Carmignac – 2026 Outlook

Economic perspectives:

• Global growth will be unchanged at 3%, still driven by the AI capex boom, national security spending and fiscal profligacy.
• Weak, uneven growth forces governments further down the populist road, with central banks constrained into monetising this fiscal blind run.
• US: expect Trump to turbocharge policy stimulus ahead of the midterms through fiscal and monetary levers and the deregulation of banks.
• Euro area: reacceleration thanks to the Merz plan and lack of adjustment in France. ECB will stand pat given the glacial pace of disinflation, provided the OAT market remains well behaved.
• China: the 15^th 5-year plan doubles down on the war economy. New fiscal stimulus is vital to floor growth at 4%. Authorities can still afford to monetize the deficit without endangering the renminbi thanks to a gargantuan trade surplus.
• Japan: We expect Takaishi’s supplementary budget and bullying of the BoJ to backfire. Markets will then force a policy U-turn that threatens a messy unwind of yen carry trades.

Investment strategy:

• Resilient growth driven by fiscal largesse cannot abstract from late-cycle dynamic and stretched valuations. The best asset classes remain equities and credit but caution is warranted on government bonds.
• The lack of diversification in global growth drivers (AI, defense, fiscal) calls for maximum diversification among the sectoral and geographic dimensions.
• Sustained inflation, fiscal activism, and unstable equity–bond correlations demand a more selective and agile investment strategy, where active, global, valuation-aware positioning outperforms passive exposure.
• Equities: a barbell approach that pairs AI and tech leaders with defensive healthcare and staples, capturing both high-end and mass-market dynamics in a two-tier consumer economy.
• Fixed income and FX: long-dated government bonds from high-deficit issuers look unattractive, while inflation-linked bonds, high-quality credit, and commodity-supported or fiscally disciplined currencies offer a better risk-reward.

AI, guns and buttter: the tryptic of growth remains
2026 growth should be on par with 2025 at close to 3%, with more impetus from US, Europe and Japan offsetting a slowdown in China and India. Growth drivers will remain limited to a tryptic of AI capex, national security spending (defence, de-risking of supply chains) and fiscal profligacy. The lack of acceleration, despite ongoing monetary easing and new fiscal easing, is due to four headwinds: continued geopolitical tensions (tariffs, Russia, Venezuela, Taiwan), tightening of credit conditions in private debt markets, repo market dysfunction and the return of bond vigilantes.

US: from K-shaped lull to a V-shaped recovery
After a year marred with policy shocks, the economy should reaccelerate owing to fresh fiscal stimulus from the Big Beautiful Bill and an easing Fed. With the supply side capped by immigration restrictions, we expect inflation to remain sticky at around 3%. This will not be enough to rescue Trump’s approval rating and avert a Republican disaster in the midterms.

One cause of the persistent ‘vibecession’ among voters is that wealth effects from the equity markets are no longer enough to lift private consumption. Wealth is too concentrated and young workers understand that the equity ‘wealth’ in AI stocks is the mirror image of the depreciation of their human capital by a revolutionary labour-replacing technology. Expect Trump to double down on easing policies ahead of the November vote, through direct handouts (ACA subsidies, ‘tariff dividend’ checks), maximum pressure on the Fed and bank deregulation. A botched peace in Ukraine and regime change attempt in Venezuela are likely to form part of an attempt to slash gas prices down to the promised $2/gallon.

With a rising budget deficit and opportunistic issuance of T-bills, the Fed will have no choice but to restart QE to prevent an implosion of the repo market (fiscal dominance under the guise of financial stability dominance).

Euro area: fiscal (stimulus) union
Traditional growth drivers of exports and private investment are structurally challenged, but synchronised fiscal activism will ensure a decent acceleration next year. Indeed, Spain is the only country that presents a virtuous mix of private investment and exports of high value-added services, but its secret ingredient is a large inflow of skilled immigration from Latin America, a boon that cannot last forever and that is not replicable in other countries. Elsewhere, the fiscal impulse is the only game in town. The Next Generation EU largesse will still irrigate the periphery into 2027. France will further postpone its fiscal adjustment, with the guilty complicity of complacent bond markets. And Germany will top the league of fiscal sinners with the historical Merz plan. After a weak H2 2025, growth should accelerate to a decent 1.2%.

Manufacturing competitiveness will remain a key impediment to growth. UNCTAD data¹ show China dethroning Germany’s comparative advantages one by one. But playing the tariff card against China would backfire as China can retaliate through its monopoly over graphite and rare earths.

