Investing in 2026: broadening regional and sector-level equity exposure

After a solid performance from equity markets in 2025 to date, can we expect a year-end rally, and what are the prospects for 2026? We examine our equity strategy and preferences.

One of the most frequent questions we receive from investors concerns the short and medium-term outlook for equities. Over the past century, when the S&P 500 saw positive returns in the year through November, December was also positive 80% of the time, with an average monthly performance close to 3%, delivering a ‘Santa Claus rally’.

However, market sentiment can turn quickly. Technical analysis helps identify resistance levels and potential pullback levels, until these are broken and patterns change again. After an impressive total return of around 41% for global equities over 2022-2025, and 51% for the S&P 500 over the same period, a temporary setback of 5-10% can of course occur at any moment.

Nevertheless, despite many uncertainties, we think earnings growth and margin expansion can continue to drive stock prices higher in 2026. This is underpinned by solid economic growth, falling US interest rates and a weaker dollar. Yet with valuations elevated across many stock markets, investors need to refine their strategy. We favour sectors and regions that have room to rise thanks to reasonable valuations and convincing growth catalysts, and have reduced our exposure to markets where valuations look extended.

We think earnings growth and margin expansion can continue to drive stock prices higher in 2026

Seeking growth at fair valuations

Regionally we see most potential in emerging markets. One of our key investment themes for 2026 is an emerging market asset revival. The MSCI Emerging Market Index currently trades at 13 times expected earnings for the next 12 months, well below the MSCI World Index at 20 times and the MSCI USA Index at 22 times. While emerging market equity valuations have historically been lower than developed markets’, we believe they may now narrow this gap.

One example is in the technology sector. Over the past three years, Chinese technology firms, as measured by the KraneShares CSI China Internet ETF index (KWEB) has risen 41% versus a 141% total return for the MSCI US Technology index. This year, however, the KWEB index has slightly outperformed. China is seeing faster AI adoption across its economy, and its technology sector is rapidly closing the performance gap versus its US counterpart, with similar earnings growth at a lower valuation.

Many emerging markets also have a sector mix that can benefit from the vital role commodities are playing in the new technological and AI revolution. Falling US interest rates and a weaker US dollar could provide another leg of support, with scope for further inflows to raise underweight positions from global investors. We are therefore tactically overweight in emerging market equities and underweight US equities.

Within emerging markets, we favour South Korea and India

Within emerging markets, we favour exposure where valuation headroom looks compelling, or earnings growth looks stronger or more reliable: currently in South Korea and India. The MSCI Korea index forward price-to-earnings ratio¹ is slightly below its 10-year median, and we expect earnings growth above 30% in 2026, driven by AI infrastructure , smartphone demand and robust semiconductor pricing. While valuations are some way above historical averages in India, our preference here is underpinned by an expected acceleration in earnings growth back to its trend of 14% - another of the strongest among emerging markets – on the back of an economic growth rebound.  

Within developed markets, we continue to see catch-up potential in Swiss equities. We like the Swiss market’s exposure to quality stocks at reasonable valuations – including in sectors such as healthcare where we see improving prospects – and expect solid earnings growth of 8% and a 3% dividend yield for the MSCI Switzerland Index next year.

We continue to see catch-up potential in Swiss equities

Reducing Japan and restoring UK exposure

Earlier this month we reduced our exposure to Japanese equities and raised our UK exposure to bring it back in line with strategic levels. Japanese equities have gained almost 50% since their April 2025 low, and valuations now look stretched. We expect the rally to pause as earnings momentum plateaus. Many investors are already heavily exposed to Japan, and the sale of equity holdings by the Bank of Japan could also represent a near term headwind. A likely yen rebound supported by rising yields could also hurt earnings for exporters. While the long term outlook remains solid, we believe short-term weakness could offer better re-entry opportunities for investors.

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Conversely, we have raised our exposure to UK equities to neutral as we no longer expect UK stocks to underperform among developed markets. The UK offers one of the highest dividend yields in developed markets, close to 3.5%, and remains attractively valued by comparison. We expect a modest earnings rebound of 7% in 2026. A fiscally prudent UK Budget on 26 November saw UK equities gain modestly, led by its largest sector financials, as UK banks avoided fresh taxes.

Favouring healthcare, utilities and materials

Within sectors, we favour healthcare, utilities and materials. These sectors should benefit from resilient earnings growth, or an earnings recovery in the case of materials, and offer attractive valuations. All are supported by structural trends, including demographics, infrastructure and AI spending, AI-related productivity gains, and rising energy demand.

Our preference for materials positions us for an expected market rotation in the coming months into cyclical sectors that offer better value. We believe materials companies will be supported by lower interest rates, a weaker US dollar and robust Chinese growth supporting commodity prices, including copper, gold and certain chemicals and industrial gases. We forecast a strong earnings rebound of 15-20% in 2026, while there is scope for investors to reallocate to the sector as fundamentals improve.

We have also raised our outlook for energy companies to neutral, as we believe that oil price weakness is reflected in current valuations, while the 4% dividend yield for 2026 looks attractive.

We see the value in owning quality, dividend-paying stocks

In summary, solid returns for global equities in 2025 have been driven by US technology and AI-related firms, where valuations are elevated. In 2026, we favour broadening exposure to regions and sectors that combine better value with solid growth prospects. Against a backdrop of market risks and resilient yet unspectacular global growth, we also see the value in owning quality, dividend-paying stocks.