After a year of surprises and strong market performance, investors head into 2026 with portfolios that look healthier but markets that also look more expensive. Across the Chelsea investment team, the message is clear: stay invested, stay diversified, and prepare for opportunities beyond the crowded US market.
Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.
Looking back at 2025
“I never imagined markets would be so strong this year, especially after the swinging tariffs announced by Trump in April,” says Juliet Schooling Latter, research director at Chelsea. Despite tariff shocks, geopolitical tension and another US government shutdown, global equities delivered broad-based gains. Even volatility, which would normally spike in uncertain times, fell sharply.
China was one of the standout performers, up more than 22% year-to-date, while India, so often the market leader in Asia, was one of the disappointments, falling around 6%*. Fixed income also surprised on the upside despite stubborn inflation, with emerging market bonds delivering particularly strong returns.
Darius McDermott, managing director at Chelsea, notes how indiscriminate the rally was across regions: “For once it’s not just been the US. We’ve seen very strong performance in the UK, Europe, Japan and Asia, with emerging markets led by China rather than India, a complete reversal of recent years.”
But the strength of the recovery brings challenges. Markets have now chalked up several strong years in a row, and valuations have risen across the board. As Darius puts it: “It’s impossible to argue US equities as a whole are cheap. The ‘Mag 7’ may not be in bubble territory, but at around 34x earnings, investors need to be aware of the risks.”
The big risks for 2026
Across the team, the biggest concern for 2026 is US equity valuation risk. Juliet notes that while expensive markets can always become more expensive, the margin for error is now much thinner. A wobble in the US could easily ripple through global markets.
Inflation remains a swing factor. “If inflation persists, central banks will struggle to cut rates,” Darius says. Rate cuts have boosted sentiment through 2025, so any interruption to that path would challenge market optimism.
There is also clear discomfort with concentration risk. “The S&P 500 may look diversified, but seven stocks now represent almost 40% of the index and they are all highly correlated,” Darius warns. This concentration underpins one of Chelsea’s biggest themes for 2026: the need to diversify beyond US mega-caps, especially for long-term investors.
Three opportunities for 2026: looking beyond the obvious winners
1. Emerging markets
“Emerging markets have been largely ignored in recent years,” says James Yardley, head of investments at Chelsea. “If the dollar weakens further, 2026 could be another strong year.” Juliet also highlights that developed markets are now more indebted than many emerging economies post-Covid. The tables have turned, and EM now looks structurally more stable than it has in years. As such, we have been increasing EM exposure across the VT Chelsea Managed funds, including selective additions to China and frontier markets.
Additionally, after a disappointing 2025, Juliet believes India is well set for a turnaround and 2026 could be the year to reset market leadership:
- Growth has bounced back above 7%.
- Recent tax cuts on goods, services and income support domestic demand.
- Exports to the US are only around 2% of GDP, limiting tariff damage.
- Foreign ownership is at a 15-year low, which is usually a positive contrarian signal.
2. UK small and mid-caps
This is a key area of agreement across the team. “UK smaller companies have been on one of their worst runs in living memory relative to large-cap,” James says. “We really like this hated part of the market. Any small change in sentiment could trigger a big recovery.”
While the headline UK market performed well this year, the valuation gap between large-caps and small and mid-caps has widened further. The UK remains extremely cheap relative to other regions and offers genuine diversification, including access to pharmaceuticals, financials, materials and energy.
3. Opportunities beyond AI
With so much excitement focused on AI, it’s worth noting the funds have also been adding selectively to areas that have lagged, such as healthcare, insurance and other specialist sectors with strong fundamentals but less hype. These additions fit well with Juliet’s belief that quality stocks, out of favour for years, could finally make a comeback in 2026.
Another specialist play in the funds has been the recent addition of silver. James acknowledges that silver has already delivered a strong run and remains volatile. But structural deficits, rising industrial demand (especially from solar, EVs and data centres), and low vault levels support the long-term case.
Stay invested
“What we learned in 2025,” Darius says, “is simply to stay invested. Those that got spooked and sold during the tariff war, regretted it later as markets bounced back quickly. Buy the dips if you can — but stay invested. Markets are not as cheap as they were, but diversification and patience remain the key to long-term success.”
Juliet agrees: “2026 will have its wobbles, but a diversified, cautious approach and taking advantage of opportunities when they arise is a strategy investors should stick with.”
