The tax year-end is approaching, and investors are considering the allocation of their remaining ISA allowances and pension top-ups. We look at the most potentially rewarding markets within the investment trust arena in the year ahead.
This is a marketing communication
The past year has been an uncomfortable one for investors. Jitters about aggressive and erratic US tariff policy, and their impact on US growth, saw global equity markets plunge in Q1 2025. Markets subsequently recovered, and US stocks hit record highs, led once again by the mega cap tech stocks that have underpinned market gains in recent years¹. However, the year ended on an anxious note due to widespread fears that heavy speculative investment in artificial intelligence (AI) has created a bubble that could burst at any hint of disappointment, adversely impacting broader market indices around the world.
North America
These fears cast the longest shadow over the outlook for the US market. In addition, there are questions about the US economy, especially the inflation risk of tariff-related price pressures. US goods inflation is already rising², and there are clear signs the labour market is slowing³. These developments, along with elevated equity market valuations, suggest there are good reasons for investors to view US equities with caution in the year ahead.
Indeed, these risks, combined with broader concerns about aspects of President Trump’s agenda, have already prompted some investors to rotate away from the US into other markets, and this trend looks set to continue in 2026 as the US administration’s efforts to influence the Federal Reserve and other independent US institutions continue to unsettle investors.
UK
After many years of being unloved by investors, a significant proportion of these US outflows has gone into the UK market⁴. UK equities are trading at heavy discounts to historical valuations and relative to other major markets, and it seems investors are finally beginning to appreciate the value on offer in this market. Further evidence of this renewed interest is the surge in mergers and acquisition (M&A) activity⁵, as strategic corporate investors and private equity funds scoop up quality businesses at bargain prices, and it seems reasonable to expect the market’s low valuations to continue to attract investment flows in 2026. In addition, large UK companies provide broad exposure to global economic activity, as 80% of UK large cap revenues come from abroad⁶. With global growth expected to continue at a steady pace in 2026⁷, holding these stocks is an effective way to gain exposure to ongoing economic expansion across a broad sweep of countries.
For investors who expect some improvement in the UK economy now that uncertainties surrounding the government’s November 2025 budget have dissipated, UK small caps offer much greater exposure to domestic activity than their larger counterparts, and they are trading at even greater discounts to their long-term history, and to other markets.
Emerging markets
Emerging markets has been another key beneficiary of investor flows out of the US during 2025⁸, and persistent US dollar weakness, combined with developments in China and some other emerging markets, suggest this sector should continue to do well in 2026, while also offering investors significant portfolio diversification. Chinese exporters have adapted quickly to higher US tariffs, re-routed exports to other Asian markets and to Europe. China is still facing domestic challenges, as ongoing property sector weakness continues to weigh on consumer confidence. However, the authorities have adopted more pro-growth policies aimed at stimulating consumption and supporting the housing market. At the same time, the country is making rapid progress in the development and adoption of AI, which is likely to fuel the penetration of Chinese tech products into global markets, giving major impetus to Chinese growth over the longer term. Elsewhere in emerging markets, Taiwanese and South Korean semiconductor manufacturers are benefiting from the integral role they play in the supply chains underpinning the AI revolution. And while the Indian stock market faced challenges in 2025, the country’s very positive long-term growth trajectory remains in place, supported by several major structural changes such as the growth of the middle class, rising demand for financial services and ongoing investment in technology and infrastructure.
Japan
There are some extremely interesting changes underway in Japan, which certainly merit more attention than this market has commanded in many years. The country is experiencing a revolution in corporate governance that has underpinned significant rises in Japanese equities. Encouraged by the government and regulators, Japanese companies are improving their capital efficiency, unwinding cross shareholdings and returning excess cash to shareholders via share buybacks and higher dividends, to the extent that Japan now boasts the strongest rate of dividend growth of any major market over past 20 years⁹. Yet these reforms are still gathering momentum and are likely to lead to a long-term improvement in profitability – and further market gains - as they run their full course.
Summary
In sum, while there are uncertainties hovering over the US, other major markets offer investors a range of interesting investment options: UK valuations are finally attracting the attention of both domestic and foreign investors; China’s recovery looks set to consolidate, and its AI expertise is challenging US domination in this field; other tech-heavy Asian emerging markets are likely to continue to perform well; India’s long-term growth story remains intact; and Japan offers exposure to a compelling corporate reform story.
So, for investors considering where to allocate their remaining ISA allowance and pension top-ups in the closing months of this tax year, a portfolio diversified across sectors seems the best approach. Diversification provides exposure to opportunities in previously out-of-favour - and hence attractively priced - markets, notably the UK and Japan, while also insulating performance from country-specific risks such as economic slowdown and political uncertainty. This should help to ensure that 2026 will be a smoother, more comfortable year for investors than the extreme volatility of 2025.