Back to school update: Global Outlook 2026

Economic Outlook: Fiscal stimulus to support growth, with the risk of rekindling inflation and pushing long-term bond yields higher

Growth: A resilient economy, with the “risk” of reacceleration

• Economic cycle prolonged by Fed easing, fiscal stimulus from the Big Beautiful Bill, and diminishing policy uncertainty.
• Additional measures may follow ahead of the mid-term elections in November, including direct transfers, increased pressure on the Fed, and bank deregulation.

Inflation: Sticky and above target for a fifth consecutive year, with upside risks

• Cooling job market offset by slower immigration, sustaining wage pressures.
• Tariff pass-through increasingly contributing to price pressures.
• Loose financial conditions and expected fiscal stimulus in 2026 adding further inflationary momentum.

Fixed Income Strategy: Short Rates/ Long Inflation

• Avoiding the short end of the curve: Markets price a terminal rate at 3% in 2026, -which is likely excessive given the growth and inflation outlook.
• Long-term rates at risk: heavy supply to finance large deficits in a non-recessionary environment, persistent inflation pressures, and growing concerns over US policy credibility, implying a sustained term premium.
• Inflation-linked bonds favoured: Real rates remain elevated relative to the debt burden, while market-implied inflation appears too low given underlying structural forces.

Equity Strategy: Neutral US equities

• Supportive but less forgiving backdrop: Growth remains resilient, underpinned by fiscal stimulus, loose financial conditions, and AI capex. Yet valuations have soared over the past year, compressing the margin of safety.
• AI capex cycle is still backed by strong balance sheets and profitability, while adoption is rising fast.
• Positioning: Active sizing of tech hyperscalers, contrarian picks among perceived AI losers (software, financial services/ infrastructure), and targeted exposure to laggards in healthcare and staples.

Currency Strategy: Short term positive/ long term negative dollar

• Unfunded fiscal largesse, fading Fed credibility, and hedging flows are all contributing to continued downward pressure on the Dollar. However, over the short term, better macro momentum from the US could support the US Dollar.

Economic Outlook: Growth sustained by fiscal policy and national sovereignty spending

• Fiscal activism as the main support: NextGeneration EU funds will continue to flow to the periphery, France has delayed fiscal consolidation, and Germany’s historic Merz plan is gaining traction.
• Structural reforms still uncertain: Progress on deeper financial integration, single-market efficiency, joint production, and procurement (notably in defence), and infrastructure investment remains to be seen.
• Disinflation losing momentum: Despite deflationary pressures from China, weak productivity and labour market resilience should slow disinflation. Yet while inflation is expected to remain below target while policy rates are at 2%, the ECB policy put can easily be triggered to help weaken the euro and restore competitiveness.

Fixed Income Strategy: Caution on rates, selective on credit

• Long-end core rates at risk: An ECB on hold anchors the front-end, but increased supply, persistent deficits, and accelerating growth are pressuring the long end.
• Sovereign spreads too tight: Fiscal slippage is not fully priced in and should lead to wider spreads, particularly for France.
• Real rates remain attractive: Close to 15-year highs while market-implied inflation expectations remain low, leaving real yields attractive.
• Selective credit positioning for defensive carry: Spreads are tight, but dispersion remains high, offering alpha opportunities to benefit from a robust risk adjusted carry.

Equity Strategy: Time for alpha, not beta

• Easing tariff, FX headwinds and German stimulus, support Europe, while offering diversification in AI-driven markets, with supportive valuations.
• Quality stocks relative to the rest of the market are trading near historical lows after the rotation into value and domestic names, while fundamentals (especially in healthcare, technology, and branded consumer goods) remain promising or even strengthened for some issuers.
• Exposure centered on industrials benefiting from long-term themes/strengths: Electrification/Reindustrialization/Aerospace.

Economic Outlook: Emergence of a multipolar world will have beneficiaries

• China: Policy remains focused on technology and AI diffusion into manufacturing. With no new response to housing stress or youth unemployment, additional fiscal stimulus will be needed to stabilise growth at around 4%.
• India: Macro momentum should remain strong under Modi’s pro-business agenda, with robust GDP growth and contained inflation. Downside risks stem from tariffs, which may pressure the currency and marginally weigh on growth.
• Latam: Mexico should continue to benefit from US nearshoring and stable political ties. In Brazil, despite still-elevated real rates and political uncertainty ahead of the 2026 elections, attractive valuations and declining rate prospects support a constructive medium-term outlook, underpinned by rising oil production, a strong agricultural sector and potential political change.

Fixed Income Strategy: Carry and local debt

• We remain selective, with a preference for local debt in countries offering attractive real yields, such as Brazil, Mexico, and parts of Eastern Europe.
• We also maintain diversified exposure to hard currency EM debt, especially special situations, which should benefit from attractive yields and specific situations.

Equity Strategy: Focus on earnings appreciation and innovation

• EM tailwinds remain supportive: softer USD, rate cuts, improving governance and industrial policies, clearer trade dynamics, resilient earnings, and attractive valuations versus their developed market counterparts (~40% P/E discount relative to the US and 32% to developed markets). After a strong rebound in 2025, selectivity and discipline will be key in 2026.
• Asia remains at the core of our exposure, focusing on the AI value chain notably through high-conviction positions in SK Hynix and TSMC, key enablers of the global AI build-out.
• Brazil and Mexico offer diversification via underpenetrated, high-growth segments (banking, healthcare, and e-commerce) and high dividends plays (finance and utilities).
• India’s 2025 underperformance is opening more attractive entry points in quality domestic franchises in banking, insurance, and real estate, at reasonable valuations.

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