(Source: Merlea Macro Matters)

Summary Global Markets Recap: 2025 in Review

Global equity markets delivered strong gains in 2025 despite persistent macro headwinds. Developed markets posted double-digit returns, buoyed by resilient growth, accommodative fiscal policy, and an AI-driven investment boom. European equities were standout performers, supported by fiscal expansion and defence spending, while U.S. stocks hit record highs on robust tech earnings and optimism around artificial intelligence. Emerging markets benefited from a weaker U.S. dollar and improving trade dynamics, though China’s structural property sector issues capped upside. Commodities also rallied, with gold and silver reaching multi-year highs amid geopolitical uncertainty and inflation hedging.

The left chart shows European and Japanese equities outperforming the S&P 500, excluding Nvidia, since October 2022. The right chart illustrates the performance of themes like European aerospace and defence, international DM banks, Taiwan technology and India consumer discretionary. These themes have kept pace with U.S. growth stocks, highlighting the importance of international diversification and active management.

However, the rally masked underlying fragility. U.S. equity valuations stretched to extremes, with the S&P 500 trading at a forward P/E near 22.8—well above its 10-year average—and the Buffett Indicator signalling a market strongly overvalued at 230% of GDP. Concentration risk intensified as mega-cap tech names drove index-level gains, leaving markets vulnerable to any reversal in AI enthusiasm or earnings momentum.

Bond markets faced sustained yield pressures throughout 2025. Despite the Federal Reserve initiating rate cuts in September and October, long-term U.S. Treasury yields remained elevated near 4.0–4.5%, reflecting sticky inflation, swelling fiscal deficits, and term premium concerns. Rising yields eroded equity risk premiums, leaving growth stocks particularly exposed. Credit stress also emerged, with downgrades climbing and spreads widening, signalling tighter financial conditions ahead.

Late 2025 saw a cautious pivot toward easing. The Fed cut rates twice, bringing the target range to roughly 3.75–4.00%, citing labour market softness despite inflation still above 3%. The ECB and Bank of England held rates steady, prioritizing price stability amid fiscal uncertainty. Divergent policy paths underscore a complex backdrop: while U.S. monetary policy is moving toward neutral, global central banks remain wary of reigniting inflation.

Consumer sentiment improved modestly into year-end, but stress indicators remain elevated. Inflation in essentials—housing, food, and energy—continues to weigh on lower-income households, while credit conditions tighten globally. Surveys highlight a shift toward ‘wiser wallets,’ with consumers prioritising value and delaying discretionary purchases. Persistent anxiety over job security and tariffs adds to the cautious tone, even as wealth effects from equity gains support high-income spending.

Outlook for Q1 2026

The first quarter of 2026 is shaping up as a bottom-testing phase. Global growth is projected to slow sharply before stabilising mid-year. The U.S. faces tariff-related drags and a cooling labour market, while Europe benefits from fiscal support and low rates. China remains constrained by property sector stress and high leverage, despite tech-sector resilience. Monetary policy divergence will persist: the Fed may deliver one more cut early in 2026, while other central banks tread cautiously.

Markets enter Q1 with three key risks: valuation fragility, yield overhang, and consumer strain. Despite these headwinds, selective opportunities remain. AI-driven investment and fiscal stimulus could cushion downside, but investors should brace for volatility and adopt defensive positioning—favouring quality equities, high-grade bonds, and sectors resilient to late-cycle dynamics.

Tactical Asset Allocation for Q1 2026

Considering elevated valuations and persistent yield pressures, a disciplined and diversified approach is recommended for the first quarter of 2026. Key considerations include:

• Equities: Prioritise high-quality companies in defensive sectors such as healthcare and consumer staples. Maintain selective exposure to technology leaders with robust fundamentals, while avoiding excessive concentration in speculative growth segments. International markets, particularly Europe and Japan, offer relatively attractive valuations compared to the U.S.
• Fixed Income: Capitalise on favourable yield conditions by increasing allocations to investment-grade bonds. A focus on shorter duration can help mitigate interest rate volatility while preserving income stability.
• Alternatives: Incorporate real assets and commodities, including gold, as a hedge against macro uncertainty. Infrastructure investments may provide steady cash flows and inflation protection.
• Liquidity: Maintain a prudent cash buffer to take advantage of potential market dislocations and tactical opportunities.