Despite the deflationary shock from China and US tariffs, disinflation has slowed to a crawl due to disappointing productivity. A dovish bias from the ECB would be welcome to weaken the euro and fix Europe’s competitiveness issues. But the central bank is unlikely to lend a hand by cutting rates unless the OAT market capitulates.

China: from mercantilism to techno-militarism
China remains resolutely focused on its war economy. The new 5-year plan prioritises self-reliance in tech and the diffusion of AI to manufacturing, with no fresh strategy to address the black hole of the housing market or the rising youth unemployment. Exports are no longer a safety valve for growth given the widespread protectionist backlash. Beijing will have no choice but to widen its deficit next year. Given the worsening asset quality problems at banks, there is no other option but to monetize this new fiscal stimulus. As long as the basis balance stays positive (current account + foreign direct investment balance), China can afford this without debasing the renminbi. This newly-created domestic liquidity will provide a floor to price/earnings multiples on the equity market.

Japan: will Takaichi emulate Thatcher or Truss?
New PM Takaichi’s ambition to resurrect Abenomics in an already over-heating economy is a recipe for a market rout and political disaster. With services inflation at 3%, a weakening yen will fuel more voter frustration. The newly announced 3.4% GDP fiscal package will further widen the positive output gap, making the wait-and-see attitude of the BoJ untenable.

An EM-like market reaction, where equities, bonds and FX sell off in unison, could force an abrupt policy U-turn: a BoJ hike, Ministry of Finance intervention on FX, Government Pension Investment Fund repatriation. Either would have a knock-on effect on US Treasury and dollar liquidity. A sudden re-appreciation of the yen would trigger a messy unwind of carry trades that have propped up both EM currencies and US equity valuations.

Conclusion
The global growth lethargy is a feature of the post-Pax America world where zero-sum interactions prevail at the international and infra-national levels. Voters frustration with this weak, lopsided growth will push governments towards more populist policies. Central banks will have no choice but to monetize this fiscal blind run under the guise of their financial stability mandate. But bond vigilantes will be looking. Who among Trump, Takaichi, Starmer or Macron will win the ‘Liz Truss Award’ for 2026 is still an open question. But contenders will surely share the burden given the co-integration of global bond markets. Xi’s China will be spared by its capital controls, but will feel the echo suffering via his export engine.

Out-of-the box thinking
The world’s four largest economies are actively supporting growth just as the macroeconomic cycle appears to be entering late-stage territory.

The cycle is ageing, but it is also accelerating. Asset valuations increasingly reflect late-cycle pricing, yet the very drivers of the cycle are extending it.

A combination of real GDP expansion and persistent inflation feeds directly into corporate revenues and earnings. This is a supportive environment for equities, credit and, more broadly, risk assets but calls for a more cautious stance on government bonds.

Three themes dominate global markets: AI-driven capex, ongoing fiscal largesse, and national security and industrial sovereignty. All three create actionable opportunities across fixed income, equities, and FX markets.

Yet valuations have soared over the past year, compressing the margin of safety. Globalisation of capital markets means assets prices are more interconnected. And narrow growth engines translate into higher correlations across and within asset classes. Today, thinking out of the box is a necessity to achieve diversification.

Equities: barbell strategy
We blend tech winners with defensive healthcare and staples, appealing to both ends of the two-tier economy.

AI & technology: The bull case is structural, not speculative
AI adoption rates have tripled - from 5% to 15% - in just three years, unleashing a massive investment wave and supporting strong earnings growth among the AI ‘poster-child’ companies.

Expected productivity gains of 1.5% per year, generating a net present value of more than $20 trillion over 10 years are relativising concerns over overspending. Markets are forward looking and part of this is likely in the price but if half that stays in the technology sector, then the Nasdaq 100 could see an additional +50% in value.

The concern is exuberance for this popular market theme. But fixed income markets are now being tapped to fund AI investment, and credit risk imposes discipline and acts as a built-in speed limit for exuberance in price action.

Frothiness in the market’s most beloved themes and valuation risk has a simple answer: when valuations are high don’t buy the index, select carefully.

Taiwanese and Korean technology companies are integral to the AI supply chain, yet trade at far more attractive multiples than US peers. China is building its own AI ecosystem, creating differentiated opportunities. Any new entrant salivating at Nvidia’s 75% gross margins becomes a catalyst for cheaper compute and higher software adoption. This would benefit software companies, laggards this year.

