We expect the global economy to accelerate in 2026. From a regional perspective we prefer European and emerging market assets.
Non-US equities, commodities, and REITs are projected to lead returns, with CLOs and bank loans offering defensive appeal, CLOs debut in the Model Asset Allocation.
Reductions in the allocations to government bonds and investment grade, as both are slightly underweight. There is an increase to high yield which remains neutral, whilst AAA-rated CLOs have an overweight allocation.
In the latest update of our quarterly Big Picture report, Paul Jackson, Global Head of Asset Allocation Research shares his Global Asset Allocation Outlook for 2026.
We expect the global economy to accelerate during 2026, supported by anticipated Federal Reserve (Fed) easing and a weaker US dollar. These factors could create a favourable environment for cyclical assets. Reflecting this outlook, we have adjusted our Model Asset Allocation: government bonds and investment-grade credit move to slightly underweight, while high yield is raised to neutral. We also introduce AAA-rated CLOs (collateralised loan obligations) into our framework, preferring them to cash within the cash equivalents category. Regionally, we maintain a preference for emerging market and European assets.
Looking ahead, many factors will shape investment outcomes in 2026. Key areas to watch include global growth, inflation trends, central bank actions particularly the Fed US mid-term elections, political developments in France and the UK, US-China relations, and ongoing geopolitical risks such as the war in Ukraine.
2025 unfolded much as expected, with financial markets benefiting from Fed easing and a weaker US dollar. These conditions supported commodities and emerging market assets, while non-US equities particularly in Europe and China were favoured over US stocks. Allocations to cash were reduced to zero, and government bonds were held at neutral, while commodities, investment grade credit, bank loans, and REITs were overweight. High yield remained underweight but was later trimmed alongside investment grade as spreads tightened. Throughout the year, we took advantage of equity market weakness to increase exposure, particularly in Europe where growth prospects improved. Gold emerged as the standout performer for the year.
Geopolitical developments shaped 2025, from trade tensions to leadership changes across major economies. In the US, policy shifts and trade disputes dominated headlines, while Europe saw a change of government in Germany and political turbulence in France. Japan’s leadership transition sparked hopes of fiscal stimulus. Looking ahead, the US mid-term elections will be the defining political event of 2026, with implications for markets and global policy.
After a steady decline since 2022, global inflation appears to have stabilised. The factors that drove disinflation falling commodity prices and easing supply chain pressures are now neutral. With economic growth expected to accelerate, rising wages and commodity prices could push inflation higher in 2026. Additionally, money supply growth is picking up, which may add to inflationary pressures over the next year or two. Inflation is likely to return as a key topic for investors in the year ahead.
Asset allocation is the process of dividing an investment portfolio among different asset classes, such as stocks, bonds and cash and so on. Bonds generally tend to be ‘safer’ investments than stocks and are, for example, seen as more defensive. Assets are allocated based on economic and monetary expectations.
Spreading the risk and number of potential opportunities across various asset classes, such as equities, fixed income and commodities. The aim of diversification is to reduce the overall risk of the portfolio.
Central banks can ‘tighten’ policy by raising interest rates. This is done to curb inflation or an overheating economy. After the pandemic, inflation rose as pent-up demand was released and supply chains issues were cleared. Russia’s invasion of Ukraine further spurred inflation due to higher energy costs. Central banks responded with a series of rate hikes, which is the tool generally used to moderate inflation.
When an asset is assigned Overweight, an analyst or investor typically thinks that it will outperform others in the market, sector, or model. Underweight is indicative of the opposite.
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