Bonds

Fixed Income Outlook 2026 — Fiscal Stimulus and Yield Dynamics

Global bond markets in 2026 will be shaped by a tug of war between government spending and central bank policy. In the United States, the Federal Reserve is expected to keep cutting interest rates, aiming for a range of about 3 to 3.25 percent by mid-year. Lower short-term rates should pull down yields at the front end of the curve, but heavy government borrowing and concerns about debt will likely keep long-term yields higher. This means the yield curve could steepen, with short-term rates falling while long-term rates stay firm.

Fiscal stimulus isn’t just a U.S. story. Europe is boosting spending through Germany’s defence and infrastructure programs and EU-wide green initiatives. With inflation near target and the European Central Bank having little room to cut rates further, long-term European bond yields will be driven more by investor demand for compensation on risk than by policy changes.

Japan is also rolling out tax cuts and support for households and businesses, alongside big investments in technology and energy. At the same time, the Bank of Japan is moving away from ultra-loose policy, allowing 10-year Japanese government bond yields to rise.

Australia is taking a similar path, with targeted cost-of-living support and infrastructure spending, while the Reserve Bank of Australia keeps rates at 3.60 percent and signals inflation will stay above 3 percent into 2026.

These factors point to steeper curves in Japan and Australia as well.

Higher Japanese yields matter globally. They make Japanese bonds more attractive compared to U.S. Treasuries, which could draw some domestic investors back home. Rising JGB yields can also push other long-term rates higher through global portfolio adjustments, and changes in currency hedging costs may reduce foreign demand for U.S. bonds.

Credit markets remain solid but selective. Corporate bonds have enjoyed strong fundamentals and low defaults, keeping spreads tight. While yields still offer decent income, there’s little room for spreads to tighten further. Slower growth later in 2026 could pressure company profits and slow credit upgrades, so focusing on higher-quality issuers makes sense. Mortgage-backed securities look appealing thanks to housing shortages and low vacancy rates, while asset-backed securities benefit from healthy household finances. These securities also offer structural advantages if the Fed cuts rates faster than expected.

In Asia outside Japan, local currency bonds have limited upside as regional central banks pause their easing cycles. Hard-currency bonds from Asian governments and companies look more attractive, supported by improving credit quality and tight supply.

Overall, expect uneven returns across fixed income in 2026. U.S. Treasuries should see short-term yields fall while long-term rates stay firm, Japanese curves will steepen as policy shifts, and selective opportunities will emerge in credit and securitized markets.

Listed Property

The Australian real estate investment trust (A-REIT) sector has started to show signs of recovery after a tough couple of years. From 2022 onwards, property yields – known as cap rates – kept rising because interest rates and bond yields were going up. This made property less attractive compared to bonds. However, analysts believe this trend is changing. As interest rates are expected to fall through 2026, property should look more appealing again, and valuations could improve. Prime office buildings in Sydney and Melbourne are likely to lead this rebound, followed by retail properties with strong tenant demand. Industrial and logistics assets remain supported by long-term trends, even though their growth has slowed.

Another positive sign is that the gap between market prices and the actual value of properties (called Net Tangible Assets, or NTA) is getting smaller. This means listed A-REITs are trading closer to their real property values, which can boost investor confidence and attract more money back into the sector.

FY25 was a turning point. Asset values began to stabilise thanks to a more predictable economic environment. The Reserve Bank of Australia’s efforts to control inflation and keep interest rates steady helped restore confidence. Lower inflation and stable monetary policy gave A-REITs a stronger foundation to rebuild. Debt levels also improved slightly, as lower borrowing costs enabled companies to manage their finances better.

Note that most AREITs are still currently trading at a discount to NTA. Remember, too, that most derive the bulk of their income from rental streams, offering more predictable, sustainable and growing cash flows, just as one would expect from property.

This is a big change from FY23 and FY24, when rising interest rates and global uncertainty hurt valuations and pushed debt levels higher. During those years, investor confidence was shaken, and the sector struggled.

