model, will stand us in good stead.
We expect US growth to moderate but we do not expect a significant downturn. Meanwhile, growth in other developed markets should remain resilient, narrowing the gap with the US. Global growth faces headwinds from US tariffs, though we believe the impact will be limited. Inflation in the UK, US, and Japan is likely to stay modestly above target, while Europe presents a more benign outlook. Given this, we see the ECB at its terminal policy rate, while the BoE and the Fed are close to their terminal rates. The latter poses the risk of cutting below a neutral policy rate, driven by political pressure. Against this macro backdrop, we reaffirm our neutral outlook on developed market equities. Despite a generally benign macro backdrop, risks abound, particularly with regards to inflation and the geopolitical backdrop. We there favour diversified positioning in portfolios across asset classes and geographical regions. Given this outlook, we maintain a neutral view between equity and fixed income allocations. As multi-asset portfolio managers, we see active fixed income management as essential to portfolio construction. In lower-risk portfolios, we see short-dated pan-European credit as an attractive yield enhancer without too much additional interest rate risk. Actively managed high yield can still deliver equity-like returns with fixed income volatility, enhancing risk-adjusted performance. In higher-risk portfolios, we favour UK and US sovereign bonds at the 10-year point as risk anchors to diversify equity exposure in the event of a downturn.
US economic data continues to support our view that the consumer remains resilient and labour market conditions are benign. Political pressure on the Federal Reserve raises medium-term concerns around central bank independence, reinforcing our underweight position in US Treasuries. Geopolitical risks remain elevated as the post-1945 rules-based international order is increasingly challenged, and gold continues to serve as a useful portfolio diversifier. We took profits on broader commodities following recent price strength. With recession risk low and inflation contained, we see no clear catalyst for an equity bear market. While valuations are demanding, we expect earnings growth to drive returns. We maintain our diversified equity exposure, including Value stocks outside the US, and remain negative on the US dollar.
Global equity markets delivered another strong year in 2025, supported by broad-based gains across regions and continued investor focus on technology and cyclical sectors. MSCI ACWI recorded an annual rise of approximately +22% in USD (around +14% in GBP and +8% in EUR), driven by robust returns across both developed and emerging markets. Over the last quarter the ACWI delivered positive returns across major currencies, with gains of around +3.4% in GBP, +3.5% in EUR and +3.3% in USD terms. Despite the tumultuous H1 tariff wars, ongoing policy and geopolitical uncertainties, 2025 was another strong year for risk assets (i.e., global equity markets); Despite market turmoil and uncertainty, Global diversification across regions and asset classes were beneficial. however, potential headwinds remain. Ongoing geopolitical tensions, intermittent trade policy uncertainty, inflation and central bank policy shifts will likely continue to influence market dynamics in 2026. We emphasise that advisors and end clients remain invested in globally diversified multi asset portfolios, aligned to the appropriate strategic asset allocation that matches the clients' risk appetite around tolerance for loss and drawdown; and to resist the temptation to time markets (tops or bottom), switch between defensive and risk assets or pick regions, sectors or stocks, all of which have been shown to erode performance in the long term, with the consequential sub optimal outcome for the end investor.
Despite evident challenges and downside risks, the overall market backdrop has become relatively more constructive compared to last quarter. Our leading economic and risk appetite indicators point to a positive alignment with the 'recovery' stage of the economic cycle. In this phase, we typically expect modest positive returns across risk assets in the medium-term. As a result, we maintain a moderate risk on stance, favouring an overweight to equities relative to fixed income. Within equities, we hold a neutral stance between US and developed ex-US markets, however non-US markets are increasingly appealing, particularly for foreign investors. On one hand, US earnings momentum continues to outperform other markets, mostly driven by technology, favouring US equities. On the other hand, our bearish view on the dollar, driven by narrowing yield differentials and positive surprises in global growth, is generally seen as a strong tailwind for international unhedged equity exposures. In fixed income, we increase credit risk to a moderate overweight. However, given spreads near all-time lows, the case for risky credit is limited to harvesting higher yields relative to quality credit and government bonds. We favour emerging market local debt exposure given our more bearish view on the US dollar.
As we move into 2026, the market backdrop remains constructive but far from complacent. Inflation has eased, policy is becoming more supportive, and earnings momentum is holding up better than many expected, providing a solid foundation for risk assets. At the same time, leadership is broadening beyond the narrow AI winners, suggesting a healthier, more sustainable phase of the cycle. Political noise, fiscal uncertainty, and geopolitical risks will continue to generate volatility, but these are increasingly being treated as tactical risks rather than structural threats. We remain of the view that investors are still "renting pessimism while owning optimism", with positioning cautious but liquidity gradually returning. In this environment, disciplined diversification, selective risk-taking, and a focus on quality earnings growth should continue to be rewarded.
