Key highlights for this quarter
GLOBAL ECONOMY
Recession fades to rear view
The combined impact of easier monetary policy, fiscal support in some markets, and ongoing artificial intelligence (AI)-related capex will support the global economy in 2026 (P.14). However, the attitudes of consumers need watching (P.24) as an upside risk to the outlook, given real wages remain positive and labour markets are relatively well supported given structural shifts in labour supply across the world. Risks to the outlook include policy missteps by central banks–keeping rates too loose for too long–and governments if fiscal largesse adds to inflation woes.
ASSET ALLOCATION
A time to rebalance
The earnings outlook supports equities even as valuations have risen, but the everything rally may have passed as investors are more discerning about 2025’s big AI theme (P.43). Narrowing growth rates between the U.S. and the rest of the world support global equity allocations. A backup in government bond yields makes core bonds more attractive (P.53), but sticky inflation is a persistent risk to fixed income investors, therefore, keep duration levels neutral. Income-focused strategies across equities, bonds, and alternatives will play a crucial role in generating returns and mitigating risks.
FIXED INCOME
A year of issuance
Tight spreads in investment-grade credit and high-yields bonds limit potential returns, while the expected rise in issuance may make investors nervous about too much supply (P.59). However, demand remains strong, and spreads are likely to remain narrow in credit markets. Emerging market debt looks well supported as an income strategy given the expected U.S. dollar depreciation and supportive fundamentals in many emerging economies (P.62).
EQUITIES
Art of official intelligence
Not every company will win in the AI race, and investors are becoming more discerning when it comes to the hyperscalers. High valuations can be justified by the strength in earnings, while still low rates of adoption suggest room for ongoing growth (P.44). Earnings growth is broadening out globally, with relative valuations increasingly attractive across global equity markets in both developed and emerging markets (P.33).