Performance in FY25 reflected this recovery. The A-REIT index returned 10.3%, slightly beating the broader market. Retail and diversified property trusts were the strongest performers, while office assets showed small gains after years of weakness. Industrial property, which had an exceptional FY24, slipped slightly as growth normalised. Vacancy rates in industrial spaces ticked up a little, and rising construction costs are making new developments harder. Still, demand remains solid, so the sector is expected to stay resilient.

Retail property is benefiting from stronger consumer spending, helped by easing inflation, wage growth, and cost-of-living support. Limited new shopping centre developments and higher office occupancy are also lifting retail demand. Office property is slowly improving, but challenges remain, including high vacancy rates and work-from-home trends.

Looking ahead to 2026, the outlook is cautiously optimistic. Lower interest rates, narrowing NTA discounts, and stabilizing values point to selective opportunities. The best approach is to focus on quality: REITs with strong tenants, low debt, and exposure to sectors with long-term growth like logistics, healthcare, and essential retail. Diversified REITs also look attractive. Office assets require caution due to ongoing risks. Investors should stay flexible and consider pairing A-REITs with other defensive income strategies to manage volatility.

Australian Equities

The Australian share market has had another strong year, but gains have been uneven. Resource stocks have surged about 25%, while the rest of the market is up only 8%. This reflects where we are in the business cycle: late-cycle conditions often favor commodities and hard assets like gold, which has jumped around 50%. Other metals such as copper, rare earths, uranium, and lithium have also risen sharply. In contrast, iron ore has barely moved, and oil prices have fallen about 15%.

Markets overall are hitting record highs, credit conditions look stable, the U.S. dollar is strong, and inflation expectations remain low. The gold rally looks more like enthusiasm than fear. Meanwhile, healthcare stocks have struggled, with CSL down 35% and others like Cochlear, Ramsay Health Care, and Sonic Healthcare also weaker. These companies remain high-quality businesses, but they are out of favour for now—creating opportunities for patient investors.

Corporate governance has been another theme, with scandals and questionable acquisitions hurting confidence in names like WiseTech, Mineral Resources, Santos, and Xero. Good governance matters because it ensures companies can recover from setbacks without harming shareholders.

Momentum and passive investing have overshadowed fundamentals this year. Large flows into index funds have pushed valuations to extremes. For example, Wesfarmers usually trades at about 24 times earnings but jumped to over 34 times, even as earnings forecasts fell. Technology stocks are even more stretched, trading at nearly 90 times earnings versus a long-term average of 49. Anything linked to “AI” attracts a premium, and with tech making up only 6–8% of the ASX, investor enthusiasm has crowded into a few names.

The rally pushed the ASX 200 price-earnings ratio as high as 20 times just months ago, far above its long-term average of 14.6 times. Year to date, the gauge is up 5.5 per cent.

 Looking ahead, earnings expectations for 2026 have improved slightly, with 5.4% growth forecast for non-resource stocks. Resources are expected to lead growth, while energy and utilities may decline. But valuations remain high: the market trades at 19.6 times forward earnings versus a 10-year average of 16.5. This leaves little room for disappointment.

Interest rates are another risk. After three cuts earlier in 2025, markets expected more easing, but recent inflation data changed that view. The RBA now sees inflation staying above target until late 2027, meaning rates could stay higher for longer. With markets priced for perfection, any shock—whether from earnings, regulation, or global credit stress—could reverse these trends quickly.

Business Cycle Correlation & Asset Tilts

We are in a late-cycle environment: growth is slowing, inflation is sticky, and interest rates may stay higher for longer. Historically, this favours defensive sectors and real assets over high-growth names.

Recommended tilts:

• Overweight: Gold and diversified miners (benefit from commodity strength), infrastructure (stable cash flows), healthcare (structural demand, attractive valuations), and quality REITs (selective exposure to retail and logistics).
• Neutral: Consumer staples and insurers (pricing discipline, steady margins).
• Underweight: High-multiple tech and consumer discretionary (vulnerable if rates stay high), and highly leveraged companies.

The key is to focus on quality businesses with strong balance sheets and reliable earnings, while maintaining flexibility to adjust if conditions change.

