Equities: A growing case for diversification

2025 was another year of very solid returns for equity markets. While US equities have performed well, when measured in a common currency they have not been the best performing market. Changing fiscal policy has helped European and Japanese markets fare much better. Likewise, emerging markets have performed well as the USD has weakened. We think those trends will likely persist into 2026 and see plenty of opportunities still outside of the US.

We’re not saying US markets should be avoided. Far from it. While US equity markets remain highly concentrated, we are very wary of betting against the AI narrative that continues to defy expectations, led by companies with strong fundamentals. Still, prudent risk management suggests we should be very mindful of those concentration risks. The more bullish investors are in playing the US AI dominated narrative, the more those same investors can benefit from diversifying their portfolios, in our view. 

Broadly, we expect 2026 to be characterised by a resilient growth backdrop that improves moderately across the globe. As our Strategy & Insights team points out, corporates are in resilient shape. They have not taken on excess leverage like they have done in previous cycles. Geopolitical risks are likely to remain elevated compared to previous decades but also likely lower than we have experienced in 2025. Greater confidence among corporates should lead to great capital spending plans, which potentially leaves scope for an improved credit cycle next year.

Easier policies from the Federal Reserve (the Fed) and Bank of England (BoE) mean those two central banks gradually catch up with the easing the European Central Bank (ECB) has already engaged in. This should provide some support to the consumer who is still sitting on plenty of savings. The scope for a positive consumer surprise is greatest in Europe and lends further support to thinking more positively about domestic exposure in that region.

We share the thoughts of our experts across our UK, European, Global, Asian, and Emerging Markets Equities teams, as well as the views from our ETF team. Please read on for their insights and analysis.

Global equities: Navigating uncertainty with cautious optimism

Stephen Anness, Head of Global Equities

Global equity markets have continued to make strong progress, reflecting resilient corporate earnings, particularly in tech and AI-driven sectors, but also raising concerns about stretched multiples amid restrained global growth. We continue to focus on the undervalued and underappreciated opportunities globally.

While economic growth looks to be modestly improving heading into 2026, the outlook remains fragile and uneven. Inflation expectations are easing but remain uncertain, prompting cautious rate cuts from central banks. The Fed and ECB are expected to further lower rates, which should support risk assets.

Geopolitical risks continue to exist. US policy uncertainty (especially around tariffs and immigration) could further disrupt trade and supply chains, while tensions in the Middle East and Asia may impact energy and semiconductor sectors. The potential for a US-China trade war and shifting alliances adds to volatility. 

Our focus remains on bottom-up stock picking, and we continue to see idiosyncratic opportunities across defensives, cyclicals, and the market cap range. We favour a broadly diversified portfolio of businesses by geographic and industrial exposure that seeks to avoid excessive style or factor risk. We believe it is imperative for active managers to remain attentive to changing macro and economic circumstances, which may provide investment opportunities.

Asian and emerging market equities: Selective exposure in a rebounding asset class

William Lam, Co-Head of Asian and Emerging Markets Equities

Asia and emerging markets are good diversifiers for US- and EMEA-based investors heading into 2026. While geopolitical risks persist, markets reacted well to two main developments: the fact that the US-China relationship appeared to stabilise through 2025, and the realisation that Asia offers relatively cheap exposure to the AI supply chain.

Valuations are no longer as compelling given 2025’s strength in share prices. However, the persistent discount to US markets and wide dispersion across sectors and regions reinforce the case for active stock picking. Improvements in shareholder return policies and earnings visibility add to the appeal.

North Asia remains central to AI-related growth, with leading manufacturers and technology firms supplying critical infrastructure. India, Southeast Asia, and Latin America continue to benefit from rising consumer demand, digital adoption, and expanding middle classes. Well-capitalised financials offer exposure to income growth, while commodity producers play a strategic role in the energy transition. 

Despite signs of exuberance in parts of tech and — to some extent — India, we are excited by the opportunities in out-of-favour markets such as Indonesia and Thailand, and by the possibility of Chinese consumer confidence finally picking up after a long downturn. We are also very encouraged by clear improvements in returns to shareholders across our markets, but particularly in Korea and China. A selective, risk-aware approach is essential at this stage of the cycle. With healthy balance sheets and structural growth drivers, Asia and emerging markets present differentiated return potential and possible diversification benefits for global portfolios.

