Asset class views for the year ahead
Written by Greg Fleming, Head of Global Diversified Funds at Salt Funds Management.
If the current US equity market holds its gains for the year, it will be the third year in succession to furnish an annual return approaching double the historical long-run average. Does the outlook warrant another such year in 2026? Or, will those expressing caution during this year be proven prescient?
Cautious investors, whose fundamentals-focussed market analysis led them to expect a clear re-pricing of equity risk, based on the economic disruptions (and at times, disarray) of the Trump Administration, have for now been disappointed. Momentum was the ruling tide in 2025.
Markets have swung from showing disapproval for some risky parts of the Trump agenda, to beginning to appreciate that for the next three- or four years, the US government is becoming a market-changing active player in key industries, which can potentially be anticipated to advantage.
However, this change does necessitate an investment philosophy dependent on contingencies, rather than one based on established metrics and processes. If investors are uncomfortable with it, only the defensive sectors of the market may be able to remain immune – e.g. global consumer staples. These are not the investments that attract crowding or huge publicity.
For now, agile market participants, aided by waves of politically and technologically-enthused retail believers, have restored a bull market trend. In an economy and culture now very susceptible to what Robert Shiller named “Narrative Economics[1],” key celebrity CEOs came to the aid of the Trump Administration’s credibility, via a series of summit events. Here, Technology sector leaders stood side-by-side with Trump Cabinet appointees and began to re-arrange the story into more market-friendly terms. This is now extending to Finance and Bank CEOs.
Expect more of the same in 2026, as the US government burnishes its image and extends its industry reach. Should this transpire, it would lead to broadly the same policy mix (tax and regulation cuts, plus tariffs) being re-cast in terms of the individual negotiated relationships between Corporates and Patrons in power.
Meanwhile, many analysts, having not discerned a marked improvement in either trade policy, consistency, or even in the realism of some new corporate opportunities, have remained sceptical of the sustainability of the equity gains. They point out that much is being taken on trust. Against this backdrop, US (equity) valuations have again become extremely expensive, by all traditional measures.
This uneasy equilibrium, which has been characterised as a tug-of-war between almost irreconcilable market- and worldviews, persisted throughout 2025, and will no doubt dominate much of 2026. It is partly a generational caution difference – market participants with memories of previous contractions and multi-year earnings recessions tend to be less blithe about the invincible A.I. / America Exceptionalism story.
Wall Street’s microprocessor-hungry miracle machines, versus a US Main Street mood mired in an affordability malaise. Which will prevail? We believe 2026-27 will see a climax of current contradictions and tensions, and that it will most likely involve higher volatility and uncertain overall market direction.
On the positive side of the ledger, stands the well-behaved nature of US wage growth, small upgrades to global growth forecasts, and the possibility that Technology company earnings may prove less sensitive to the economic cycle due to transformational features. So far, earnings surprises have been predominantly positive, and much reliant on the technology and associated e-commerce industry set.
It is an understandable, if optimistic, expectation, that A.I. won’t prove vulnerable to cyclical demand forces. The industry focus is squarely on building supply and assuming demand will continue to follow. Presently, tech companies are in a very profitable phase, allowing them to underwrite the datacentre and advanced microchip requirements of the digital infrastructure frameworks needed to further develop A.I. and semi- autonomous product ranges, such as humanoid robots, automated drones and cars.
The vital question is, will the array of revolutionary applications of Artificial Intelligence and Robotics be able to be straight-forwardly monetised into consumer products for the investors, and over which timeframe? A scenario that sees genuinely profitable A.I. within two to three years from now, would heavily validate the commitment of investment capital that occurred in 2024-5. If the timeframe were to stretch out to five years, many investors would become nervous.
Given that uncertainty, prudence councils continuing investing in high-quality technology and software enterprises, and instead placing the bulk of such investments adjacent to any single technology that is at the centre of ‘revolutionary earnings growth ahead’ hypotheses, which are hype-prone.
It is notable that so far, the main beneficiaries of A.I equity investment enthusiasm has been in the hardware aspects, and not much in the industries which supposedly stand to gain most from transformations. Opportunities lie there - one thinks of diagnostic technology, or remote delivery of medical therapies.
Similarly, listed real estate trailed most sectors in 2025, so if an active investment selection is made across all property types and jurisdictions, such assets presently look attractive.
Taking a brighter view of NZ equities
Whilst the New Zealand economy is still in the throes of the very difficult domestic trading environment, we believe that the easing path now well-advanced by the Reserve Bank of New Zealand, as well as the defensive nature of the industries that are heavily represented on the NZ exchange, mean that NZ equities should stay resilient.
In 2026, we anticipate incremental domestic demand improvement, alongside some probable election year pump-priming, allowing the local market to build upon its moderate recent gains. Lower savings interest rates in NZ should also draw attention to equities paying strong, sustainable dividends.
However, as the influence of US markets never leaves New Zealand unaffected, equity exposures should be carefully managed. Longer-term NZ investors or international capital will likely continue to accumulate stock in our home market. Australia, though, lacks monetary policy support for now, so may well continue lagging.
The bond diversification argument remains complex
While typically, a slowing global economy would lend itself to portfolios having a higher allocation to Fixed Income, the present situation and outlook suggest investors should err on the side of caution.
The enormity of the global demographic and economic challenges is reflected in the fiscal furores that have recently been topical in the US, the UK and France, and looks intractable, given limited political willpower to adopt fiscal discipline. Other things being equal, this reality keeps Sovereign yields higher and thereby, elevates the yields on other securities that derive a spread over a putatively “risk-free” Sovereign interest rate of a comparable tenor.
Meanwhile, corporate debt quality, which has been high, is beginning to show indications that the credit cycle is unlikely to get any easier in 2026, and it may begin to fray for weaker issuers.
So, bonds will likely again provide moderate returns next year, but there is a higher probability of marked differentiation in fixed income total returns, by specific credit type and borrower domicile.
Similarly, a return to term premia is healthy, but it can disrupt other markets if reliance on ready, cheap, long-term credit has been extended beyond what a full cycle can bear.
With this in mind, Japan will be key to watch as their domestic yields rise further, tempting Japanese capital home.
In summary
Faced with tepid growth prospects and an uncertain global landscape, diversification will be as important as ever for investment managers in 2026.
The long-term case for investing is strong, as is the short-term case. Cash and cash-like assets are losing appeal in line with falling rates, and equities should once again prove to be the growth engine of most diversified portfolios and funds. Investors will do well to be prepared for short-term pockets of volatility, particularly with tech stocks and the A.I story.
Selectivity, agility, and resilience through diversification will be what defines investment returns in 2026.
[1]Source: https://press.princeton.edu/books/hardcover/9780691182292/narrative-economics?srsltid=AfmBOooLZ_LENgvdZQd8mCZqo4JPk5VLzZlhTYwAtjw8B1mVv4gUYKc2
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