America

The U.S. economy is in a late-cycle phase, and President Trump’s push to “juice up” growth ahead of the midterm elections is shaping market expectations. His administration is leaning on fiscal stimulus—tax cuts, infrastructure spending, and even tariff-funded rebate checks—to boost consumer confidence and corporate activity. The goal is clear: keep the economy strong and markets buoyant going into 2026.

So far, the U.S. stock market is trading near record highs. The S&P 500 is up strongly this year, supported by optimism around AI investment and fiscal stimulus. But valuations are stretched. The market’s forward price-to-earnings (P/E) ratio is about 21.5x, compared to its 10-year average of 17x. This means stocks are priced for perfection, leaving little room for disappointment. Technology stocks are even more expensive, trading at over 30x forward earnings, while defensive sectors like healthcare and utilities are closer to historical norms. In short, investors are paying a premium for growth stories, especially anything linked to AI or infrastructure.

Interest rates remain a key variable. The Federal Reserve cut rates four times in 2025, but recent inflation data has cooled expectations for further easing. Inflation is still above the Fed’s 2% target, hovering around 2.8–3%, and the central bank now expects it won’t return to the middle of its target band until late 2027. This means rates could stay higher for longer than markets hoped. The current federal funds rate sits near 3.88%, and while another cut is possible, the risk of a pause—or even a hike—has increased.

Bond yields reflect this uncertainty. The 10-year Treasury yield is around 4.3%, elevated compared to pre-pandemic norms. Fiscal stimulus and rising government borrowing add upward pressure, even as short-term rates ease. For investors, this creates a mixed picture: lower policy rates help equities, but sticky inflation and high long-term yields limit upside for bonds and could cap equity valuations.

The effects of tariffs tend to appear with a lag, which means that U.S. trade policies could still push up inflation, thereby eroding real wages and further weakening consumer confidence. There is already talk of an emerging “K-shaped economy” in which high-income households thrive and lower-income households struggle. Business confidence also could take a hit, especially if concerns about an AI bubble lead to a large equity-price correction and softer capex. But even in this gloomier scenario, the recession would be short and shallow, because the Fed would cut rates more aggressively and fiscal authorities could intervene with additional stimulus to support economic recovery.

 Will the economy rebound? Growth is expected to remain modest, with GDP forecasts for 2026 in the 1.7–2.2% range. Fiscal stimulus and AI-driven investment should cushion the slowdown, but late-cycle dynamics—slowing job growth, margin pressure, and high valuations—signal caution. The U.S. is not in early recovery; it’s in a mature phase where risks are rising.

What does this mean for positioning? In a late-cycle environment, history favours quality and resilience over aggressive growth bets.

Recommended tilts include:

• Overweight: Infrastructure and industrials (benefit from fiscal spending), healthcare (structural demand, reasonable valuations), and select technology leaders with strong cash flow.
• Neutral: Consumer staples and insurers (steady margins, defensive characteristics).

• Underweight: Highly leveraged companies, speculative tech names trading at extreme multiples, and sectors sensitive to higher rates, like consumer discretionary.

Bottom line: Trump’s stimulus may give markets a short-term boost, but with valuations high and inflation sticky, investors should stay disciplined. Focus on strong balance sheets, reliable earnings, and sectors that can weather volatility.

Europe

As we head into 2026, Europe and the UK are navigating a period of transition. After two years of aggressive interest rate cuts to fight inflation, central banks have largely finished their easing cycles. The European Central Bank (ECB) has brought rates down to around 2%, and the Bank of England is expected to lower its base rate to roughly 3% by year-end. Inflation is cooling—close to 1.7% in Europe and 2.5% in the UK—while growth remains modest. This isn’t an early recovery surge, but rather a “soft landing” phase where economies stabilize after a slowdown.

Source: (Left) IBES, LSEG Datastream, MSCI, J.P. Morgan Asset Management. Forward P/E ratio is price to 12-month forward earnings, calculated using IBES earnings estimates. Cyclically adjusted P/E (CAPE) is price-to-earnings ratio adjusted using trailing 10-year average inflation-adjusted earnings. P/B ratio is priceto-book ratio.  

