Ten Investment Convictions for 2026

The investment outlook and opportunities for 2026 are shifting after two years of exceptional financial market returns. High asset valuations demand that investors carefully balance risk and reward while focussing on diversification. Our convictions for 2026 reflect this approach by combining structural growth themes with strategies designed to enhance resilience and capture returns in a fast-changing global economy.

We expect growth in developed economies to remain below potential in 2026. Quality developed market equities with attractive dividends can provide stability through cash flows and lower volatility than the broader equity market. Small- and mid-cap stocks will continue their recovery, driven by earnings growth, attractive valuations and AI-driven productivity gains. Within developed market sovereign bonds, UK Gilts stand out as inflation slows and interest rate cuts loom.

Emerging markets (EM) look well positioned in a world of more intense competition for resources and technology, supported by accommodative fiscal and monetary policies. EM assets will benefit from economic expansion, and long-term trends including urbanisation, automation, and a rising middle class. EM equities combine appealing earnings growth with reasonable valuations. EM bonds offer compelling yields in US dollar terms, supported by healthier public debt ratios and external balances. US interest rate cuts will be a tailwind for EM currencies.

Emerging markets look well positioned in a world of more intense competition for resources and technology

In China, we highlight two themes: technology, which spans cloud computing, AI, electric vehicles and semiconductors, and sustainability, where China benefits from leadership in rare earths, solar and water conservation technologies. Tech valuations remain attractive versus global peers, and China’s investment in power capacity supports its AI ambitions.

Convertible bonds can thrive in an environment of market volatility and soft economic growth, while Swiss and European real estate investments hold appeal for yield-seeking investors. Commodities, particularly materials, are benefitting from AI and electrification trends, and gold from geopolitical fragmentation. Hedge funds and private equity can enhance portfolio diversification, and our currency preferences include an undervalued Japanese yen and a strengthening Chinese yuan.

1. Emerging markets’ revival

After years of weak performance, 2026 looks promising for EM assets. EM equity valuations are attractive and we expect them to enjoy robust earnings growth of 17%. Earnings drivers include rising economic growth, urbanisation, automation, and a growing middle class fuelling consumption. EMs also benefit from resource ownership critical for the energy transition and youthful demographics in India and Brazil. EM bonds offer compelling yields while public debt ratios and external balances remain healthier than in developed markets. EM currencies are also well supported, especially against the US dollar, and the US interest rate cuts we expect in the second half of 2026 will maintain this momentum.

2. China tech and sustainable China

Chinese equities are volatile, but sectors designated as strategic policy priorities can outperform. For 2026, we favour two key themes: Chinese technology and sustainability. China’s tech firms span capabilities in cloud computing, AI, e-commerce, electric vehicles, and semiconductors, with strong earnings growth and faster adoption of advanced technologies than in developed markets. China is closing the tech gap with the US and building spare power capacity to support its AI ambitions. The country’s sustainability leadership benefits from its dominance in rare earth refining, electric vehicle supply chains, and solar energy. China is also making progress in water conservation and digitalised treatment systems, reinforcing its role in the global energy transition.

Chinese equities are volatile, but sectors designated as strategic policy priorities can outperform

3. Quality developed market equities with attractive dividends

Reinvesting dividends is one of the most reliable strategies for wealth preservation and growth in equity portfolios. Quality, dividend-paying companies in developed markets can offer attractive cash flows, lower stock price volatility than the broader market, and strong balance sheets. These companies span industries such as financials, energy, industrials, healthcare, consumer staples, utilities, and real estate. Such sectors can include some exposure to technology that helps to sustain dividend growth and reduce industry-specific risks. Quality dividend stocks can anchor portfolios in volatile periods and can help shield performance in times of uncertainty and amid current elevated valuations.

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4. Developed market small and mid-capitalisation recovery

Developed market small and mid-cap equities recovered in the second half of 2025 thanks to easing monetary policy, improving earnings revisions, and capital expenditure. In 2026, we expect small and mid-caps to keep outperforming, driven by accelerating earnings growth and attractive valuations relative to large caps. We also see tailwinds from AI-driven productivity gains, rising merger and acquisition activity and any changes to US import tariffs. Historically, these stocks tend to lead in periods of profit recovery and interest rate cuts. Investor positioning is light, leaving room for more inflows to this segment.