In our view there are going to be three key themes driving markets over the next six to twelve months. As outlined below, we are positioning to capture these themes:
• The economy is holding steady: companies remain profitable, governments spending is supportive, and interest rates are likely to fall. However, there are some signs of softening on the horizon. We retain an elevated stock market exposure, but hold gold and US dollar for ballast
• Earnings take the helm: we expect a market driven less by headlines and speculation, more by fundamentals in the year ahead. We are tilting towards US and Emerging Market equities where profits remain high, and remain cautious on the UK where earnings are softer
• Mind the debt iceberg: public finances in developed markets continue to take on water as national debt and interest payments rise. We remain focused on shorter dated developed market government bonds. By contrast, we like emerging market government bonds and corporate bonds, where spending is more contained
The global macro environment remains constructive for risk assets. Growth remains relatively resilient supported by a strong US consumer and AI related capital spending. Fiscal easing in Germany, China and Japan adds to a continued strong growth picture. Emerging market exports remain strong led by AI and strong commodity prices. The UK remains in slow growth trajectory. The two biggest risks to the growth picture is the labour market, where continue to see few jobs added, and the AI capital investment boom coming to an end. While the inflation picture continues to shift down, the degree to which it can get to target or stay at target is limited by the strong growth environment and rising commodity prices. The expectation is further disinflation into H1 and then H2 a stall in disinflation or increase. The expectation is for another year above target for inflation from global perspective. With this inflation backdrop, central backs are likely to pause (barring the BoE), as real rates have normalised. Markets may get less of an accelerant now with central banks holding the line. A key risk to markets remain valuations. In 2026, we have seen several markets move to above average ratings including perennially cheap markets like Japan and Europe.
Indexes look concentrated and valuations, especially in the US look high, though rising tides have increased valuations across most of the world. Value opportunities seem to be outside of the US at the moment; Asia, EM and Europe. Moderate falls in Gilt yields could present an exit opportunity to fuel bets in IG.
With tariffs and trade tensions having peaked in the second quarter, greater certainty has provided for a period of relief the second half of 2025 and markets have performed strongly since the Liberation Day sell-off. The events in Venezuela provide another reminder of the unpredictability of geopolitical events as we rolled into 2026, and we remain mindful of both known and unknown risks. However, oil prices have been relatively stable and there has been no material spillover into mainstream assets.
We enter the new year cautiously optimistic that against a backdrop of lower inflation expectations in most regions, Central Banks that are willing to reduce rates to support growth as necessary, in combination with fiscal support (at least in some regions), that capital markets will continue to perform well. That said we do acknowledge that valuations do look stretched in some asset classes and although earnings estimates continue to be met (and in some cases exceeded), the possibility of disappointment has increased. We are conscious that this is the case, and continue to manage well diversified portfolios, which are constructed to deliver good outcomes for our clients over the longer term.
2025 was a year defined by heightened geopolitical uncertainty, shifting monetary policy expectations, and a broadening of market leadership. Global markets ended the year on a resilient note, supported by moderating inflation, solid corporate earnings, and a cautious shift towards monetary easing. Disinflationary trends across the US, Europe, and the UK became more established as supply chains normalised and fears of tariff-induced inflation eased, allowing central banks to begin modest rate reductions.
Equity markets delivered positive returns, although performance was uneven across regions and sectors. Against this backdrop, strong performance was driven by a strategic overweight to Asia, emerging markets, European value equities, and commodities, reflecting a disciplined focus on areas offering attractive valuations and robust growth potential. In particular, BlackRock World Mining was a standout contributor, benefiting from elevated gold, copper, and battery metal prices, which were supported by infrastructure investment, energy transition themes, and supply constraints. Other equity contributors included European value strategies and emerging market cyclicals, which capitalised on regional growth dynamics outpacing developed markets.
Bond markets remained challenging as yields stayed elevated, reinforcing the importance of broad diversification beyond traditional stock-bond allocations. Within this context, alternative strategies continued to demonstrate their value, providing uncorrelated returns, smoothing volatility, and supporting capital preservation. A key development in October was the launch of the Apollo Diversified Multi-Strategy Fund, now incorporated across our model portfolios. This fund offers exposure to a range of absolute-return strategies designed to deliver consistent, uncorrelated returns across equities, fixed income, commodities, and alternative markets, enhancing portfolio resilience and supporting long-term risk-adjusted outcomes.
Portfolio management during the year also involved taking some profits from high-performing thematic equity positions and reallocating capital to globally focused active managers targeting quality businesses at attractive valuations. Strategic adjustments within fixed income and alternative allocations were made to maintain diversification, liquidity, and downside protection.
