Investment Weekly: High uncertainty, calm markets

12 January 2026

After 2025’s “rally in nearly everything”, the consensus view is optimistic on the market outlook for 2026. But there are still key questions facing investors. Here are the top six issues under debate:

1. Can the economy stay “K-shaped” in 2026? AI investment is driving GDP growth amid a simultaneous cooling of the labour market and a “vibecession”. But policy support could help the “arms” of the K come together in 2026.

2. If 2025 was the year of peak tariff uncertainty, will 2026 be the year of peak geopolitical uncertainty? With some areas of the market “priced for perfection”, any bad news could be doubly negative.

3. If the Fed cuts rates, will long-term yields move lower, or higher? Usually it would be lower, but with “fiscal dominance” in play, the answer is less clear. And if the Fed raises the prospect of rate hikes – how would investors react?

4. Will international markets catch up in 2026? The broadening out trade began to work in 2025. But further EAFE outperformance relies on good global growth, profits delivery, a moderately weaker dollar, and AI stocks slipping.

5. Are emerging markets lucky or good? 2025 performance was supported by dollar weakness and a re-rating – and there was a degree of luck in that. But EMs have also been good, with derisked macro, policy credibility, and lower asset market volatility. Another strong year in 2026 will prove the doubters wrong and change the stereotype about EMs.

6. Finally, where are the hedges? Can investors still rely on gold after 60%+ gains in 2025? Fed cuts, fiscal worries, and a more normal stock/bond correlation mean investors will need bond substitutes, including alternative asset classes like hedge funds.

Geopolitical events have been in focus in early 2026, with investors digesting news on Venezuela, Greenland, Iran, and Ukraine. But commodity and investment markets have remained mostly unperturbed. Oil prices – which tend to be a key channel for geopolitical events to shock the macro system – have been stable. And global stocks have enjoyed a solid start to the year, with Asian indices reaching record highs.

This contrast between elevated uncertainty and calm markets seems puzzling but makes sense in the context of a good global growth outlook, and an expected “coming together” of global profits growth in 2026. But as in 2025, geopolitical events will be a key influence on markets this year. This is important because, despite the bullish mood, a continuation of last year’s “bull market in almost everything” depends on good fundamental news being delivered. With some asset classes arguably “priced for perfection”, any adverse news could stoke volatility.

Currently, the outlook remains moderately pro-risk, but episodic volatility is possible. A complex economic and geopolitical environment means a changed playbook for investors too. That means re-assessing the old stereotypes about emerging markets and using new diversifiers to secure portfolio resilience.

Europe isn’t a major participant in the AI boom, but sectors like industrials could benefit. There may also be value in defensives like Swiss healthcare and staples, and areas like UK financials, materials, energy, and healthcare. European stocks trade close to a long-term average PE of 14.5x, but there are signs of value, and scope for upside if 2026 EPS growth comes close to target expectations.

With GDP growth and profits momentum picking up in Q3 last year, there are signs of a recovery. And while US-India trade remains uncertain (with a deal potentially a catalyst), India’s relatively insulated economy and macro stability should offer protection. Earnings growth and improving return on equity are key drivers of its market returns, and after a period of downgrades, expectations are stabilising.

The living sector benefits from potentially attractive fundamentals, with rising urbanisation and limited supply, and ageing demographics driving demand for senior housing – particularly in Asia. It also tends to see stable cash flows, high occupancy, and regular rent reversion. Investment markets face the likely prospect of episodic volatility this year – making the stability of real estate returns potentially appealing for investors looking to manage that volatility challenge.

Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 09 January 2026.

Source: HSBC Asset Management. Data as at 7.30am UK time 09 January 2026. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way.

Global commodity and investment markets began 2026 in a robust mood, largely unfazed by rising geopolitical tensions. Gold prices strengthened, while oil prices climbed through choppy sessions amid the US dollar’s modest gains against a basket of major currencies. US Treasuries were mixed, with 10-year yields range-bound ahead of Friday’s US employment report. European sovereign bond yields were set to end lower following benign eurozone inflation data. In equities, US stocks pared gains ahead of the Q4 earnings season. The Euro Stoxx 50 and UK FTSE 100 both touched all-time highs, and Nikkei 225 also advanced. Most Asian markets rose, led by Kospi on continued tech sector strength. Shanghai Composite also performed well. Conversely, Hang Seng fell modestly, and Sensex weakened.