View from the Bridge: Positioning for Opportunity in 2026
- Asim Javed
- 6 days ago
- 12 min read
Updated: 23 hours ago
Navigating Opportunity Amid Uncertainty
The year 2026 has commenced against a backdrop of heightened geopolitical volatility, with markets experiencing sharp fluctuations driven by policy uncertainty, trade tensions, and shifting global power dynamics. Despite this turbulence, we believe the environment is becoming increasingly favourable for emerging markets, commodities, and tangible assets. Investors will need to navigate a series of structural shifts unfolding across economies, sectors, and regions — from evaluating whether the enthusiasm surrounding artificial intelligence has pushed equity markets beyond their fundamentals, to determining how best to construct portfolios resilient to the realities of a more multipolar world.
Our Central Thesis for 2026 Rests on Five Key Pillars:
The US dollar is expected to remain under pressure, while geopolitical tensions will continue to influence currency markets, the broader trend towards de-dollarisation is likely to intensify, offering a significant tailwind for emerging market assets and non-dollar-denominated investments. Confidence in the Federal Reserve’s policy trajectory appears weaker than in other major central banks. Ongoing structural challenges in US fiscal policy — combined with anticipated Fed easing and narrowing growth differentials — suggest further depreciation of the dollar, barring a major geopolitical shock. Simultaneously, investors are increasingly seeking stores of value beyond the dollar, a shift that particularly benefits emerging markets.
Commodities appear to be entering a sustained bull market, underpinned by persistent supply constraints, the ongoing energy transition, and heightened demand associated with AI infrastructure and data centres. Despite recent market fluctuations, the long-term investment case for real assets remains robust, particularly as a hedge against currency debasement.
Fiscal dominance is becoming more prevalent in developed markets, with higher deficits and debt-financed expenditures contributing to an expanded money supply and mounting inflationary pressures — most notably within the services sector. This evolving economic backdrop reinforces our strategic preference for real assets.
Short-duration bonds currently present a more attractive risk-reward profile relative to long-term developed market sovereign debt. Principal component analysis suggests increased sensitivity at the long end of the yield curve due to supply factors, while limited Treasury coupon issuance should keep term premia elevated.
AI adoption is set to accelerate, extending beyond the technology sector into financial services, manufacturing, logistics, and healthcare. In healthcare, AI is transforming diagnostics, personalised medicine, and patient care; in finance, it is enhancing risk assessment and fraud detection. We view the AI adoption cycle — and its associated productivity gains — as still in its early stages, with substantial room for growth across industries. This helps explain why markets continue to support elevated valuations across the AI value chain, encompassing core developers, infrastructure and platform providers, and semiconductor manufacturers. However, the rapid expansion of AI will place significant pressure on global energy networks, with an estimated USD 21 trillion of investment required in power grids by 2050, including approximately nine million kilometres of new transmission lines.
While geopolitical uncertainties and the approaching mid-term elections may introduce episodes of volatility, these disruptions are expected to present tactical opportunities rather than derail overarching trends. Consensus forecasts suggest approximately 12% upside potential for the S&P 500, targeting levels near 8,000. Nonetheless, we anticipate that 2026 will demand a heightened focus on active risk management across regions, sectors, and the yield curve, given the increased dispersion in market dynamics.
I. Dollar Weakness & The Emerging Markets Opportunity
The US dollar’s depreciation, which accelerated in the second half of 2025, is expected to persist throughout 2026. The Bloomberg Dollar Index has already declined by 8.5% from its peak at the start of 2025, and market consensus suggests the DXY could fall towards 88 as the year progresses. This outlook reflects a confluence of structural pressures, including monetary policy divergence, fiscal imbalances, and shifting global capital flows — all of which are weighing on the greenback.
Several key dynamics underpin this trend. The Federal Reserve is forecast to cut interest rates by 50–75 basis points in 2026, narrowing the differential with other major central banks, some of which may adopt a neutral or tightening stance — notably the Bank of Japan. At the same time, the US fiscal position is deteriorating, with the budget deficit potentially nearing 7% of GDP. This fiscal trajectory is expected to contribute to a 2.6% to 3.6% decline in the broad value of the dollar. Meanwhile, the narrative of ‘US exceptionalism’ is losing traction, as trade policy uncertainties and relatively slower economic growth reduce the performance gap between the US and regions such as Asia.