Looking ahead to 2026, the investment landscape is expected to remain highly data-dependent and sensitive to geopolitical developments. Growth is likely to moderate but remain positive, supported by ongoing investment in structural areas such as artificial intelligence, digital infrastructure, and energy transition. Outside the US, valuations in Asia, emerging markets, and selective frontier regions remain attractive, providing opportunities for disciplined active management.
In this environment, a balanced, diversified approach continues to be critical. Alternatives and multi-strategy allocations, including the Apollo Diversified Multi-Strategy Fund, remain key differentiators, providing uncorrelated sources of return and enhancing resilience. Active regional and thematic positioning, combined with disciplined risk management and broad diversification, positions portfolios to capture growth opportunities, preserve capital, and navigate volatility in 2026.
Our portfolios had a good Q4 and strong 2025 overall, with our autumn increase in gold & silver equities being a key contributor. We held an overweight to unloved and cheaper Asia & Emerging Markets, EU and Gold & Silver equities and all outperformed the more frothy US equities. In addition, our long-standing overweight to Alternatives with their lower volatility and more predictable returns, at the expense of Fixed Income, continues to add value. We expect 2026 to bring greater volatility. Questions around AI's long-term profitability and elevated valuations could weigh on sentiment, while spreading geopolitical uncertainty will add to market crosswinds. We are maintaining our bias to the cheaper equity markets and more predictable Alternatives, with gold and silver as "insurance" against growing risks.
We maintain a positive outlook on risk assets, supported by resilient corporate fundamentals and supportive macroeconomic backdrop. Tariffs weigh on the global economic outlook, but US fiscal stimulus and the expectation of lower interest rates provide a meaningful offset. At the portfolio level we are positioned with a modest risk-on tilt with an overweight to equity and alternatives and an underweight to fixed income. Regionally, we prefer non-US companies, where valuations are less demanding and sentiment is improving. We are strongly optimistic on alternatives for their ability to generate returns while enhancing diversification and resilience against supply-side shocks and geopolitical risks. Here, we favour gold and hedge funds. We see fixed income as less compelling, favouring shorter maturities to reduce interest rate sensitivity.
Globally, markets look expensive across equities and fixed income, with few pockets of value apparent. However, with markets awash with liquidity (via fiscal and monetary easing) and economies performing pretty well, this is partly justified. For this reason, we remain cautiously optimistic for stock markets in the short term. We believe the next period of positive equity market returns (if indeed there is one) will be driven by earnings growth rather than P/E multiple expansion. We continue to prefer markets with valuation support and lower expectations priced in. Europe is a good example of this, as is Emerging Markets and, to a lesser extent, the UK. Within fixed income, we continue to favour high quality short dated fixed income as protection in portfolios but are considering adding some longer rates exposure in the UK in the weeks ahead.
As buy-and-hold factor-driven investors, ebi believe the optimal approach is to allocate on a long-term strategic basis to the market, rather than seek to generate alpha from short-term tactical positioning or calls on market direction. That being said, 2025 marked a year of volatility, with the U.S.' aggressive new tariff regime, geopolitical instability, and questions over the extent to which inflation has been brought under control all raising concerns for investors. As different factors provide relative outperformance versus the market at different points in the economic cycle, we believe that through adopting a diversified factor-based approach investors are able to harness higher expected risk-adjusted returns over the long-run.
Our global multi-asset approach remains overweight in equities in aggregate, with a value style in Europe, Japan, Emerging Markets, and the UK. We have continued with our overweight to Emerging Markets due to opportunities with the asset class. We are also focusing on investing across the full market cap spectrum in our equity allocation. In Fixed Income, we maintain a barbell approach, balancing long-duration government debt with short-duration corporate credit to navigate varying market conditions and manage interest rate risk. To enhance portfolio diversification and resilience, we continue to integrate alternative assets, including infrastructure, gold, and defined return strategies. We have maintained our overweight to Gold and Silver due to the positive backdrop for these metals in the current environment. We continue to take a disciplined, forward looking approach to portfolio construction and believe this philosophy will remain effective as markets evolve through 2026 and beyond.
Geopolitical events, mostly emanating from the US, still dominate headlines, but underlying economic growth remains positive, as well as the outlook for corporate earnings. So, we look beyond these headlines, which may have limited effect on either, and focus on fundamentals. Valuation levels are not even both across and within individual markets, so diversification globally remains the best way of dealing with this. This also helps to reduce the impact spikes in volatility associated with the geopolitics. With central banks likely to continue a policy of easing, aside from Japan, this should help provide positive momentum. Whilst, bonds face challenges over increasing borrowing levels and an increasing lack of appetite for duration, this policy should provide a backdrop for yield like returns, as well as remaining supportive for equity markets.
