Markets enter 2026 facing persistent fiscal pressures, concentrated equity leadership and an uneven global recovery, defence takes precedence over outright risk-taking. Following a year marked by policy shocks, shifting tariffs and renewed questions around fiscal sustainability, a more cautious and flexible approach is shaping our portfolio construction. John Stopford, Head of Managed Income: “The year started with policy shocks, notably President Trump’s ‘Liberation Day’ tariffs. Markets sold off on fears of slower growth and higher inflation, but the impact proved temporary as tariff terms shifted and markets gradually reassessed their significance.”
Despite inflation easing and central banks cutting rates, longer-dated government bonds have failed to benefit. Expanding public debt burdens and higher post-pandemic interest rates have left long maturities vulnerable, necessitating a change to how duration is used in portfolios. “Central banks may still be easing, but long-dated bonds remain pressured by one dominant force: fiscal deterioration,” Stopford explained. “That means duration is now a tactical call, no longer a structural one.”
Concerns over fiscal discipline are resurfacing across major economies. Heavy borrowing in the US, political inertia in parts of Europe and looser policy signals elsewhere are testing market resilience and reviving questions around long-term sustainability. At the same time, a growing discussion around de-dollarisation has increased demand for alternative stores of value, including gold.
These dynamics are unfolding against a fragile macro backdrop. Equity markets have been buoyed by artificial intelligence, but gains are narrowly concentrated in a small group of mega-cap names, raising the risk of abrupt reversals if expectations are not met. “AI has driven equity markets higher and encouraged wealthy US consumers to keep spending,” said Stopford. “However, stock market gains have become overly concentrated in a handful of mega-cap technology names, adding to market fragility.”
With diversification benefits less reliable, defence requires a more flexible approach rather than traditional index driven bond allocations. Selectivity across markets focusing on credible fiscal and monetary frameworks, combined with active management of duration and risk, is central to navigating the year ahead.
Reliable income remains a cornerstone of this approach. “Reliable income remains central – it is the most visible part of total return, providing it is backed by dependable cashflows,” Stopford noted. Finding that income at reasonable valuations helps anchor portfolios defensively, particularly as corporate credit valuations appear tight and attractive equity income harder to source.
Alongside income, downside protection is also playing a larger role. Option exposure across equities, bonds and currencies are being used to limit the impact of market drawdowns while preserving upside, providing resilience in an environment where option pricing has remained reasonable despite elevated risks. Stopford said: “Markets often appear calm until they are not – they climb the escalator on the way up but take the lift shaft down.”
As 2026 unfolds, the focus remains on steady income, capital preservation and the ability to adapt as conditions change. In a year likely to be shaped by geopolitical concerns, lingering inflation risk, shifting policy and crowded markets, a defensive and flexible stance is seen as essential. “In what is likely to be a challenging year,” Stopford concluded, “that combination of resilience and flexibility feels like the right place to be.”