We expect small and mid-caps to keep outperforming, driven by accelerating earnings growth and attractive valuations relative to large caps

5. High yielding developed market sovereign bonds: preference for UK Gilts

With corporate spreads – or the yields offered in excess of those offered by sovereign bonds – at historically tight levels, select, high-yielding government bonds offer attractive risk-adjusted returns. We favour 10-year UK Gilts; while the UK’s debt-to-GDP ratio is above 100%, November’s government budget focussed on fiscal consolidation. Tax rises will lead to lower refinancing needs and sovereign bond issuance. With a sharp decline in inflation, we expect the Bank of England to cut policy rates by 100 basis points in 2026, leading to a fall in long-term yields, and attractive total return prospects for Gilts.

6. Convertible bonds

Convertible bonds combine a bond with an equity call option, or the right to convert the debt into stock if the price rises significantly. The former offers a downside cushion and the latter offers participation in rising equity markets. Convertible bonds thrive in environments that combine moderate economic growth with market volatility, providing diversification along with the ability to capture greater upside than downside risk. Global convertible bonds have significant exposure to the Asia Pacific region and sectors like utilities, real estate, and materials. Current conditions of low volatility make them attractive to add to a portfolio, as the equity call options gain in value when volatility rises. Convertible bond issuer default rates fell in 2025, supported by lower interest rates. We expect further US rate cuts to sustain favourable conditions in 2026.

Current conditions of low volatility make convertible bonds attractive to add to a portfolio

7. Swiss and European real estate

Swiss real estate investments still offer an attractive alternative source of yield for Swiss franc-based investors. The distribution yield of Swiss real estate funds over 10-year Swiss sovereign bonds is at its highest level since 2022, offering a better alternative than many corporate bonds. The difference between European real estate yields and the benchmark market interest rate for borrowing over five years is significant. As the European Central Bank has cut policy rates, real estate now offers an alternative source of income for euro-based investors.

8. Commodities and commodity-related stocks

Commodities have become strategically important as AI adoption and digitalisation drive energy and infrastructure demand. These shifts are boosting investment in renewables and electrification, lifting demand for copper, aluminium, rare earths, and uranium, which are critical for data centres, electric vehicles, and grid upgrades. The appeal of precious metals, led by gold, increases as geopolitical fragmentation deepens and central banks diversify their reserves. Limited mining capacity underpins our expectation of higher gold prices, and supports our preference for the materials sector within equities.

9. Hedge funds and private equity

To enhance diversification in 2026, investors should maintain exposure to hedge funds and private equity. Hedge fund strategies that focus on corporate activities, such as event-driven strategies, and equity market price dislocations, such as relative value/arbitrage strategies, can deliver returns irrespective of the direction of the broader equity market. Private equity can complement these exposures. Here we favour strategies that target mid-sized businesses at sensible valuations, using less leverage than mega-cap buyouts and making operational improvements to create value. Co-investments and secondary private equity deals can offer lower fees, greater flexibility and better cash flow timing for investors. Together, these alternative investments can provide independent sources of return and resilience during periods of public market volatility, with the aim of strengthening portfolio diversification.

To enhance diversification in 2026, investors should maintain exposure to hedge funds and private equity

10. Focus on undervalued currencies: Japanese yen, Chinese yuan, Swedish krona

Among major developed market currencies, the Japanese yen looks undervalued, with policy rate convergence set to push the US dollar lower against the yen in 2026. Interest rate cuts from the Federal Reserve and further monetary policy tightening from the Bank of Japan will spur repatriation flows. They will also help the unwinding of trades in the yen that were used to finance higher yielding opportunities overseas, as higher domestic Japanese yields reduce the appeal of holding foreign bonds. We also expect the recovery in the Chinese yuan seen in 2025 to continue, driven by resilient Chinese exports, a current account surplus, and ongoing internationalisation in trade and investment – factors that strengthen China’s balance of payments and justify further currency gains. In Europe, we highlight the Swedish krona as being substantially undervalued, and expect a further recovery, supported by improving cyclical growth, especially in Sweden’s rate-sensitive housing market, and by a high exposure to improving German growth prospects. Sweden’s well developed defence sector also positions it as a beneficiary of the increased global focus on defence spending.