Concerns over impact of trade wars on growth and inflation have faded with geopolitical escalation taking centre stage. This coming quarter we expect increased volatility in equity markets alongside significant bond yield and currency moves. We look to our safe havens such as gold to dampen those moves in portfolios. We also expect our real assets holdings to perform well given the high level of income generated alongside expected realisations.
After a volatile 2025, while various geopolitical risks remain this year, global corporate earnings growth is set to remain positive in 2026-7 and we remain positively positioned in equities, but being active investors, we are selective and conscious of valuations as well as growth potential. There has been much written regarding "AI bubbles" and concentration risk; as active investors, we are able to choose which stocks we own and which to avoid. With markets expecting inflation to moderate, allowing modest US and UK interest rate cuts, we retain a preference for UK gilts over corporate credit, seeing more upside for gilts. Commodities and real assets offer diversification and inflation resilience for portfolios; we remain positively positioned and see long term structural demand drivers for gold, copper, uranium and other commodities. Protection Strategies are useful, given market volatility is inevitable. Like insurance, we actively use such strategies aim to mitigate risks.
The final quarter of 2025 reinforced the dominance of geopolitical forces over traditional economic drivers, leaving markets highly sensitive to shifts in policy, trade dynamics and fiscal credibility. Despite bouts of volatility, global equities proved resilient, supported by selective regional strength and improving sentiment in emerging markets. However, valuations, particularly in the US, remain stretched, amplifying the risk that any deterioration in earnings or escalation in geopolitical tensions could trigger a repricing.
Recent moves by Donald Trump towards Venezuela and increasing suggestions of action elsewhere such as Greenland and Colombia have to date had limited market impact but have potentially increased the risk of other volatile geopolitical events in the coming months.
Economic data across major regions continued to soften, with the US showing clearer signs of deceleration and labour-market fragility. While monetary policymakers have shifted decisively toward easing. Nonetheless, policy support in Europe and Asia, alongside selective fiscal expansion, may help extend the global business cycle, albeit with uneven momentum.
Fixed income assets retain an important defensive role, especially as the yield curve normalises and recession risks linger. High-quality bonds offer attractive carry and the potential for capital appreciation should growth weaken further. However, long-duration government debt remains vulnerable to concerns around fiscal sustainability, particularly in the US and UK. Credit spreads, meanwhile, remain tight and offer limited compensation for rising macro uncertainty.
Alternatives, especially infrastructure and gold, continue to provide diversification and defensive characteristics. Infrastructure’s inflation-linked cash flows and relative insulation from equity-market swings justify its ongoing overweight within portfolios. Gold remains a critical hedge amid elevated geopolitical risk and structural shifts in global currency dynamics.
Against this backdrop, maintaining an underweight exposure to equities, a preference for higher-quality fixed income, and an overweight to real assets remains appropriate. This positioning aims to balance resilience with optionality, allowing portfolios to navigate near-term volatility while preserving the ability to redeploy into risk assets should valuations become more attractive and economic conditions stabilise.
We remain overweight equities, supported by resilient corporate earnings and a broadly constructive macroeconomic backdrop. Earnings growth is underpinned by strong nominal activity and supportive fiscal policy, while moderating inflation has reduced pressure on margins and lowered the risk of further aggressive monetary tightening. We remain underweight bonds due to an unfavourable risk-reward profile. Elevated fiscal deficits and increased sovereign issuance limit capital appreciation in government bonds, while corporate credit spreads remain compressed despite late-cycle risks, offering limited upside. We are constructive on alternatives, favouring assets that provide diversification and inflation resilience. Gold remains a core holding, supported by its defensive characteristics amid geopolitical uncertainty and central bank demand. We are also positive on transition-related commodities, benefiting from investment linked to electrification, decarbonisation and data-centre build-out.
2025 began under a cloud of uncertainty, yet many of the year's major market themes unfolded as expected. Regional divergence defined the landscape with the US facing valuation pressures and tariff drag. Meanwhile Europe, the UK and emerging markets benefited from defence, infrastructure spending, and AI-linked commodities demand. Change and rotation define the outlook for 2026. Rate cuts, fiscal stimulus, and growing AI investment could boost global growth and profits. These dynamics could favour previously unloved areas such as US small caps and cyclicals, while dominant tech names may struggle to maintain leadership. Geopolitical flashpoints, policy uncertainty and the lingering impact of tariffs could disrupt momentum. Weak growth could drive defensive strategies, while rapid acceleration might trigger inflation and tighter monetary policy.