Fiscal Largesse: Investing in the barbell of American spending and bifurcated baskets
Healthcare and consumer staples display a relative low correlation to the technology sector and thus, are worth considering. Future fiscal policies are increasingly expected to target households and election countdowns have a way of making fiscal restraint evaporate.

Large technology monopolies are both part of the solution and the problem. On the one hand their capex cycle has become a stabilising force in the global economy. But on the other hand, their dominance contributes to widening wealth gaps (as they channel wage/jobs and capital gains to a narrow segment of the population).

We see two consumption realities in a two-tier economy. The wealthy continue to spend, while lower-income households face rising delinquencies and stagnant real wages, pushing them toward private labels, buy-now-pay-later schemes, and deep discounts.

For investors, the implication is clear: seeking exposure to both ends of this two-tier economy. For example, stocks such as Procter & Gamble cater to broad, mass-market consumer needs with affordable and essential goods. Meanwhile, Sprouts targets the premium, appealing to higher-income consumers focused on fresh foods.

National Sovereignty and the New Industrial Order
The end of the Pax Americana has thrust national sovereignty back to the centre of industrial policy, unleashing strategic investment across defence, infrastructure, and electrification.

In defence, investors must look past the obvious market darlings. Parabolic price moves and stretched valuations signal a crowded trade driven by momentum rather than fundamentals. A smarter approach is to tap the credit market, where fast-growing European defence groups offer IG-rated debt with 4%–5.5% yields and revenue profiles that have doubled in recent years - exposure to national-security spending without equity froth.

But national security goes beyond defence names. Companies like Prysmian and Siemens are central to strategic resilience as they help secure critical infrastructure in automation, mobility or electrification.

Fixed Income & FX: Navigating fiscal excess and inflation persistence
Government bonds
As Central banks ease while inflation lingers and as deficits swell and government bond supply increases, long-term yields rise. Thirty-year debt from fiscal offenders - the US, UK, Japan, France - provides inadequate compensation for the risks involved. We avoid or short government bonds.

Conversely, real rates remain too high for the current debt burden, while market-expected inflation remains too low relative to structural forces. This creates a favourable backdrop for inflation-linked bonds (ILBs): If real rates fall, ILBs appreciate. If inflation surprises on the upside - as it often does - inflation break evens widen. Either way, ILBs provide carry, protection, and convexity.

Corporate Credit: Defensive carry, not blind beta
With index spreads tight and debt rising in the shadow, caution seems warranted. This cycle saw private credit and government bonds markets grow massively (2x over the past 10 years), but public credit markets have barely expanded keeping debt levels contained. Public credit markets are benefiting from the strengthening of fundamentals, with improving credit quality: higher-quality issuers dominate high-yield segments, secured bonds proliferate, and EBITDA growth buffers larger firms.

As the cycle matures and selectivity becomes essential we advocate a defensive carry strategy with a focus on quality issuers and syndicated issues, given that much of today’s leverage has accumulated in the shadows, public markets are inherently more defensive.

Thanks to wide dispersion across issuers, ratings and sectors, investors can construct credit portfolios yielding 5% with an investment grade average credit rating balancing risk and return effectively.

FX: Fiscal strength meets commodity advantage—an attractive combination
Currencies of countries benefiting from improved trade terms and fiscal consolidation stand out. The Chilean Peso is boosted by copper exports and should benefit from more market-friendly policies. The South African Rand benefits from a 7% carry, a turnaround dynamic and is supported by gold and transition-metal exports while being an oil importer. The Australian Dollar combines the benefits of a resilient economy, a relatively hawkish RBA, exposure to the potential Chinese fiscal plan and world-leading production in sought after commodities and critical materials.

Conclusion
We are living through a financial paradox: a late cycle that refuses to slow down. Fiscal power, AI investment, and the politics of national sovereignty are shaping the investment landscape. Fiscal expansion is not dead, nor is inflation.

In such a world, traditional risk-free assets face inflation risk. Risk assets hedge inflation and capture nominal growth. With supply-chain tensions and fiscal shocks keeping equity-bond correlations unstable, cross-asset agility becomes critical. The most attractively priced hedges can be found in credit default swaps, the Japanese yen and gold.

Valuations demand selectivity, not retreat. The investment playbook must evolve. Passive exposure to indices or regions is no longer enough. The winners will be selective, global, valuation-aware, and agile across asset classes. This is not a ‘Goldilocks’ moment. It is a forward race, one where the most responsive, not the most cautious, will come out ahead.