Diversification and income generation are fundamental investment principles that should always be applied, but they may be especially important in 2026.
In brief
- The lack of discipline in fiscal sustainability, technology investment and financial institution risk management could be penalized by investors in 2026.
- The frontloaded growth cycle in the U.S. would require investors to rotate from risk on to a more conservative allocation through the year.
- Income generation through alternative assets and options overlay equity strategy continues to be key.
Risk on to start the year, a more balanced allocation as growth softens
2026 is expected to be a year of softer economic growth and easing monetary policy. With the U.S. likely to avoid an economic hard landing, the outlook for risk assets—such as equities and corporate bonds—remains constructive. However, after three years of strong market returns, elevated valuations in certain markets, including U.S. equities and non-investment-grade corporate bonds, may be vulnerable to negative shocks. Overall, we anticipate higher volatility in financial markets throughout 2026.
Current earnings momentum and a temporary boost to U.S. economic growth in the first half of 2026 should continue to favor equities as we enter the new year. As economic momentum gradually fades later in the year, investors may shift toward a more balanced stock-bond allocation and seek alternative income-generating assets where possible.
Discipline should be a guiding principle for investors, both in asset selection and portfolio construction.
Premium for discipline from governments and CEOs
Fiscal discipline may become increasingly important, especially as political stalemates or a lack of policy urgency could prompt investors to demand higher term premiums for longer-dated DM government bonds. This trend has already emerged in economies such as France and Japan. Investors will also be watching the outcome of the 2026 U.S. mid-term elections to assess the federal government’s ability to reduce deficits. In contrast, economies with lower fiscal shortfalls and debt levels may attract greater demand.
Technology companies involved in artificial intelligence (AI) development will need to exercise discipline in their capital expenditure strategies and funding approaches, as well as maintain clear communication with investors. While we remain optimistic about medium-term demand for AI models and computing power, growth may not be evenly distributed among the major hyperscalers, underscoring the importance of careful company selection. Additionally, overcoming potential bottlenecks—such as electricity supply for data centers—could further differentiate investment returns.
Financial institutions need to remain disciplined in risk management, particularly amid a wave of financial deregulation driven by the Trump administration. Weaker growth typically leads to a deterioration in overall credit quality, impacting earnings and capital bases. Many financial regulators globally are stress testing their banking sectors for such scenarios. A key emerging question is the resilience of non-bank financial institutions, especially in private credit markets where borrower data is often less transparent.
Investment discipline to handle rise in volatility
Portfolio construction also demands discipline. Diversification and income generation are fundamental investment principles that should always be applied, but they may be especially important in 2026.
We maintain our view that APAC investors broaden their allocations to global equities, rather than focusing solely on the U.S. and home markets. In the U.S., technology remains a long-term driver, but a broadening out of adoption by other sectors presents opportunities.
A weaker U.S. dollar is likely to drive capital into emerging markets and Asia. Northeast Asian markets—such as Japan, South Korea and Taiwan—are closely linked to global AI developments, while Japan and Korea also benefit from structural improvements in corporate governance. Although ASEAN may not directly benefit from semiconductor and hardware demand associated with AI, the region’s businesses, particularly in e-commerce and services, could find new opportunities through AI adoption. Given the potential for increased equity volatility, option overlay strategies could help investors generate income from market fluctuations.
In fixed income, investors can maintain a barbell approach with government bonds and high-yield corporate debt. As growth momentum weakens, there should be a greater focus on high-quality, investment-grade corporate debt, which presents greater resilience.
Alternative assets continue to play a key role in portfolio construction. Infrastructure, transportation and real estate are likely to provide consistent income streams. The evolution of global supply chains should drive ongoing demand for shipping and related infrastructure. Rising electricity demand for data centers and households presents additional opportunities. Lower interest rates should support private equity, and despite recent challenges with individual borrowers in the leveraged loan market, we do not see systemic risk in private credit. Nevertheless, manager selection remains crucial for managing credit risk and enhancing returns.