Stock markets have entered the new year in a glass half-full mode, with further rate cuts expected and global fiscal stimulus to build on last year's economic resilience. Although companies have, by and large, coped well with tariffs and a host of other uncertainties, valuations leave little room for these to cause problems down the road. We remain fully invested in equity, but will continue to skew away from the US while the threats to its institutional underpinnings remain elevated. With governments largely unable or unwilling to get their fiscal deficits under control, we remain wary of longer duration bonds. Alternatives remain our preference to diversify portfolios and manage risk, which remains elevated. Gold's run in this environment looks extended and we will reduce our weighting, but keep a decent exposure.
The current geopolitical environment seems to be the biggest potential risk to markets, especially with the recently threatened US tariffs on countries not supporting the takeover of Greenland. Corporate earnings still seem to be relatively resilient and investor sentiment remains robust so diversification continues to be the watchword with EM, European Value and US value looking most attractive in the short to medium term. From a sector perspective extended valuations in large-cap tech look precarious but there is definitely opportunity to be found away from the most highly valued companies.
We are not in the "AI is a bubble" camp. In fact, we remain positive AI equities through our Technology exposure as a diversified play on the theme. Within the AI sector, we are seeing a clear shift as investors become more discerning, increasingly looking to separate potential winners from companies unlikely to deliver sustainable returns. This growing scepticism is, in our view, a healthy market development. Although the sector's investment and revenue goals are ambitious, our analysis suggests they're plausible, despite ongoing challenges such as the need for more data centres, securing reliable power sources, and increased regulatory scrutiny. While these risks are genuine, so too are the sector's potential rewards. We maintain a positive view on the sector and would look to take advantage of any significant market pullbacks to increase our exposure. We remain neutral on government bonds but see relative value in gilts, where yields are elevated compared to peers despite expectations that UK inflation will converge towards that of other G7 countries next year, which we think makes gilts attractive.
UK government bond yields have risen less than those in other major economies like Germany, France, and Japan since we initially recommended overweighting gilts. This means Gilts are becoming less attractive relative to global alternatives. However, we still see modest upside for UK bonds as inflation continues to fall, wage growth slows, and the job market weakens – factors that could push yields lower. While gold appears expensive by some measures and investor sentiment is bullish, its fundamental case remains strong. Central banks continue buying gold, and it serves as valuable insurance against risks like dollar weakness, inflation spikes, or geopolitical tensions. Gold benefits when real yields fall or inflation rises, making it an effective portfolio hedge in uncertain times.
As we move into 2026, the investment landscape remains promising but nuanced. While equity markets appear poised for further gains, supported by solid fundamentals and earnings growth, investors must navigate uncertainties around US policy shifts, central bank actions, and geopolitical developments. The strong run higher in equity markets over recent years has certainly left investors feeling nervous, while another concern often cited relates to current stock market valuations, with global equities trading above their long-term average. In both cases, we would highlight that the picture is more intricate – and positive – than it first appears. We continue to see a constructive environment for equity and bond investors, but one in which we nevertheless remain prudent, avoiding all-in bets on specific themes or markets. While we believe that AI is a potentially transformative technology, offering considerable growth potential ahead, our exposure to US technology names remains selective, with a focus on growth at a reasonable price, not at any price. Away from this sector (that continues to dominate headlines) we see exciting opportunities across Europe, whether from the effects of increased infrastructure and defence spending, or the chance to purchase quality businesses currently out of favour. Emerging markets also continue to offer attractive valuations, strong earnings, and robust GDP growth, while elsewhere we see merit in retaining the diversifying benefits afforded by alternative investments such as UK REITs, listed infrastructure, listed private equity, and hedge funds.
In sterling terms, 2025 saw the US stock market lag well behind non-US equities. Our positioning, with a significant underweight in US stocks, allowed us to benefit from this divergence. Looking forward, we intend to maintain this underweight, as US equities continue to trade at a meaningful valuation premium relative to the rest of the world. At the same time, the scale of recent moves across global markets means we will selectively trim some of our equity positions, redeploying capital into commodity-linked equities and into more defensive areas such as shorter-dated government bonds and diversifying alternatives, balancing risk management with ongoing strategic exposure.
Shorter term positioning has largely remained neutral over the period. By this I mean we’re not actively adding or reducing from the overall risk level of portfolios. Many of the themes from 2025 we see continuing through 2026, so we’re not making too many alterations to portfolios right now.
Small cap stocks remain an area of interest, with an overweight position reflecting our belief that they’ll perform well in light of the tax incentives and lower interest rate environment in the US. Tight credit spreads e.g. the amount extra you get paid for lending money to a company vs a government, keep us committed to our underweight position in the asset class. This is helping fund an overweight to Alternatives, which offer clients a strong level of diversification alongside traditional bonds and equities
While the US remains the largest component of our equity exposure, we have reduced exposure to mega-cap technology companies and increased exposure to undervalued areas of the market. This reflects our expectation that companies trading on more attractive valuations will perform well as interest rates fall further and the global economy continues to prove resilient. We also anticipate that US President Donald Trump’s administration will add to the supportive backdrop by introducing voter-friendly policies in the run-up to the US midterm elections in November.
