After years of shocks, resilience grows

It may be the start of the year, but investors could already be forgiven for feeling they have endured false dawns. Geopolitical anxieties have flared, markets have wobbled and steadied, and New Year optimism has met the reality of the macroeconomic environment. In that sense, 2026 is not so much a fresh start as a continuation, with a few added considerations. 

The opening weeks were marked by a bout of political theatre. These tensions unsettled markets, but the volatility was shallow and short-lived, occurring against the backdrop of still-resilient asset prices. Investors appear increasingly adept at distinguishing noise from signals. 

That discernment is being tested again in America. Donald Trump, never one to respect institutional boundaries, has turned his attention to the Federal Reserve. Pressure on Jerome Powell, whose term ends in April, and speculation over his successor have revived a familiar question: how independent is America’s central bank? Markets have taken the hint. Expectations of lower interest rates have strengthened, buoying gold and lending the dollar a softer tone, even if episodic crises briefly reverse the trend. 

The irony is that the inflation backdrop, which has long been the bane of policymakers, has been behaving itself. Disinflation has continued, granting central bankers more room to manoeuvre. However, the Federal Reserve’s task remains awkward: balancing a president who is impatient for cheaper money against the lingering risk that inflation’s retreat could stall. The market’s wager is that rates will fall sooner rather than later. 

Elsewhere, the global picture is uneven. Japan appears to be emerging from its decades-long malaise. Europe and Britain, by contrast, remain mired in sluggish growth. Rate cuts may help, but neither region looks poised for a dramatic revival. Still, the feared global recession has not materialised. America’s economy, while showing pockets of weakness, particularly in manufacturing and housing, continues to expand at a respectable clip. Growth may be slowing, but it is not collapsing. 

This resilience has mattered for markets. 2025 delivered robust returns across a range of asset classes, even amid political noise and the hangover of monetary tightening. Gold was the standout, but strength was not confined to fashionable corners such as artificial intelligence. British equities and parts of Asia performed well, a sign that the market rally is broadening beyond a narrow set of mega-cap winners. That diffusion is healthy: bull markets that rely on too few pillars tend to wobble. 

Fixed income tells a more complicated story. Government bonds, once the refuge of the risk-averse, have underperformed since the 2022 inflation shock. Credit, by contrast, has thrived. High-yield bonds have enjoyed several strong years, compressing the extra return investors demand for taking risk to near-record lows. Defaults remain scarce; balance sheets look healthier than in past cycles. However, this success has sown discomfort, as when spreads are tight, there is little margin for error. 

The danger here is complacency. Private credit has expanded rapidly, much of it funding the capital-intensive build-out of AI infrastructure. If growth falters or risk appetite suddenly wanes, these pockets could become stress points. In such moments, investors typically flee to government bonds, leaving credit exposed to sharp repricing. 

Against this backdrop, disciplined asset allocation matters more than ever, and investors are leaning heavily on systematic, data-driven approaches. Annual strategic asset allocation exercises help counter the human tendency to overweight the latest news. They also reflect a broader opportunity set where once portfolios considered a few dozen asset classes, some now scan far wider terrain. 

The big question for 2026 is whether central banks can engineer what markets hope could be a “perfect pivot”: cutting rates early enough to support growth without reigniting inflation. Yield curves are already steepening, a pattern that has historically accompanied recessions. This time may be different, not because policymakers are suddenly wiser, but because businesses and households have grown more resilient after years of shocks. 

For now, markets seem content to give that resilience the benefit of the doubt. Politics will continue to surprise and cause uncertainty, but unless this translates into genuine economic damage, investors appear willing to look past the bluster and stay invested.