Valuations in both regions look attractive compared to the U.S. The STOXX 600 index in Europe trades at about 13–14 times forward earnings, while the FTSE 100 in the UK sits near 13 times. Both offer healthy dividend yields of 3.5–4%, making them appealing for income-focused strategies. In contrast, U.S. stocks are priced at over 21 times earnings, leaving less room for upside. Analysts expect European equities to deliver 8–11% returns in 2026, while UK markets could see 10–13%, supported by earnings recovery and share buybacks.

In Europe, defensive sectors like healthcare and utilities stand out. These businesses offer steady cash flows and resilience in a slower-growth environment. Financials, particularly well-capitalised banks, also look attractive as stable rates support margins. Infrastructure and renewable energy projects are another bright spot, thanks to government investment in green transition programs.

In the UK, global-facing sectors such as energy and defence are well positioned. Healthcare remains a long-term growth story, driven by aging populations and innovation. Infrastructure-style businesses—think toll roads, logistics, and utilities—offer dependable returns. On the other hand, domestic consumer discretionary stocks may struggle under higher taxes and slower wage growth, and speculative tech names look risky given stretched valuations.

Both regions are in a late-cycle environment. Rate cuts have already happened, inflation is easing, and growth is steady but subdued. This favours quality companies with strong balance sheets and reliable earnings over high-risk, momentum-driven plays. Investors should avoid chasing crowded trades and instead focus on businesses that can deliver consistent returns regardless of short-term market swings.

Trade tensions and tariff spillovers could weigh on European exporters. Fiscal constraints in major economies like Germany and France may limit public investment. Inflation surprises—especially from energy or wages—could slow or reverse policy easing. Currency moves (EUR and GBP) may also impact returns for global investors.

Europe and the UK offer relative value compared to the U.S., with lower valuations and higher dividend yields. The outlook for 2026 is cautiously optimistic: moderate returns, supported by stabilising fundamentals and selective opportunities. Focus on quality, income, and structural growth themes like healthcare, infrastructure, and energy transition.

Japan

Japan enters 2026 under new leadership, with a strong focus on stability and growth. The government has announced a significant stimulus package designed to boost domestic demand and ease living costs. The new Prime Minister has introduced a ¥21.3 trillion stimulus plan, which includes energy subsidies, tax cuts, and infrastructure investment. These measures aim to lift GDP growth to around 1.4% annually over the next three years. While this will support domestic demand and help offset global trade headwinds, Japan continues to face structural challenges such as an aging population and high public debt levels, which remain among the highest in the developed world.

The data underscores the challenge the Bank of Japan faces in juggling pressure from persistent food inflation against risks to the fragile economy from uncertainty over President Donald Trump’s trade policy.

Inflation is expected to ease toward 2% in 2026. Headline inflation will likely fall below 2% for much of the year due to government subsidies, while core inflation is expected to remain slightly above 2%, supported by wage growth and resilient service prices. Japan has moved past its long-standing deflationary era, but inflation will remain moderate rather than accelerating sharply.

Japan’s bond market is undergoing a major shift as the Bank of Japan ends its yield curve control policy and reduces bond purchases. The 10-year government bond yield recently reached 1.85%, its highest level since 2008, and the 30-year yield is now above 3.4%. Policy rates are expected to rise gradually to around 0.75–1.0% by mid-2026 before stabilizing. Higher domestic yields could encourage Japanese investors to repatriate funds, which may have ripple effects on global markets.

Japan is currently in a late-cycle expansion with reflationary undertones. Growth is modest, supported by fiscal stimulus and wage gains, but structural constraints such as demographics and debt continue to limit upside potential. Equity valuations remain reasonable at 15–16 times forward earnings, which is well below U.S. market multiples, offering selective opportunities for long-term investors.

Japanese households hold over ¥2,000 trillion in financial assets, providing a strong buffer for consumption and a reliable source of domestic funding for government bonds. However, as the population ages, these savings will gradually decline, influencing long-term growth and interest rate dynamics. For now, this wealth supports economic stability and cushions against external shocks, making Japan’s financial system more resilient than many of its global peers.

