Explore what could go right or wrong with three mid-year outlook forces

The world has changed structurally from the pre‑COVID era. Markets are contending with rolling shocks — geopolitical, energy, inflation and technology transitions — that can reprice risk quickly. That is the “pressure.” The “promise” is that dislocations can create entry points for long‑term investors who are prepared, diversified and disciplined.

We expect three forces to remain dominant in investment markets through 2026 and beyond: global fragmentation, inflation risk and a continuing AI supercycle. For private investors with global footprints — homes, businesses, spending needs and assets across currencies — these themes matter because they influence not only financial returns, but also purchasing power, drawdown risk and the effectiveness of portfolio diversification.

1) Global fragmentation: Energy, security and being selective in EMEA markets

A defining feature of the fragmentation taking place across the world’s economies and markets is renewed dependence on chokepoints and industrial policy. Energy is the most immediate example. The Strait of Hormuz typically carries 20 million barrels of oil per day — about one‑fifth of global petroleum consumption and nearly one‑quarter of seaborne oil trade. About 20% of global liquid natural gas (LNG) shipments use the same route. When that corridor is disrupted, the inflation impulse can be swift.

In the recent shock, oil rose more than 60% and European LNG prices surged nearly 100% in two days, highlighting Europe’s sensitivity to energy pricing. Europe faces a particular competitiveness challenge: regional electricity prices are double to quadruple those in the United States, and energy volatility can widen that gap. Policy constraints further amplify the issue: the European Central Bank and the Bank of England may be pushed to maintain or even tighten interest rates to address inflation, despite weak domestic growth, which can pressure growth-sensitive assets such as equities, high-yield bonds and commodities.

Europe also faces constraints in innovation and financing. Research and development (R&D) spending at is ~2.2% of gross domestic product (GDP), below the United States (3.6%) and Korea (5.2%), and European productivity is at ~77% of U.S. levels. Europe’s share of global foreign direct investment (FDI) flows has halved over five years, and venture investment is ~0.05% of GDP, roughly one‑tenth the U.S. level.

Semiconductors are the second strategic chokepoint. Advanced chip production is highly concentrated, with Taiwan producing more than 90% of the world’s advanced semiconductors. A severe disruption there could be a ~‑5% shock to global GDP growth, illustrating why “trusted supply chains” and industrial resilience are becoming structural investment drivers.

Finally within fragmentation, a more constructive scenario is “selective fragmentation” — a shift toward resilience that still preserves trade and capital links among trusted partners.

Actions we suggest

• Don’t avoid Europe, but be selective: Portfolio selection may need to focus on areas tied to multi‑year security and infrastructure investment rather than broad-based support for all assets.
• Benefit from the security imperative: The need for countries across the EMEA region to invest in their own security—be it military defence, supply chain, infrastructure, or technological security—is one of the clearest takeaways from the geopolitical turbulence in 2026. Investing in companies, whether domestically or internationally, that aid in those endeavours is sensible in our view.

2) International opportunity for EMEA investors: Emerging markets and strategic supply chains

Fragmentation of global markets also reshapes capital flows. Industrial policy and security-driven regulation can segment markets and concentrate opportunity in regions with resources, manufacturing scale or strategic geography.

We are positive on emerging markets, given their improved fundamentals and support for current company valuations. In equities, emerging markets outperformed developed markets by ~11 percentage points in 2025, and emerging market corporate earnings are expected to grow over 40% in 2026. In bonds, emerging market sovereign yields are above 7%, and valuations are below longer-term averages.

Latin America is strategically relevant to the next investment cycle, with more than 40% of global copper and nearly 60% of known lithium reserves, positioning the region as an important supplier to electrification and AI-related demand. East Asia remains central to AI infrastructure supply chains, with ~75% of global memory capacity concentrated in South Korea and rare-earth dominance in China (~70% mining and ~90% processing). If AI capital expenditure stays strong, these bottlenecks can command pricing power, though geopolitical risk must be taken into account.