Global liquidity dynamics are also shifting in favour of non-dollar assets. This trend is reflected in the United States’ worsening Net International Investment Position (NIIP), which stood at –$27.61 trillion at the end of Q3 2025. US residents held $41.27 trillion in foreign financial assets, while foreign investors owned $68.89 trillion in US assets — highlighting the scale of the country’s growing net liability position. As capital continues to flow into alternative markets and currencies, the dollar’s structural headwinds are likely to intensify, reinforcing the case for diversified currency exposure in global portfolios.
Emerging markets are set to benefit significantly in 2026, as a softer US dollar and lower interest rates draw capital towards non-dollar assets. This opportunity is reinforced by attractive valuations, solid earnings growth, and relatively low investor exposure — particularly in technology and AI-linked sectors, where there is room for multiple expansion. India stands out with strong policy frameworks and favourable trade agreements that support resilience, while China’s increased policy support and liquidity measures are expected to stabilise activity and create space for further stimulus. China’s ongoing export of deflation, combined with rising export activity, is also likely to support AI-related industries as global capital seeks more competitively priced opportunities.
In China, efforts to curb intense price competition are beginning to ease deflationary pressures, though a full recovery will require stronger demand-side measures. India, meanwhile, is expected to maintain its pro-growth trajectory in 2026, supported by robust domestic demand, favourable demographics, and recent tax cuts. With inflation remaining benign, the case for further rate cuts is strengthening, which could provide an additional boost to consumption and investment. After a relatively subdued 2025, Indian equities may be better positioned for a rebound, particularly in sectors aligned with domestic growth and digital transformation.
II. Commodities & Energy: Structural Demand Meets Supply Constraints
Amid pronounced volatility in early 2026, commodities appear to be entering a structural bull market, supported by persistent supply constraints, the global push for energy transition, and surging demand from AI infrastructure development. The Bloomberg Commodity Index has risen by 14% over the past year, with gold appreciating by 77% and copper climbing 44%, reflecting strong investor appetite for tangible assets amid ongoing economic uncertainty. Base metals, particularly copper, remain in focus due to significant supply disruptions totalling around 800,000 tonnes across 2025 and 2026. Inventories outside the US are exceptionally tight, while COMEX copper stocks are near decade highs, keeping prices elevated — with forecasts pointing to levels above $12,000 per tonne in 2026. Structural demand is being driven by the expansion of electricity grids, the electrification of transport and industry, and the rapid growth of data centres and AI infrastructure, which are expected to lift global copper consumption by 3–4%.
COMEX copper inventories have surged over 380% since 2024 to 534,000 tonnes, while LME stocks have halved, as traders reallocate metal from London and Shanghai to New York in anticipation of potential US tariffs of 15–25% on refined copper, expected to be decided in June 2026. This has created a temporary glut in the US and artificial tightness elsewhere, distorting global price signals. Analysts at Goldman Sachs anticipate that once tariff uncertainty is resolved, much of this copper will flow back out of the US, likely triggering a short-term price correction before structural tightness reasserts itself. Over the longer term, Bloomberg NEF projects that copper demand will triple by 2045, driven by AI adoption and the energy transition — suggesting that current inventory builds are more reflective of trade policy hedging than actual demand weakness. Against this backdrop of supply-side constraints and intensifying demand, the outlook for real assets remains constructive, with investors increasingly seeking exposure to base and precious metals, as well as energy commodities, for both diversification and protection against inflation and geopolitical risk.
The convergence of supply disruptions, energy transition ambitions, and technology-driven demand points to sustained strength in commodity and energy markets throughout the year.
III. Fiscal Debasement & The K-Shaped Economy
Developed Market Fiscal Dynamics
Fiscal policy across developed markets is increasingly marked by widening deficits and rising debt-financed expenditure — a trend that appears likely to persist. While this expansionary stance may support short-term growth, it is raising concerns about long-term fiscal sustainability and the risk of entrenched inflation, particularly within the services sector. This is a defining feature of the current K-shaped recovery, where economic outcomes are diverging sharply across income groups. In the United States, the fiscal deficit stands at –5.36% of GDP, with debt servicing costs exacerbated by elevated interest rates. According to the Congressional Budget Office (CBO), only a significant reduction in the Federal Funds Rate — potentially to as low as 1% — would make the debt burden more manageable.
