Our capital markets philosophy and outlook

Scenario analysis – living in an uncertain world

Finally, a key tenet of our capital markets framework is how we model and account for inherent future uncertainty. While there is only one realised past, we must consider many potential futures. As such, a signifi­cant proportion of our time is spent calibrating and analysing qualitative as well as quantitative scenarios.

The qualitative scenarios focus on key themes that we expect to drive capital markets over the near term, which have, most recently, focused on optimistic and pessi­mistic technology scenarios, fiscal risks, and scenarios that would lead to geopolitical escalation e.g. the recent Middle East crisis. This allows us to create robust port­folios for clients, which are highly diversified by geography and asset type, across a range of scenarios.

Rather than relying on any single area to generate significant returns, we use the sum of many parts to create attractive risk-adjusted returns from a highly diversified mix of assets that we believe are well positioned for future growth.

Asset class outlook

Equities

Developed markets

2025 delivered strong double-digit returns across major indices, but elevated US valuations – driven by AI enthusiasm and ample liquidity – heighten risk, especially with poten­tial growth shocks or policy missteps.

Emerging markets

Stronger relative growth, widening valuation discounts and potentially weaker dollar support emerging mar­ket prospects for 2026, though tariff risks, trade tensions and broader geo­political risks remain key watchpoints.

Fixed income

Government bonds

Government bonds delivered solid returns in 2025, thanks to high starting yields and steadier rate expectations. For 2026 and beyond, policy rates are set to converge, with the US and UK easing, Japan tightening gradually, and Europe remaining relatively stable. Yield curves have steepened as term premia normalise, and while positive real yields improve return prospects, inflation and fiscal risks could still drive volatility. Overall, government bonds now offer better value and useful downside protection, but a mix of regions is critical to avoid being overly exposed to any one fiscal pathway.

Corporate bonds

Corporate bond yields edged lower in 2025 as rates fell and spreads tightened, led by the US dollar market, while European investment grade finished broadly unchanged. Credit spreads relative to government bonds are now close to historic lows, and whilst defaults are expected to stay contained into 2026, we are wary of downside risks. Ultra-tight spreads, slowing growth, tricky monetary policy decisions and external pressures such as tariff uncertainty could challenge credit markets over the medium term.

Orthogonal strategies

Traditional markets are driven largely by macro forces like rates and growth, leaving returns closely tied to the economic cycle. To improve diversification, we’re adding “orthogonal” return sources such as cross-asset momentum and volatility risk premium, which tend to behave differently from equities and bonds.

These strategies have historically shown low correlation with traditional assets, helping portfolios stay more resilient during periods of stress. More importantly, cross asset momentum, for example has delivered returns in scenarios where other asset classes have struggled, for example the Global Financial Crisis, or 2022. As such, even small allocations can enhance risk-adjusted expected returns, reducing reliance on macro conditions and adding an extra layer of protection when volatility spikes.

Real estate

Commercial real estate enters 2026 still regaining ground after higher interest rates, with 2025 delivering steady but muted returns versus public markets. Rental growth is emerging in select areas – especially in Europe – though analysts expect performance to diverge widely across sectors and locations. The return out­look for 2026 is cautiously positive, supported by normalising vacancy rates, limited new supply, stable demand and broadly attractive valu­ations. While a strong rally is unlikely, sentiment is improving in the US.

Private equity

Private equity endured another stop-start year in 2025, with early momentum stalling amid tariff uncertainty and a quiet summer before activity improved in the second half. The key question for 2026 is whether deal flow can truly accelerate or if “extend and pre­tend” will continue to dominate.

Private credit

Private credit – lending outside traditional banks – has grown rapidly since the financial crisis, offering attractive returns and diversifica­tion. But 2025 highlighted risks, with a few failures raising concerns around lending standards and covenants, although overall default rates have remained low to date.

For investors, manager discipline is essential: selecting lenders who maintain rigorous standards rather than chasing yield. Private credit can add income and diver­sification, but it’s not without risk. Careful selection and a focus on quality lending are essential to avoid surprises if markets turn.

Infrastructure

Infrastructure remains a major long-term theme. Although activ­ity has been quieter since the 2021-2022 boom, momentum is improving as economies invest in AI buildout, urbanisation, energy transition and climate resilience.

For investors, infrastructure contin­ues to offer stable, inflation-linked cash flows, but stretched public finances mean private capital will play an even larger role. Selectivity is crucial: core assets face return compression, so focusing on strong fundamentals and avoiding political or technological risks is key.