Macro
Investment Perspectives 2026 Outlook: Searching for value amid the euphoria.
13 min read 18 Dec 25
Overview
Can the wave of optimism continue?
Tristan Hanson
Co-Manager, M&G Episode Macro Strategy
In 2025, most major asset classes delivered positive returns, despite repeated shocks. Yet, a sense of unease has grown among investors. Tristan Hanson, Co-Manager of the M&G Episode Macro Strategy, points to elevated equity valuations and worries over credit quality, on top of the existing issues of policy unpredictability and sovereign debt levels, as causes of investor angst.
A big debate among investors is whether we are in an AI boom or bubble. However, Hanson argues it is more helpful to look for signs of emotionally-driven behaviour: are investors focused on returns or risk of loss?
“Given considerable excitement about the potential of certain companies to make money from AI, there is scope for disappointment if some of the planned expenditure proves excessive or somewhat cyclical,” he suggests.
Aside from the AI frenzy, Hanson believes central banks will come back into focus in 2026. The market may be pricing in around 100 basis points of interest rate cuts in the US next year, but sticky inflation and political pressure could complicate the Federal Reserve’s job.
Hanson sees reasons to believe that markets can remain resilient but we may also discover whether investors’ optimism is justified. Inevitably, there will be unforeseen events in the year ahead but adopting a disciplined, diversified approach could potentially help investors find long-term value in 2026.
Equities: Are we in an AI bubble? That’s the wrong question
Fabiana Fedeli
CIO, Equities and Multi Asset
After driving markets since late 2022, investors are beginning to question whether the AI bonanza is about to come to a halt.
Fabiana Fedeli, CIO Equities, Multi Asset and Sustainability, shares her view: “AI is not a bubble. It is a technology that has developed into a powerful tool, generative AI, capable of bringing structural change to the way we live and work.”
For Fedeli, AI’s power is in its pervasiveness, its ability to be applied to so many of our daily processes, products and services. And we are only at the very start of broader application.
If there is a bubble, Fedeli suggests it is not in the technology but in the valuations of a specific group of companies. So where to now for these stocks? Fedeli highlights three possible outcomes:
- Companies continue to print ever better earnings, meaning current valuations are realistic.
- Investors have overestimated the near-term growth opportunities of the companies that provide the essential hardware and critical infrastructure of AI. This would imply a temporary fall in share prices followed by a rebound once fundamentals catch up.
- The current technology supporting AI is displaced by a more powerful one, and the winners of today are replaced by the leaders of tomorrow.
While any of these outcomes have a decent chance of occurring, Fedeli says that, for investors, getting the timing right is just as crucial as investing in the right asset. She favours casting a wider investment net to capture AI-related opportunities. “Importantly, as the tide that lifted all boats starts to recede, this is the time to let go of passive exposure to AI stocks, and take a more active investment approach,” she maintains.
‘If there is a bubble…it is not in the technology but in the valuations of a specific group of companies.’
Aside from AI “enablers” (companies supplying the key technology), Fedeli believes there are two other sets of winners: those firms that deploy AI to reallocate economic resources more efficiently, and those firms that support such reallocation through their services.
As we enter 2026, Fedeli says we should not be asking whether we’re in an AI bubble but, rather, can we identify which companies are quietly taking advantage of what AI has to offer, and whose attractive valuations allow for upside. This requires rigorous due diligence to separate hype from substance and identify the winners of tomorrow.
Fixed Income: Income is back
Andrew Chorlton
CIO Fixed Income
Low interest rates and quantitative easing defined the decade following the Global Financial Crisis, skewing risk to the point that there was very little compensation in bonds. But in 2025, yields on government bonds have returned to a healthy starting place.
Given attractive real yields across fixed income markets, Andrew Chorlton, CIO Fixed Income, believes bonds offer good value compared to equities. Given the government bond yield currently makes up about 80% of the all-in yield in investment grade credit, in his view, government bonds provide an attractive source of income without taking on additional credit risk, especially as interest rates could fall and historically tight credit spreads could widen.
‘…government bonds provide an attractive source of income without taking on additional credit risk.’
According to Chorlton, central bankers are currently walking a difficult tightrope, that is the balance between keeping inflation around their target rate while addressing sluggish growth rates across the developed world. “While we can see visible signs of a softening in the economy, mismanaged inflation remains a potentially corrosive force,” he notes.
