Market Outlook 2026

Geopolitics:

A belligerent US is a serious complication to the outlook. The objectives of the Trump administration are a bit unclear as their economic and social aims may not be compatible with current international norms. Conquest for the sake of conquest is a risk we have to entertain. Europe is in the crosshairs and much uncertainty surrounds its response and how the US might respond. Russia and China have been silent thus far, pursuing their own territorial agendas, but this might change and could compound the complexity. 

Domestic US politics will come into focus quickly as the composition of Congress will have implications for the Trump agenda. Mid terms happen end of this year. Already there is a creeping sense of domestic oppression in the US and this could escalate. The White House needs domestic support for its international expansionist agenda and quite how it achieves this will be interesting. 

Economics:

An equally important concern is sovereign debt levels. While tariffs may have improved the US fiscal position in 2025, deficits are expected to increase steadily from 2028 – 2035. Pensions, welfare, healthcare and defence requirements are likely to pressure budgets in most major economies across the world. 

Fiscal spending may be constrained by borrowing costs. Monetary policy may be constrained by inflation. On current general conditions, central banks can be expected at some stage to resume buying government bonds, unless inflation rises significantly above target. 

Markets and investment strategy:

Asset values can be supported if fiscal and monetary policy are coordinated in accommodation mode. If nothing interrupts fiscal expansion and monetary accommodation, asset valuations may rest at a new, higher, mean. If not, then expected returns must decline. The threats to fiscal indiscipline or debt monetization will be rising inflation, interest rates and exchange rate volatility. 

Markets are in a state of constant uncertainty, however, current levels of uncertainty are acute. Market risk is high and return per unit risk is poor. Liquidity risk is high given that flexibility is valuable, thus liquidity premia per unit risk is also poor. Complexity risk, which is assumed when investing in many alternative investments like relative value and arbitrage strategies is high given that historical relationships may become dislocated. 

Valuable qualities in any portfolio and strategy include stability of capital, liquidity, simplicity and flexibility. All things being equal, in credit, seek to be in liquid markets and senior in claim. In equities, balance between value and growth and avoid over allocation to any particular country or sector. Market cap weighted index ETFs are poorly diversified and should be de-emphasised. Seek a globally diversified, equally weighted equity portfolio to express the equity view. 

Generally, in an asset repricing, crystallise losses and increase risk. Sell senior buy sub. Sell value buy growth. Sell liquid buy less liquid. This will require discipline and preparation since it will involve acting against most human emotional instincts. Asset classes need to be identified buy and sell levels identified. 

Scenarios coming out of uncertainty should be built to guide the investment strategy post repricing.