As we look ahead to 2026, three strong years for stock markets have left some investors cautious. However, this also creates opportunities for those willing to look beyond the most crowded areas of the market. While there are parts of the market that have started to look expensive, there are plenty of areas that have been crowded out by the all-consuming AI trade in 2025 and could do a lot better in the year ahead.
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‘Quality’ companies
It has been a tough year for ‘quality’ companies – those companies with strong balance sheets, predictable earnings and secure dividends. Investors have had their heads turned by the AI trade, and while some AI companies qualify as quality companies – Microsoft, for example – they tend to appear at a lower weighting than in the MSCI World index or S&P 500.
The MSCI World Quality index has trailed the MSCI World index by around 5% for the year as a whole*. This is a lot in a single year and in the type of market conditions in which quality companies normally do well. The higher weighting in consumer and healthcare companies has undoubtedly weighed on this part of the market.
We believe some adjustment may be due and suggest incorporating a fund like the WS Guinness Global Equity Income fund, which tends to favour high quality companies. It still has some AI exposure through groups such as Broadcom and Taiwan Semiconductor, but also offers some diversification through consumer goods groups such as Danone, or healthcare companies such as Abbvie**.
Asia
With the tariff turmoil more or less behind it, it is possible to refocus on the real story across Asia. There is still a lot to like. India is putting a difficult year behind it, ending the year with GDP growth of 8.2%***, unexpectedly high, even for India. China looks set to benefit from domestic stimulus and ongoing innovation. Equally, economies across Asia are not weighed down by the indebtedness in the same way as the UK, European or US economies. The IMF reckons that Asia growth will be 4.7% in 2026, the highest in the world****.
We suggest the Baillie Gifford Pacific fund, managed by Roddy Snell, who has an eye for a compelling growth company. He says: “Most global portfolios remain structurally light on Asia ex Japan equities. Despite contributing a far larger share of global GDP and producing many of the world’s fastest-growing companies, the region accounts for only 8% of the MSCI All Country World index. The gap translates into missed growth, diversification, and active return opportunities.
“Two forces make the timing particularly compelling. First, China’s domestic policies have pivoted decisively towards supporting growth and the private sector after three years of extreme market pessimism. Second, the US dollar has fallen by about 10% on a trade-weighted basis in 2025; a weaker dollar has historically turbocharged returns in Asian markets.”
Fixed income
If investors are nervous about the outlook, incorporating some diversifying fixed income funds into your portfolio can’t hurt. Fixed income has had a good year in 2025, but is still likely to be supported by falling interest rates in the year ahead. There have been some worries over falling corporate bond spreads over government bonds, but the income on offer still looks very attractive and provides a significant cushion for any weakness in bond prices.
The Rathbone Ethical Bond fund is a good option, run by experienced manager Bryn Jones. He has proved himself as a careful and judicious selector of the right bonds at the right time. His view is that the outlook is still attractive for fixed income: “Even with a big rise in government bond yields or a widening of credit spreads, you still make a positive nominal return given the level of yields.” That said, he has positioned his fund relatively cautiously for the year ahead, “if you see a storm cloud ahead, you don’t necessarily want to drive into it at full pelt.” He is “dropping the gears” a little and assessing the risks.
Healthcare
Healthcare has looked increasingly mispriced over 2025. Certainly, there were some well-documented problems. The appointment of vaccine sceptic RFK Junior as US Health Secretary was a capricious choice and there have been ongoing worries over drug pricing. However, these worries have been slowly resolved and the sector has moved markedly higher since the announcement of a landmark drug pricing agreement between Pfizer and the Trump administration on 30 September 2025.
There has been a good run of earnings among the pharmaceutical companies, including strong quarters from Eli Lilly and AstraZeneca. In addition, there has been a raft of merger and acquisition activity, particularly in the biotechnology sector. Johnson & Johnson bought Intra-Cellular, while Sanofi snapped up Blueprint Medicines and Merck took over SpringWork. Polar Capital Global Healthcare Opportunities is a well-diversified option in this part of the market.
A good generalist
2026 could be more complicated. Stock markets have run up a long way. They have started to diversify in 2025 and this could become more evident in 2026, as the AI trade gets more mature. That means returns may be harder won. It is time to align yourself with a capable stock picker who can navigate these changing fortunes. We’d suggest the IFSL Pinnacle Global Equity Income fund.
The fund is managed by Joseff Thomas and Niko de Walden. It has an innovative process, that aims to limit exposure to broad generic risks such as style, sector or geography and maximise its exposure to stock picking. Risks are carefully managed and it may be just the right sort of fund for whatever difficulties await in the year ahead.
There are risks for 2026, but there is still plenty to like about global stock markets. Aligning yourself with good managers is likely to be even more important in the year ahead.