Over the next decade, the US primary deficit is projected to hover around $12 trillion, necessitating continued borrowing unless offset by either increased revenues or reduced government spending. Inflationary pressures remain concentrated in the services sector, as evidenced by a persistent 2.6% year-on-year rise in US Core CPI, despite easing in goods prices. The interaction between expansive fiscal policy and constrained monetary policy continues to fuel inflation, contributing to a bifurcated economic environment. In this landscape, asset holders are increasingly advantaged, while wage earners face ongoing cost-of-living pressures, exacerbating inequality and social discontent.
This dynamic is also reflected in a rising term premium, as investors demand greater compensation for the perceived risks associated with fiscal sustainability and inflation. As a result, any decline in long-term US Treasury yields is likely to be limited and potentially reliant on active yield curve control. These developments underscore the mounting challenges facing developed economies as they attempt to balance growth imperatives with fiscal discipline. The path forward will require careful coordination between monetary and fiscal authorities to mitigate inflationary risks while preserving economic stability.
Favouring Short Duration
Principal Component Analysis indicates that the long end of the US Treasury curve is highly sensitive to supply dynamics. With limited coupon issuance, there is a risk that the US dollar could weaken as demand for coupons increases. In this environment, longer-dated bonds appear less attractive, reinforcing the case for favouring short-duration strategies. This has contributed to a widening spread between two-year and ten-year Treasury yields, intensifying bear steepening and exerting downward pressure on positions with greater duration exposure.
Given these dynamics, we maintain a preference for the shorter end of the yield curve. Short-term US Treasury yields are likely to decline more than their long-term counterparts, driven by persistent fiscal concerns. Although the Federal Reserve is expected to cut rates by 50–75 basis points in 2026, yields on ultra-long Treasuries may remain elevated due to ongoing worries about the sustainability of government debt. Higher deficits and an increase in issuance of long-duration bonds are likely to prompt investors to demand greater compensation for duration risk, pushing long-end yields higher.
With first quarter US government financing estimated at around $574 billion and no changes anticipated in auction sizes or structure, the focus remains firmly on short-duration instruments.
US Equities: Broadening Beyond Mega-Cap Tech
The S&P 500 is currently trading at 6,917.81, with a forward price-to-earnings (P/E) ratio of 22.9x. Consensus forecasts suggest approximately 12% upside, with the index projected to reach 8,000 by the end of 2026. However, the path to this target is unlikely to be linear. A period of rotation within the technology sector and among Nasdaq constituents is expected in the first quarter, allowing markets to consolidate recent gains. Earnings prospects remain strong, with S&P 500 earnings per share (EPS) forecast to reach $320 in 2026 — a 14.2% increase — supported by broader earnings contributions beyond mega-cap tech. The forward P/E multiple has edged up to 23.0x, reflecting investor confidence in the economy’s resilience. Enhanced liquidity measures, led by Treasury Secretary Bessent and likely Federal Reserve Chair Kevin Warsh, are expected to improve financing conditions, particularly for mid-cap firms, potentially attracting increased investor interest.
Artificial intelligence is set to remain the dominant investment theme in 2026, with capital expenditure expanding beyond semiconductors into data-centre infrastructure, electrical equipment, utilities, and memory. The semiconductor sector is projected to deliver 10–15% annual revenue growth, driven by demand for accelerated computing, custom chip design, networking upgrades, and advanced memory technologies. Data-centre investment is expected to rise by at least 50% year-on-year as the need for AI-ready capacity intensifies — a trend likely to persist well beyond 2026. Utilities are entering a phase of significant expansion, driven by electrification and the surging power demands of data centres, prompting major grid upgrades. Companies specialising in power infrastructure are poised to benefit from the anticipated transition to 800-volt architecture from 2027.
Meanwhile, AI has emerged as the central technological battleground between the United States and China, with both governments viewing leadership in advanced AI systems as critical to long-term economic and strategic dominance. As both nations pursue divergent, state-led, capital-intensive strategies, meaningful investment participation will require looking beyond the most prominent technology names and into the broader AI value chain. This includes infrastructure providers, component manufacturers, and software enablers that underpin the deployment of next-generation AI capabilities. Investors attuned to these structural shifts may find compelling opportunities across a wider spectrum of sectors and geographies.