European equities: Low political expectations could lead to opportunities

Oliver Collin, Co-Head of UK and European Equities

Last year, we highlighted how pessimistic investors were towards European equities. A combination of low expectations and depressed valuations, largely due to German political uncertainty, meant not much had to go right for the asset class to do well. Since then, we’ve had the Merz-led German pivot and the start of greater defence spending. 2025 returns have been very strong, even more so on a dollar basis.

Is this as good as it gets? It seems to us the set up today isn’t so different from a year ago. This time French politics are at the forefront of investors’ minds, and there’s building anxiety caused by the lack of German fiscal spending to date. Whilst we’re not claiming there is a magic wand for France, we believe news flow has the potential to positively surprise the low expectations.

Regarding Germany, the budget law was only passed in September, meaning infrastructure spending will accelerate from late 2025. With tariff uncertainty fading and fiscal support accelerating, GDP and EPS growth prospects are improving. Low expectations are typically a strong backdrop for future investment returns. This bodes well for European stocks, an asset class long ignored by many.

UK equities: Pessimism is laying the groundwork for possible improvement 

Martin Walker, Co-Head of UK and European Equities

In addition to providing diversification benefits for international investors, UK equities delivered strong returns in 2025, despite constant concerns over stubbornly high inflation, low growth, and worsening government finances. As a result, the risk premium for the asset class remains elevated with markets more focused on what can go wrong from here. 

Not all is bad, however. Lower rates could certainly help, encouraging reluctant households to start spending again. UK households are sitting on savings equivalent to 14% of GDP which could be deployed as they get more confident. Private sector regular wage growth is 4.2% today versus its peak of 6.6% (a key influence on core inflation), which reduces reasons for the BoE not to cut rates. 

We see interesting opportunities in utilities (especially ones set to grow strongly) and internationally orientated consumer staples, many of which are at attractive valuations compared to their overseas counterparts. Healthcare remains out of favour for many, so it’s an opportunity we want to take advantage of. While already performing strongly, domestic UK banks are still well placed to deliver strong returns.

Global small-cap equities: A solid backdrop for cross-regional opportunities

Michael Oliveros, Head of Global Small Cap Equities

The dominant macro narrative in our view remains cantered on the interplay between monetary policy, labour markets, and tariff stability and impact. The US economy has shown robust nominal growth, but market optimism may outpace fundamentals, risking a need for follow-through to sustain valuations. Risks include delayed policy easing failing to support labour markets. Conversely, a “melt-up” scenario could occur if rate cuts and fiscal stimulus boost confidence beyond AI-related sectors.

Europe faces headwinds from weak demand, strong currency, and Chinese competition. However, a credit cycle may emerge if policy mistakes are avoided, supported by strong household and bank balance sheets. Asia is increasingly independent, with domestic demand and governance reforms aiding Japan and Korea, while China remains uncertain with its export market oversupplied and competitive. China’s anti-involution policies may help consumption recovery, but slowdown risks persist, and further stimulus is likely in late 2025.

In a fragmented, less globally integrated world, nimble companies adapt supply chains and seize new opportunities more effectively as larger companies’ scale advantages may diminish. This environment is constructive for small caps. The optionality embedded in small caps is as attractive as we have seen in recent years, and the breadth of opportunity across regions and sectors is expanding.

ETFs: Options for growth and diversification potential

Chris Mellor, Head of Equity Product Management

The US will always account for a sizable proportion of most investors’ portfolios, even in times when conditions may favour other regions, as framed in the 2026 Investment Outlook from Invesco’s Strategy & Insights team. Investors may consider low-cost passive exposure to this core market through ETFs. Those who are concerned about concentration risk within US large caps might consider smart beta alternatives such as equal weighted ETFs, which  offer a more balanced approach than market-cap weighting and include an automatic “buy low, sell high” rebalancing methodology.

European and global equity exposures may also warrant an equal weight approach, or alternatively an actively managed strategy. Active ETFs are among the fastest growing segment in the European-domiciled ETF market and may offer a choice of regional exposure to Europe, global and emerging markets. Active ETFs generally aim to outperform the broad market over the long term.

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