We have modestly increased our exposure to Japanese equities. In our view, this market remains attractively valued and companies have the potential to increase their earnings. In addition, industrial companies and manufacturers are well represented in the Japanese market, offering diversification benefits at a time when exports could rise against a backdrop of improving economic conditions.
Our equity positioning elsewhere remains broadly unchanged, with a continued preference for balanced regional exposure and a focus on quality, resilient companies.
Infrastructure
We continue to see an opportunity in infrastructure companies and so we have maintained our position in this asset class, which we expect to benefit from falling interest rates. Infrastructure projects – such as airports, toll roads and pipelines – are long-term in nature and companies investing in them tend to perform well when interest rates are falling, which reduces the cost of financing. With global economic growth showing signs of modest slowing and inflation easing, central banks are positioned to continue cutting interest rates, creating a supportive environment for infrastructure companies.
Bonds
We continue to favour higher-quality government bonds and have increased our allocation. In our view they offer twin attractions: appealing yields and the likelihood they will benefit from further interest rate cuts. The case for bonds is further reinforced by the fact that tariffs have so far proved less inflationary than feared and because economic growth is holding up better than expected.
However, we are mindful that investor concerns about governments’ fiscal policies could have a negative impact on longer-dated government bonds.
In corporate bonds, we have maintained our reduced exposure to high yield bonds. This is because we do not believe the extra yield currently available is sufficient to compensate for the increased risk they present, compared to investment grade.
We have added to our emerging market bond holdings, because we believe they can offer diversification away from heavily indebted developed economies, without sacrificing quality. We see opportunities in a number of emerging market countries, where bond valuations are attractive and real yields are appealing. A weakening dollar is also supportive.
As we enter Q1 2026, the investment landscape continues to present both opportunities and challenges. At Binary Capital, our long-term, high-conviction approach remains our guiding first principle. We firmly believe that by focusing on fundamentally sound investments and maintaining a global perspective, we are well-equipped to navigate the evolving investment markets and deliver sustained returns.
Our outlook for the next three months is particularly focused on growth markets, where we maintain strategic exposure, albeit with a degree of short-term caution. The technology sector, a consistent engine of innovation and disruption, remains an area of interest. Despite volatility, we are confident that companies with robust fundamentals and significant exposure to secular growth trends, such as artificial intelligence (ai) and cloud computing, are exceptionally well-positioned for long-term success. Our emphasis here is unequivocally on the long-term journey.
Emerging markets also present a compelling investment case in 2026. While acknowledging the inherent risks associated with these regions, we highlight the attractive valuations and a favourable growth trajectory when compared to developed markets. We are particularly optimistic about opportunities within Asia, an optimism rooted in their demographic advantages, expanding middle classes, and increasing technological adoption. While China's growth trajectory slows down, other dynamic regions are stepping up to drive regional and global growth.
In alignment with our established investment philosophy, Binary Capital will persistently seek out the most promising investment ideas and strategies worldwide. We remain steadfast, unswayed by short-term market noise, and are deeply committed to consistently applying our best ideas in a focused manner.
While we maintain a cautious stance in the immediate months ahead, we are inherently optimistic investors. We foresee the longer-term upside possibilities in markets significantly outweighing the potential downsides.
The start of a new calendar year is always a good time to reflect on our current positioning and challenge whether any changes are required to our core positions. While there is possibly too much reliance placed on the full year outlooks, it does help one take a step back and review wider matters.
The end of US exceptionalism? Probably the most widely discussed topic is whether US assets (I include the dollar and treasuries as well as equities) can continue to lead the way as they have done for the last 10 or so years. Last year was the first year in a few years that other major stock indices (UK, Europe, Japan and Emerging Markets) outperformed. Why is this so important? Well, in passive equity indices, around 65% of the stocks are US which also means a significant amount of dollar exposure for sterling investors. For comparison, the UK makes up 3.3%. It therefore means that the majority of passive returns are tied to the performance of US assets and from our perspective, while the last few years have been excellent for US growth stocks and dollar exposure, we don’t see them being the best performing areas over the next few years. We still retain exposure to some of these areas but do carry an underweight stance, preferring our domestic UK market, particularly financial stocks, and overseas markets like Japan and Emerging Markets.