This balancing act is made more complicated by renewed political pressure on the Federal Reserve. 2026 will be a decisive year for the central bank’s independence as President Trump appoints a Chair to replace the outgoing Jerome Powell. In the short term, the President could use the process to extol the need for further interest rate cuts. However, the long-term impact would be an undermining of credibility in, arguably, the most important central bank in the world.
In contrast to the macroeconomic uncertainty, fiscal deterioration, and volatility that has challenged developed markets (DM), emerging markets (EM) have exhibited significant resilience over the last few years, proving a compelling alternative to DM.
Supported by generally lower debt levels, both in sovereigns and corporates, continued strong growth and decreasing dependency on the dollar and the US economic cycle, Chorlton notes that EM debt has emerged as an attractive space for fixed income investors, particularly those seeking diversification. Because if there is one thing that is certain, it is that there is always more uncertainty on the horizon.
Emmanuel Deblanc
CIO, Private Markets
Going into 2026, Emmanuel Deblanc, CIO Private Markets, believes there are reasons to be optimistic about private markets: the interest rate environment now appears more stable, the IPO market is beginning to re-open (facilitating a recycling of capital), and there is evidence of a renewed focus on operational value creation.
Within private equity, underwriting has become more disciplined, and private credit continues to expand, continuing to blur the lines between public and private lending. There is also pent-up demand across private markets to deploy dry powder and exit a backlog of mature assets, which may drive near-term deal activity levels.
According to Deblanc, private credit continues to be one of the most dynamic segments, offering increased diversification, yield enhancement and floating-rate appeal. While there is increasing chatter about the potential for systemic risk emerging in private credit, he believes it is important to distinguish between the two principal markets: the US and Europe.
Comparing both, Europe has historically offered superior risk-adjusted returns relative to the US, as well as superior credit quality, with Europe offering higher interest cover and lower default rates1.
‘private credit continues to expand, continuing to blur the lines between public and private lending.’
Within private equity, Deblanc notes that underlying operating performance remains healthy. There are also signs the IPO market is mounting a partial rebound and demand is clearly there. “There is a long tail of pent-up IPOs which if it continues into 2026, coupled with the potential for some out-sized PE exits, should improve top-line exit figures, and with it, investor confidence,” he says.
Heading into 2026, Deblanc sees the most compelling opportunities sitting within truly transformative sectors. In his view, technology-centric industries such as climate tech, fintech, cybersecurity and health tech, as well as those innovating within energy transition and leading environmental and societal change, are poised to deliver highly-attractive returns. Further interest rate cuts will also likely prove a tailwind for private equity in 2026, supporting both transaction and exit activity.
Real estate: Recovery underway but uneven
Richard Gwilliam
Head of Property Research
Global real estate is stabilising after two years of sharp repricing and frozen liquidity, but recovery is far from uniform. Yields have rebased, sentiment is improving and deal flow is returning, yet structural forces – not short-term rebounds – will define the next cycle, argues Richard Gwilliam, Head of Property Research. Capital is moving toward certainty and resilience, favouring assets that can withstand volatility and deliver sustainable growth.
Europe and Asia Pacific (APAC) are leading the recovery as investors diversify beyond the US. European transaction volumes are forecast to rise 7% year-on-year, while APAC has seen cross-border investment surge 88%, driven by policy support and lower financing costs. Gwillam notes that South Korea, Japan and Australia are emerging as key hubs, reinforcing the shift toward markets combining stability with growth potential.
For Gwilliam, sector performance highlights the uneven nature of recovery. “Prime central business district offices remain in demand, while secondary stock faces mounting obsolescence amid hybrid work and ESG pressure,” he observes. Logistics is entering a selective phase, with core urban hubs outperforming peripheral corridors. Living sectors continue to show resilience, underpinned by chronic undersupply and demographic trends, while retail is rebounding in pockets through experience-led formats.
Looking ahead, Gwillam believes structural themes will shape returns: AI-driven workplace change, demographic pressure on housing, supply-chain modernisation and sustainability as a capital filter. In his view, the winners of the next cycle will not be those who simply ride the recovery, but those who reinvent – embedding ESG, leveraging technology and aligning strategies with long-term demand drivers.
1 Source: Interest cover: Pitchbook, LBO Interest Rate coverage Ratios, 10-year average as of 30 September 2025.
Default rates: LCD ELLI and US LLI 10-year default rates by issuer count as of 30 September 2025
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