Actions we suggest

• Be targeted in emerging market investment: Opportunity is strongest where macro buffers and policy credibility are improving, and where economies benefit from resource demand or supply-chain relocation — as is the case in South Korea, China and Latin America.

3) Inflation: Protect your purchasing power and diversify beyond equities and bonds

Inflation is a persistent, often silent threat — especially when shocks arrive in succession and become normalised. For investors, the risk is not only higher inflation, but higher inflation volatility. This can increase the correlation between equities and bonds, thereby weakening the protection a traditional portfolio expects from bonds during falls in equity markets.

Several figures underscore the purchasing-power problem:

• U.S. consumer prices have risen more than 25% in total since the start of the decade.
• Each sustained $10/barrel increase in oil adds ~30–35 bps to inflation; a $40/barrel move implies roughly ~1 percentage point higher inflation.
• Many clients hold nearly 20% or more of their assets in cash and very short-maturity fixed income, which may not preserve the real value of their capital after inflation and taxes are taken into account.

Actions we suggest:

• Stress-test your goals, not just markets: Model how inflation, interest rates and stock market falls could affect your future spending and legacy objectives, taking account of taxes and cash flows, too.
• Add real assets to your portfolio: Commodity-linked equities, infrastructure and real estate are potentially inflation-resilient exposures. Real assets together can represent up to ~5% of a portfolio. Natural-resources equities have characteristics including a ~5.5% total shareholder yield and ~15x P/E.  Global infrastructure enjoys ~8%–12% historical annualised returns, with power now accounting for ~60% of the benchmark (up from 20% a decade ago).
• Use diversifying strategies: Alternative investment strategies that have historically demonstrated low correlation to traditional equity markets, such as macro and relative value strategies, can potentially act as portfolio stabilisers. Macro hedge funds notably had a ~9% return in 2022 — the year that stock markets saw their worst performance since the 2008 global financial crisis.
  
  Multi-currency investment and a 3-6% allocation to gold might also be considered as a means to diversify risk-adjusted return.

4) AI: Participate through infrastructure and bottlenecks

AI is the most durable “promise” theme — a global investment cycle already showing up in activity and trade flows. Taiwan, a key player in AI-related technology, saw GDP growth of more than 7% in 2025 and a record $640 billion in exports. Korean exports surpassed $700 billion with ~one-quarter tied to semiconductors. Combined capital expenditure by major U.S. tech leaders is expected to be above $650 billion to the end of 2026, much of it AI-related.

Actions we suggest:

• Focus on the ‘picks-and-shovels’ players: Invest in areas that are critical to building the world’s AI infrastructure such as data centres and networks, semiconductor supply chains, power generation, transmission and storage, rather than relying on a narrow set of “AI winner” equities such as the big-name AI platforms.
  
• Look at AI opportunities in private markets: There are some spillover impacts in private markets, given direct lending exposure of ~21% to software (rising to ~40% including tech and business services) and weak profitability in some parts of the legacy software market. We encourage selective private-market exposure to emerging applications, while avoiding those business models most vulnerable to disruption.

Questions to consider in your portfolio

• Cash: Given inflationary pressures, is excess cash in your portfolio unintentionally eroding your purchasing power?
• Stress testing: Has your portfolio been tested for shocks in local and global energy markets, inflation volatility, and foreign exchange risk?
• Diversification: Is your portfolio sufficiently diversified across a range of asset classes (including real assets, private markets and alternative investment strategies) to help reduce the impact of falls in any single market and help maximise your return potential?
• EMEA allocations: Are your local market exposures concentrated in areas supported by security and infrastructure investment cycles?
• Artificial Intelligence: Is your AI investment exposure broad and focused on infrastructure and bottlenecks — while avoiding the most disruption-prone models?

Bottom line:  The current ‘Promise and Pressure’ investment environment calls for preparation over prediction: stay diversified globally, be selective in Europe, intentionally build resilience against persistent inflation, and participate in AI through the infrastructure build-out that underpins the supercycle. This includes recognising that opportunities that Latin America and East Asia present in AI-related demand.

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