On interest rates, we are firmly in a rate cutting cycle on both sides of the Atlantic but the real question the pace of cuts. Focussing more on the UK which has more of an impact to us, the market is pricing in between one and two cuts but we believe there are reasons to be optimistic the Bank of England could cut more. While inflation remains stubborn around 3%, mostly due to core services, there are signs that many of the recent price increases are from one-off or administered factors rather than persistent demand-driven forces. In addition, wage growth has slowed notably, easing the pressure on inflation staying high. Combine both with the Bank of England’s wish to prop up growth and avoid recession, provides the runway for more cuts than what is currently expected. Short-dated Gilts, where we have a good amount of exposure should benefit from this, as well as alternative assets (such as those in the property and infrastructure sectors) should also benefit as the yield differential between the Bank of England base rate and the rate of dividend they are paying increases. We have evidence of the validity of Net Asset Values in these sectors given the takeovers seen in early 2025.
We have been vocal in the past of our notable weighting in gold and have continued the benefit of this during the first month of 2026 – although, the rise in the yellow metal (and other commodities) brings different worries which we have to be alert to. As we move into a structural regime change where, we believe, US equity dominance will not be as strong as the last 5/10 years, we will be keeping our flexible and active investment management style which has served us well. While general macro numbers remain supportive to keep neutral equity weightings, there are still data points flashing amber which show we have to be ready to move more defensively. Maintaining our over-exposure to non-US geographies will likely continue over the coming period.
Equity markets may continue to be supported by a number of positive factors, including an increase in growth forecasts, interest rate cuts, fading tariff effects, and accommodative fiscal policy. AI remains an unknown, with $3 trillion of expected infrastructure spend, and uncertainty on the economic impact. It supports the potential for improved productivity gains, but only if companies can harness its abilities. Primary concern is valuation. Although S&P earning growth in 2025 was 18%, the index is expensive (on CAPE earnings as expensive as it's been since 1999). Expensive markets can continue to get more expensive, but valuation ultimately matters and there may be a little margin for error if the outlook deteriorates. Value looks more attractive than Quality in the US, with a more balanced situation elsewhere. 2026 growth for markets was pulled forward into 2025. We remain broadly positive but expect lower returns this year.
After a strong run for global risk assets, we believe selectivity is increasingly important, particularly within US equities where valuations, especially across parts of the technology complex, appear stretched. While the long-term case for AI remains compelling, with adoption likely to support productivity gains across a broad range of sectors, we see growing opportunities outside the most crowded areas of the market. Inflation dynamics are becoming more constructive, with disinflation continuing and price pressures expected to move closer to central bank targets over time. In the UK, persistent economic weakness increases the likelihood that the Bank of England may be forced to cut rates more aggressively than currently priced, a combination that could weaken Pound Sterling and push bond yields lower, providing the Chancellor with much needed fiscal breathing room ahead of the next budget. Against a backdrop of elevated geopolitical risk, we continue to see a role for alternatives within diversified portfolios. Investor positioning remains optimistic, leaving markets vulnerable to short-term drawdowns should negative surprises emerge, yet underlying fundamentals continue to support the case for long-term returns.
We cannot shy away from the ongoing discussions about AI and AI-related stocks - will they continue to grow and justify the current valuations? Associated to this is the concentration risk and imbalance in earnings in the market and whether that is a healthy investing environment. This also links to the discussions about the k-shaped economy and the difficulty for the US Federal Reserve to balance risks and monetary policy in the face of loose fiscal policy in the US.
Our view is that the market is expecting continued rate cuts, and we think there is a risk of inflation remaining stubbornly sticky or even increasing which could lead to a shift in these expectations. If that occurs, then the US debt sustainability question gains more traction and could impact on financial markets. In the shorter term, we expect the US administration to want the economy to run hot into the mid-term elections.
Closer to home, the UK does look cheap relative to other markets following a good year, but not so much relative to its own history (the story for lots of regions and sectors). We need to see signs of sustainable growth and the current data does not seem to be supporting that. While you could put that argument forward for Europe, we can see the potential impact of looser policy in Germany acting as a catalyst for industry and therefore economic growth.
We continue to maintain a focus on international diversification, with a preference for US diversification as well. While higher starting bond yields offer opportunities we retain a preference for diversifying into liquid alternatives.
From the surface, headlines are causing some uncertainty for clients. Yet, drilling down, economic indicators look reasonable. Interest rates are stable or falling (usually good for assets, outside of a recession). Central banks are paying investors handsomely not to take too much risk. Inflation is steadying at long term levels, with visible drivers on their way downwards. Company balance sheets are very healthy – with decent maturities and strong earnings leaving little to be worried about. From a portfolio perspective, diversification remains key. Having broad exposures to the global equity market, without a reliance on individual markets doing the majority of the heavy lifting, remains a sensible approach going into 2026.
We remain constructive on equities overall but retain our longstanding underweight to the US on a relative basis and overweight UK, Europe, Asia and GEM. We are nominally increasing the duration of the portfolios by reducing cash and increasing bonds, starting with globally short-dated.