In summary, Japan’s outlook for 2026 is cautiously optimistic. Fiscal stimulus and wage growth will support domestic demand, inflation will stabilize near 2%, and bond yields will remain elevated as monetary policy normalizes. Investors should expect moderate growth and focus on quality equities and income strategies to navigate this evolving environment

In conclusion, Trump’s victory creates a dual-edged scenario for Japan. While exporters may see immediate benefits, the BOJ could face tough decisions in balancing inflation control and economic stability. A pivot in monetary policy, including potential rate hikes, seems increasingly likely in the months ahead.

China

China enters 2026 with a renewed sense of direction. After several years of uneven growth and property market stress, the government is doubling down on technology and innovation as the next engine of expansion. Massive investments are being channelled into semiconductors, artificial intelligence, cloud computing, and green energy. This strategic pivot aims to reduce reliance on foreign technology and position China as a global leader in advanced manufacturing and digital infrastructure. These initiatives are expected to drive productivity gains and create new opportunities for investors in high-tech sectors.

At the same time, the property market—long a source of volatility—is showing signs of stabilisation. After years of falling prices and developer defaults, recent policy measures have helped restore confidence. Authorities have eased mortgage restrictions, provided liquidity support to developers, and encouraged local governments to purchase unsold housing stock. While a sharp rebound is unlikely, these steps have reduced systemic risk and laid the groundwork for a gradual recovery. Analysts expect property prices to remain broadly stable in 2026, with modest gains in tier-one cities.

One of Beijing’s biggest challenges is unlocking domestic consumption. Household savings in China are enormous—estimated at over ¥130 trillion—but much of this wealth remains parked in deposits and low-yield assets. To encourage spending, the government is rolling out targeted measures: tax incentives, subsidies for electric vehicles and home appliances, and programs to boost rural consumption. Combined with rising wages and improving job security, these efforts aim to shift the economy toward a more balanced growth model driven by domestic demand rather than exports and property speculation.

China’s GDP is forecast to grow by 4.5–5% in 2026, supported by infrastructure spending, tech investment, and steady consumer demand. Inflation is expected to remain contained at around 2%, giving policymakers room to maintain accommodative monetary conditions. The People’s Bank of China is likely to keep interest rates low to support credit growth, while fiscal policy remains proactive.

Bond yields in China are expected to stay relatively stable, with the 10-year government bond yield hovering near 2.5–2.7%. Large household savings provide a strong buffer for financial stability and help absorb government debt issuance. This domestic funding base reduces reliance on foreign capital and limits vulnerability to global market swings.

China is in an early-to-mid recovery phase. The worst of the property downturn appears to be behind us, and tech-driven investment is gaining momentum. However, external risks—such as trade tensions and slower global demand—could temper growth.

AI-related spending of users in the four major endpoint industries — professional services, government, finance and telecom — will collectively exceed 60% of the total spending of China’s AI market. Construction, discrete manufacturing and health care industries have also achieved high growth rates for Chinese AI.

For investors, this environment favours selective exposure to sectors aligned with structural themes: technology, renewable energy, and consumer services. Property-related equities may offer value opportunities, but caution is warranted given lingering debt issues among developers.

In summary, China’s outlook for 2026 is cautiously optimistic. The combination of a tech-driven growth strategy, property market stabilization, and measures to unlock consumer spending provides a foundation for steady expansion. Investors should focus on quality companies in innovation-led sectors while maintaining a balanced approach to real estate and cyclical industries.

Emerging Markets

Emerging markets are projected to grow at an average rate of around 4% in 2026, which is significantly higher than the expected growth for advanced economies. Asia-Pacific and Sub-Saharan Africa are forecast to lead with growth above 4%, while Latin America is expected to expand at a slower pace of about 2%. This outlook reflects ongoing adjustments to global trade conditions, currency movements, and domestic policy measures aimed at supporting stability and investment

The U.S. has raised effective tariff rates to historic highs, creating headwinds for global trade. However, many emerging markets have adapted quickly by diversifying export destinations and accelerating near-shoring strategies. Mexico and Vietnam, for example, are benefiting from supply chain realignment as companies seek tariff-friendly hubs. Meanwhile, the U.S. dollar, which surged during the tariff shock, is now expected to weaken in 2026 as U.S. interest rates fall. A softer dollar typically supports emerging market currencies, eases debt burdens, and attracts capital inflows—providing a tailwind for equity and bond markets.

