Past performance does not predict future returns. You may get back less than you originally invested. Reference to specific securities is not intended as a recommendation to purchase or sell any investment.
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Equities are supported by growth and falling rates, but index returns are likely to moderate, making more selective opportunities increasingly important.
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Macro uncertainties and the AI investment cycle will drive volatility and dispersion.
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Diversification away from US mega-cap concentration offers the best risk-reward, with Europe and emerging markets standing out.
From index-led gains to a wider opportunity set
We see great opportunities for global equity markets in 2026 as growth remains robust and interest rates fall around the world, led by a dovish Federal Reserve. However, diversification must be the key mantra and is the price of staying fully invested.
The narrow performance drivers of recent years should start to give way to a much broader set of returns across geographies and sectors, while the most obvious trades in the technology arena carry, in our opinion, too much risk relative to the reward on offer.
Three-year returns are a key benchmark for allocators and investors, and it is worth noting that we currently sit at the higher end of historic return levels for that metric for the S&P 500 and MSCI All-Country World index. It seems likely that headline, index level, returns are likely to be more muted in 2026. If true, then the best returns will be found outside the very largest cap names in the market.
Uncertainty around macro backdrop and AI investment
We believe there are two primary drivers for equity returns in 2026 – macroeconomic uncertainty around economic growth, inflation and the path of interest rates, and uncertainty around the path of AI investment and returns.
We see a high probability of a policy misstep in the United States, led by a dovish Fed Chair appointment and a path of lower interest rates. This is likely to lead to a further US dollar decline – a back-to-back event not seen since 2006/07 or, before that, 2002/04 – both periods of more muted equity returns.
At the same time as US economic outcomes and policy are in focus, the AI story will also continue to carry disproportionate weight both in terms of its contribution to US GDP growth (estimated by Barclays to be as much as 50% in 2025) and the intense capital cycle running well ahead of return on investment certainty. This will mean that news flow around AI, its development and its investment will impact equity market returns and, more importantly, levels of volatility.
We are persuaded by the argument that we are at the end of the beginning for AI. This phase of huge investment levels has led to a highly competitive landscape for large language models (LLMs) and, like all disruptive spending booms, there is a point where the spend runs way ahead of the returns. We are there now. As well as uncertainty about outcomes, there is more volatile price action – think Oracle up 40% on the day it reported results in September 2025 because of its huge AI order book, only to find the shares trading well below the pre-results level three months later as investors fear the implied debt mountain required to realise these investments.
Europe and emerging markets offer renewed opportunity
We believe that the US dollar will continue to come under pressure, the AI narrative will be volatile and unpredictable, and diversification away from the very biggest names in the market will offer the best risk/reward profile.
Our broadest positioning conviction is to diversify both geographically and within the US equity market. US equities have now risen to represent almost two thirds of the MSCI World equity index, yet US GDP as a proportion of world GDP has remained flat at around 23%.
We believe that the market is still too bearish on Europe, where we find plenty of strong investment ideas, and the prospect of a weak dollar is supportive of emerging market equities.
Europe is constantly under fire for being backward thinking on structural reform and investment, but this is changing. While a stronger euro is not ideal for many of the quality names in the market, we believe that 25 years of underinvestment is reversing, led by defence spending and power infrastructure investment.
While consumer Covid stimulus in the US has generally been spent, in Europe it has been saved – creating a consumer balance sheet fortress. Valuations are reasonable and the reverse of the Mag 7 effect is in play in Europe with the largest cap names having underperformed for some time. A relative turning point in August could herald a more lasting recovery.
Emerging markets look well-set to extend 2025's outperformance, as domestic liquidity improves, driving a return of the earnings growth premium to developed markets. Cheap and under-owned after a near 15-year underperformance cycle, emerging markets are set for a cyclical recovery, with the Fed's impending easing cycle opening the door to a near-universal reduction in interest rates across markets, whilst the end of dollar dominance removes a key headwind. India and Latin America offer two of the most compelling opportunities, albeit with very different drivers and characteristics.
In India, a rare year of underperformance has left the market on much more attractive valuations than 12 months ago, with record low foreign allocations. A clear earnings recovery is now unfolding. Latin America's opportunity is more clearly driven by heavily discounted valuations at a time when economic growth accelerates as inflation normalises and interest rates fall further.
Diversify away from the largest, most AI dependent, US names
We are unsurprised by the advance in hard assets, with gold and silver delivering a stellar 2025. It is hard to see prices pushing on aggressively, but equities linked to commodities have lagged and offer compelling opportunities. Positive action for commodities prices will also further support the emerging markets trade, particularly in Latin America. A clear structural supply/demand problem for copper also makes that a prime choice.