We Reduced equity in Q4 on valuation grounds. We are becoming increasingly concerned about equity valuations globally and should they continue to strengthen we will look to further reduce our exposure. Our modelling suggests that all equity markets are over valued. and while we have concerns about fixed ibncome markets we feel the prudent course of action is to place the proceeds in short dated Gilts. We continue to see further rate cuts this year, but do not expect the long end of the curve to react significantly to these while inflation remains a threat.
Strong performance from equities playing into the AI supply chain continues across the US and Emerging Markets, bringing with it rising concentration risk. We're now seeing valuation opportunities in US sectors that are complementary to portfolio diversification. Health Care, Utilities and Energy sectors all have the potential to benefit from the real-world roll-out of AI, alongside several other positive catalysts on the horizon. For example, a weak oil price looks symptomatic of abundant supply and gives little acknowledgement to rising geopolitical risks, nor the potential for an upswing in economic growth. Meanwhile bond markets are rejoicing in the cooling of inflation and rate cuts, however we see the long-term inflation outlook as vulnerable and real yields in the US and UK as good value.
In 2026, the world continues in a phase of economic uncertainty. The lack of clarity around US trade policy is amplifying global uncertainty, with knock-on effects for investment confidence and cross-border growth. While growth remains positive, it is increasingly uneven, supported by pockets of innovation and productivity gains rather than broad-based expansion. In this environment, volatility is likely to remain a defining feature as investors reassess earnings durability, policy credibility and currency risks. Portfolio construction therefore needs to emphasise balance and resilience. Regional and asset class diversification remain central to navigating uncertainty.
We maintain a neutral stance on overall portfolio risk, balancing economic and geopolitical uncertainty against the support of lower interest rates and moderate global growth. With bond yields higher, the case for fixed income is stronger than it has been for many years. We prefer high-quality bonds, reduced interest-rate sensitivity, and increased exposure to inflation-linked securities given the uncertain inflation outlook. We retain allocations to flexible bond managers who can adjust duration, credit exposure, and regional positioning as markets evolve. Equities are supported by lower interest rates and resilient earnings, though elevated valuations, driven largely by the United States, keep the outlook balanced. We have reduced US exposure due to valuation and concentration risks, as the ten largest companies now account for nearly 40 percent of the market. We are overweight value, which further diversifies away from the largest US companies and offers attractive valuations. We have also increased exposure to emerging markets, where valuations are more compelling and the earnings outlook remains positive, while maintaining a lower-risk, minimum-volatility strategy to provide resilience if recession risks rise. Real assets help hedge inflation risks and enhance diversification. We favour listed infrastructure for its inflation-linked revenues, defensive characteristics, and tendency to perform well once interest rates have peaked.
Looking forward, we are likely to see inflation moving lower and closer to Central Bank targets which should therefore lead to interest rates being lowered further this year. The US and European economies are looking to increase fiscal stimulus in 2026. This should help drive a stronger global economy this year. Reduced interest rates should stimulate the economy because it encourages savings to be spent and lowers lending rates for borrowers. We remain positioned shorter duration within fixed income portfolios. Political developments will continue to dominate the headlines, with local elections in the UK and midterm elections in the US later in the year. Should geopolitical issues start to ease, that could also be positive for global economies. Although we have regularly taken profits from our equity allocation in 2025, our outlook remains cautiously optimistic for 2026. We remain well diversified across global stock markets.
Against a backdrop of heightened geopolitical risk, elevated technology concentration in equity markets, and persistent recession fears, we remain firmly focused on the long term. Markets have a long history of absorbing uncertainty far faster than investors expect, and short term reactions to headlines rarely improve outcomes. Our positioning therefore continues to favour low cost, globally diversified, evidence based strategies that minimise unnecessary concentration and avoid market timing. We have also seen factor based strategies provide valuable behavioural support during volatile periods. Tilts towards value, smaller companies, and profitability can help investors stay invested when market narratives turn negative. We expect this behavioural benefit to remain important as uncertainty and volatility persist.
Within our latest tactical asset allocation review, we decided to maintain the majority of our existing positioning with a couple of exceptions. We marginally increased our view on UK gilts to neutral. Following the recent UK budget, we felt more comfortable with this asset class, as yields remain relatively attractive and the asset class provides good diversification qualities. We also marginally upgraded our views on Asian and emerging markets equities to slightly positive. We have become more comfortable with the outlook for these asset classes, as they have adapted to the impact of US tariffs and they are relatively attractively valued based on similar/better corporate earnings expectations versus western markets. Within fixed income our primary focus continues to be on shorter-dated investments, and on flexible investment strategies. The team maintain a neutral view on equities and we continue to like alternatives. We remain positive on infrastructure, real assets, and precious metals.
