Welcome to the future
91 Tuesday, 6 January 2026 17:27
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As we step into 2026, we’re back to sharing our insights and providing fresh perspectives on market developments. We wish you all a very happy and prosperous 2026!
Back in December, we titled our yearly outlook “Tough on a tightrope” because the fear of equity overvaluation reflects a reality for investors. Three consecutive years of near 20% returns for global equity markets pushed valuations to high levels, involving, in theory, lower expected returns in the future. If the tech playbook were to falter at any point, the consequences could be systemic, given the heavy concentration of the AI theme within major equity benchmarks and soon in US credit benchmarks. But the fundamental issue with relying on a valuation-based approach is that it would have significantly limited portfolio exposure to Technology stocks years ago, leading to a huge opportunity cost.
The opportunity set continues to lie on the fact that tech and innovation are a source of wealth creation. To paraphrase the recent Nobel laureates in economics, innovation is both creative and destructive, and “creative destruction creates conflicts that must be managed in a constructive manner so that innovation will not be blocked”. The competition between the US and China in Tech leadership is also a source of “creative destruction” in our view, provided that the rivalry does not go too far. On the US policy front, the Fed’s reshuffling (FOMC chair, regional Fed voters) will have a dovish bias that supports both equities and bonds. Also, Trump’s majority faces risks in the end-2026 midterm elections, a key milestone that will shape the policy agenda in H1-26: trade tariff cuts, and other forms of support to households’ purchasing power that will propel domestic consumption. More globally, the trade de-escalation between the US and China, and potentially between the US and India, creates opportunities in emerging markets that are in rate-cut mode. In Europe, a potential resolution of the Ukraine-Russia conflict and the execution of the German stimulus plan create opportunities that we aim to capture with our equity baskets presented in our report.
Risks remain centred around Trump’s controversial policies that could inflict damage on US Treasuries and the US dollar, which are cornerstones of the global financial system. Elsewhere, the Russian threat will persist in Europe, suggesting that the defence theme should continue to perform even if Ukraine and Russia agree on a peace deal. Also, will China seek to capitalise on Trump’s lenient stance on Taiwan and attempt an invasion during his term? In Europe, Germany continues to face growth challenges, and the Euro appreciation does not help. Chinese competition or the EU/ China trade tensions could further damage consumer confidence in Europe. Last but not least, the AI infrastructure race comes with bottlenecks and grid congestion that could slow down the deployment of AI and lead to disappointments.
The above-mentioned threats and weaknesses are not new, and in our view, markets have learned to live with persistent geopolitical threats. We are thus reasonably positive on risk assets heading into 2026, with an Overweight stance on equities, but diversification is key. From an asset allocation perspective, we find value in bonds but stay shy of being too aggressive on duration risk. From a geographical perspective, we find value in Asian equities and favour a mix of Japan and EM Asia. We are structurally cautious on China, hence prefer a tactical approach to this market, due to the real estate meltdown/ consumer weakness, but continue to see Asian Tech as an opportunity. From a European equity sector perspective, we highlighted luxury and pharmaceuticals as attractive in last year’s outlook. For 2026, our contrarian call is Autos, where we anticipate softer regulatory constraints as the EU adapts its Green Deal to the new geopolitical reality. That said, our strongest Overweight remains European Health Care, complemented by an Overweight stance on Utilities.
Below, we reiterate our six key calls for 2026, although they are not set in stone. Adaptability in the financial world is tantamount to survivorship in the physical world, to quote a famous adage, and Trump’s unpredictability will, in our view, again require great flexibility in portfolio management this year.
#1 US equities remain a cornerstone of global portfolios. We recommend maintaining a diversified and agile exposure to Tech, as AI will create both winners and losers
- Don’t fight the Fed, don’t fight the Tech trend, but still mind the gap as the AI infrastructure race comes with bottlenecks and potential disappointments.
- Beyond Tech, we expect further upside on pharma and banks in the US, and a recovery in consumer discretionary. We increased exposure to US small caps to leverage the growth resilience theme and additional Fed rate cuts than expected.
#2 Overweight European equity sectors such as Healthcare and Utilities
- Visibility has been restored in the pharma sector. The industry has taken steps to address Trump’s calls for lower drug prices and increased investment in the U.S. The sector offers attractive valuations and secular growth exposure (population ageing, obesity). Its low correlation with Tech makes it an effective diversifier.
- Utilities have become more dynamic lately with the AI infrastructure theme. As a low beta, high dividend, attractively valued sector, the exposure to the AI ecosystem involves an interesting risk-return profile.
#3 Play contrarian in European Autos and Luxury
- The Automotive sector in Europe has massively underperformed in the past 18 months. Its valuation has thus become attractive. We expect softer regulatory constraints on the sector, as the EU adapts its Green Deal to the new geopolitical reality, to unlock the value discount.
- Luxury also underperformed the European equity market in 2025, though there are signs of stabilisation, in particular in China. The Middle East is now the fastest-growing region, fueled by tourism and robust domestic demand. The Americas benefited from repatriated local customers and improved sentiment in H2, while Europe was hit by weaker tourist inflows amid EUR strength. APAC ex-China improved, with South Korea showing recovery signs.
#4 Global diversification: Japan, Emerging Markets, China, Gold
- While we believe that US equities remain a cornerstone of global portfolios, diversification is key.
- We maintain an OW position on Japan and EM equities. Valuations are reasonable, Japan responds to new internal dynamics (consumer confidence, fiscal stimulus, potentially the end of the BoJ rate hikes in 26). China is more speculative/ tactical in our view.
- Gold is also a source of diversification. Its long-term performance is similar to equities, without substantial correlation to equities. The weakening of the dollar as a reserve currency under the Trump administration remains a driver for gold.
#5 Remain long on Italian government bonds (EGBs) for the carry; a status quo on French OATs
- We expect further declines in borrowing costs in the eurozone in 2026, with the ECB's deposit rate anticipated to reach 1.5% by the end of 2026.
- Italy offers a higher carry than other eurozone government bonds and more political stability than France. But also involves credit risks, with public debt close to 140% of GDP. Mind the growth slowdown however, that can complexify the budget equilibrium.
- In France, we expect a status quo in 2026. The spread versus Bund is set to remain in the 75-85 bps range.
#6 European credit: overweight hybrid bonds and bank Tier 2 bonds. Selectivity in HY, AT1s and RT1s
- We reiterate our Overweight stance on corporate hybrids, which rests on four pillars: 1) a clear premium over the BBB-rated corporate index; 2) a broadly stable credit outlook for most issuers; 3) very low extension risk supported by consistent call and refinancing behaviour; and 4) favourable primary market conditions.
- The European insurance sector has demonstrated resilience on fundamentals in 2025. Credit quality stays stable, with agencies largely affirming ratings and outlooks. We believe RT1s should outperform the broader high-yield market, although the available bonds remain limited.
- We stay positive on euro bank Tier 2 bonds, focusing on 3-to-5-year call windows with clear refinancing economics.
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