VIII. Risk Management: Geopolitical Volatility & Market Dynamics
Geopolitical Risk Landscape
The year 2026 has begun amid heightened geopolitical volatility, a trend likely to persist given the US midterm election cycle, which often introduces political uncertainty and the potential for policy shifts. Key risks to monitor include ongoing trade policy tensions, such as prospective tariff implementations and increasing trade fragmentation, both of which could disrupt global markets and weigh on corporate earnings. Regional flashpoints remain active, with developments in areas of geopolitical tension threatening commodity flows, supply chains, and investor risk appetite. Additional concerns include the growing threat of cyber-attacks on critical infrastructure, potential energy market shocks stemming from geopolitical disputes, and the impact of diverging global monetary policies, which may amplify currency and capital flow volatility. Rising populism and social unrest in several regions further compound the risk of market instability.
Recent developments in Latin America reflect a broader reorientation of global security priorities, a shift mirrored in the United States and increasingly across Europe. Heightened geopolitical competition is prompting governments to focus not only on military capabilities but also on enhancing resilience, regional stability, and control over critical resources such as energy, raw materials, grid infrastructure, and supply chains. This evolving landscape supports a “circle of influence” thesis, which posits that the United States, China, and Russia are each seeking to consolidate their respective spheres of influence. These powers are working to ensure that the systems and infrastructure within their domains align with their strategic models, reinforcing their geopolitical leverage.
This intensifying contest for influence, resources, and alignment is expected to shape capital flows and, increasingly, the use of the US dollar in intra-bloc trade. For investors, this signals that defence and security-related capital expenditure is becoming a long-term structural trend rather than a temporary response to isolated risks. This is further reinforced by Europe’s and Japan’s efforts to modernise defence capabilities and expand industrial capacity. As geopolitical dynamics continue to evolve, investors may find opportunities in sectors aligned with national security, infrastructure resilience, and strategic autonomy — themes that are likely to define the investment landscape in the years ahead.
Volatility Indicators & Options Market Insights
Market volatility indicators are currently pointing to a period of moderate uncertainty. The VIX index stands at 17.64, slightly above its six-month average, while the 12-month implied volatility for S&P 500 options is at 17.68%. These levels suggest that although concerns about market fluctuations persist, they remain well below crisis thresholds. The market appears to be pricing in a degree of unpredictability, but not to the extent that would trigger panic-driven decisions. Investors seem prepared to navigate short-term volatility with a measured approach, maintaining confidence in the broader economic outlook.
On the policy front, the anticipated appointment of Kevin Warsh as Federal Reserve Chair in May 2026, alongside Treasury Secretary Scott Bessent’s focus on real-economy outcomes, signals a shift in economic strategy. Closer coordination between the Fed and Treasury could lead to a reduction in the central bank’s direct market interventions, potentially accompanied by deeper interest rate cuts than currently expected. These measures aim to support the real economy, enhance liquidity, and stimulate employment and AI adoption — dynamics that are likely to benefit mid-cap equities and smaller businesses. As policy priorities evolve, investors may increasingly favour sectors aligned with domestic growth and technological transformation.
Conclusion: Positioning for a Year of Dispersion
While geopolitical risks and policy uncertainty are likely to generate periodic volatility, the underlying macroeconomic trends—namely dollar weakness, commodity strength, fiscal expansion, and accelerating AI adoption—offer clear directional cues for asset allocation. Although the trajectory may not be uniformly upward in 2026, it is expected to present compelling opportunities for investors who manage risk effectively and remain agile in their positioning.
Our Core Positioning for 2026:
• Add to emerging markets to capitalise on dollar weakness and improving fundamentals
• Increase exposure to commodities and real assets as a hedge against currency debasement and to capture structural demand
• Favour short-duration bonds over long-dated developed market debt
• Favour the UK for its attractive yields and strong shareholder returns
• Maintain selective exposure to US mid-caps poised to benefit from AI adoption and shifts in liquidity
• Add to S&P 500 positions, targeting a 12% upside towards 8,000, while preparing for greater dispersion across sectors and styles