Emerging markets are in a mid-cycle phase, transitioning from tariff-driven disruptions toward more stable growth. Monetary policy remains supportive, with several central banks continuing to ease rates as inflation trends lower—particularly in Asia, where 2026 inflation is projected near 5%, down from recent highs. Fiscal space is tighter than in 2025, but targeted stimulus and infrastructure spending continue to underpin domestic demand.

Slower U.S. rate cuts pose a risk for emerging markets, as inflation and strong demand may delay policy easing. This could tighten financing conditions and limit EM rate reductions. Overvalued tech stocks add volatility risk if prices correct sharply. Upcoming elections in several EM countries introduce policy uncertainty, challenging baseline growth assumptions.

Emerging market equities remain attractively priced compared to developed markets. The MSCI EM Index trades at a forward price-to-earnings ratio of about 12.7, versus over 21 for the S&P 500. Several markets stand out as particularly cheap. Brazil offers compelling value with a forward P/E near 8.3, supported by improving fiscal discipline and strong commodity exports. South Africa trades around 9.7 times earnings, with high dividend yields and an undervalued currency. South Korea remains below 10 times earnings, offering opportunities in technology hardware despite global volatility. By contrast, India is more expensive at 22 times forward earnings, reflecting strong growth expectations but limited margin for error.

Opportunities are concentrated in regions and sectors aligned with structural trends. Asia-Pacific technology and manufacturing hubs such as Vietnam and Indonesia are benefiting from supply chain shifts and digital adoption. Latin American energy and infrastructure plays, particularly in Brazil and Mexico, are gaining traction as near-shoring accelerates. African consumer and financial sectors are supported by rapid population growth and mobile-first economies.

Persistent tariff uncertainty, slower global trade, and political instability in parts of Latin America and Eastern Europe could weigh on sentiment. Additionally, climate-related disruptions and refinancing risks in frontier markets remain on the radar.

In summary, emerging markets offer a compelling mix of growth and value heading into 2026. With GDP expanding at roughly 4%, valuations near multi-year lows, and a likely weaker U.S. dollar, the case for selective exposure is strong. Investors should focus on quality companies in undervalued regions, diversify across sectors.

Commodities Sector Outlook 2026

The global commodities sector is entering 2026 with notable changes across energy, metals, and agriculture. Investment trends, currency movements, and geopolitical developments are shaping how these markets perform.

Oil investment has been falling as the world moves toward cleaner energy. Spending on new oil projects has dropped sharply over the past two years. This means supply growth is slowing, which could keep prices steady or even push them higher if demand remains firm. However, long-term demand faces pressure from electric vehicles and renewable energy policies.

Gold prices have been strong in recent years, helped by global uncertainty and conflict. If major wars end, some of the risk premium built into gold prices could fade. Current valuations are high compared to historical averages, so big gains may be harder to achieve unless new risks appear. Still, gold remains popular as a safe-haven asset and a way to protect wealth.

A weaker U.S. dollar could also support gold prices in 2026. When the dollar declines, gold becomes more attractive globally because it is priced in dollars, making it cheaper for holders of other currencies. At the same time, the global move toward more nationalist governments may increase uncertainty around trade and foreign policy. Such developments often lead investors to seek safe-haven assets, which could sustain demand for gold despite high valuations.

Copper continues to play a key role in the shift to clean energy. It is essential for electric vehicles, power grids, and renewable projects, which keep demand strong. Silver also benefits from industrial uses like solar panels and electronics. Rare earth metals are increasingly important for technology and defence, and China’s control of supply remains a major factor in global pricing.

Agricultural markets face challenges from climate change and supply disruptions. Some countries are building large reserves of grains and other staples to protect against shortages. India and China, for example, have increased stockpiles to ensure food security. These moves, along with export limits in some regions, could lead to price swings for crops like wheat, corn, and soybeans.

In summary, the commodities sector in 2026 reflects a mix of old and new forces. Oil investment is shrinking, gold may lose some of its war-driven strength but could benefit from a weaker dollar and political uncertainty, and metals tied to technology and energy remain in high demand. Agriculture is shaped by security concerns and hoarding trends. Understanding these shifts will be key to navigating the year ahead.