Within the US market, we would diversify away from the largest cap names because of concentration risk both in terms of the proportion of the S&P 500 represented by the top 10, as well as those same names having a high degree of exposure to AI spend. The outlook for the return on this extreme spend is just too uncertain and so it is impossible to make a reliable analysis of risk – anyone who tells you otherwise is too focussed on bullish news flow with little regard for careful analysis.
We do however believe that AI is a huge long-term creator of both productivity and innovation and so those companies that use it effectively across all sectors will be long term winners. Using this factor as a navigation tool for sectors like healthcare and financials is likely to create significant alpha generating opportunities.
Diversification the key to staying fully invested in equities
The outlook for 2026 in equities is a positive one, with careful and thoughtful analysis pointing to a more diversified portfolio than in recent years. Diversification is key – away from concentrated positions, themes and therefore also passive dominated pools of capital (the S&P 500 for example). The primary intersect of these three risk pools is the Mag 7, where we would remain structurally underweight. However, we predict much larger levels of relative performance within the Mag 7 and so picking the right names to avoid will be crucial. The opportunity set more broadly is increasingly powerful and we believe will generate strong alpha in the next few years.
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KEY RISKS
Past performance does not predict future returns. You may get back less than you originally invested.
We recommend this fund is held long term (minimum period of 5 years). We recommend that you hold this fund as part of a diversified portfolio of investments.
The Funds managed by the Global Equities Team:
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May hold overseas investments that may carry a higher currency risk. They are valued by reference to their local currency which may move up or down when compared to the currency of a Fund.
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May encounter liquidity constraints from time to time. The spread between the price you buy and sell shares will reflect the less liquid nature of the underlying holdings.
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May invest in smaller companies and may invest a small proportion (less than 10%) of the Fund in unlisted securities. There may be liquidity constraints in these securities from time to time, i.e. in certain circumstances, the fund may not be able to sell a position for full value or at all in the short term. This may affect performance and could cause the fund to defer or suspend redemptions of its shares.
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May have a concentrated portfolio, i.e. hold a limited number of investments or have significant sector or factor exposures. If one of these investments or sectors / factors fall in value this can have a greater impact on the Fund's value than if it held a larger number of investments across a more diversified portfolio.
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May invest in emerging markets which carries a higher risk than investment in more developed countries. This may result in higher volatility and larger drops in the value of a fund over the short term.
Certain countries have a higher risk of the imposition of financial and economic sanctions on them which may have a significant economic impact on any company operating, or based, in these countries and their ability to trade as normal. Any such sanctions may cause the value of the investments in the fund to fall significantly and may result in liquidity issues which could prevent the fund from meeting redemptions. -
May invest in companies predominantly in a single country which maybe subject to greater political, social and economic risks which could result in greater volatility than investments in more broadly diversified funds.
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May hold Bonds. Bonds are affected by changes in interest rates and their value and the income they generate can rise or fall as a result; The creditworthiness of a bond issuer may also affect that bond's value. Bonds that produce a higher level of income usually also carry greater risk as such bond issuers may have difficulty in paying their debts. The value of a bond would be significantly affected if the issuer either refused to pay or was unable to pay.
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May, in certain circumstances, invest in derivatives but it is not intended that their use will materially affect volatility. Derivatives are used to protect against currencies, credit and interest rate moves or for investment purposes. The use of derivatives may create leverage or gearing resulting in potentially greater volatility or fluctuations in the net asset value of the Fund. A relatively small movement in the value of a derivative's underlying investment may have a larger impact, positive or negative, on the value of a fund than if the underlying investment was held instead.
The risks detailed above are reflective of the full range of Funds managed by the Global Equities Team and not all of the risks listed are applicable to each individual Fund. For the risks associated with an individual Fund, please refer to its Key Investor Information Document (KIID)/PRIIP KID."
The issue of units/shares in Liontrust Funds may be subject to an initial charge, which will have an impact on the realisable value of the investment, particularly in the short term. Investments should always be considered as long term.
DISCLAIMER
This material is issued by Liontrust Investment Partners LLP (2 Savoy Court, London WC2R 0EZ), authorised and regulated in the UK by the Financial Conduct Authority (FRN 518552) to undertake regulated investment business.
It should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product. Examples of stocks are provided for general information only to demonstrate our investment philosophy. The investment being promoted is for units in a fund, not directly in the underlying assets.
This information and analysis is believed to be accurate at the time of publication, but is subject to change without notice. Whilst care has been taken in compiling the content, no representation or warranty is given, whether express or implied, by Liontrust as to its accuracy or completeness, including for external sources (which may have been used) which have not been verified.
This is a marketing communication. Before making an investment, you should read the relevant Prospectus and the Key Investor Information Document (KIID) and/or PRIIP/KID, which provide full product details including investment charges and risks. These documents can be obtained, free of charge, from www.liontrust.com or direct from Liontrust. If you are not a professional investor please consult a regulated financial adviser regarding the suitability of such an investment for you and your personal circumstances.
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