The imperative to diversify as the ground shifts in 2026

From time immemorial, the public sector has influenced or intervened in the workings of the private sector.

But arguably, government interference escalated to a new level in the decade following the Global Financial Crisis.

In the US, hopes ran high that a re-elected President Donald Trump and a Republican Congress would lighten the government's heavy hand.

One year on, however, we are now merely observing an altered form of state-directed capitalism.

While industrial policies to protect domestic businesses and/or to achieve national security goals are nothing new, the act of singling out companies one by one in order to punish or reward them surely is.

Alignment with the government's evolving policy priorities has now become a critical success factor for business leaders and investors alike. But governments taking direct stakes in companies may have crossed a line. Even if this measure is being applauded for now, it is unlikely to bode well in the long run.

Another worrying development in the US is the Executive Branch's attempt to trespass into the domains of monetary policy.

While central banks are part of government, their independence is usually enshrined by law and upheld by the courts.

Notwithstanding Trump's occasional attacks, this time-tested arrangement is likely to prevail in the US.

For the Federal Reserve and other central banks around the world, the danger lies less in a de jure but rather in a de facto loss of independence.

"Fiscal dominance" describes a situation where large public debt and deficits place severe constraints on what monetary policy can do without risking financial instability. This scenario has not yet materialised, but we are perhaps moving in that direction.

Averting bond riots and debt crises and aiding sovereign deleveraging will shape monetary policy in the years to come. As a result, we could end up with policy rates that are too low and inflation that runs too high.

For the most part, geopolitical events have only short-lived effects on economies and markets, even when they are quite dramatic in nature. What matters is whether the events are symptomatic of a major shift in the balance of power.

Looking at current developments on the global stage, we believe this to be the case. With the US no longer willing to police the world, stable unipolarity has given way to an era of unstable multi-polarity.

Smaller but more frequent conflicts and wars are the consequence, possibly with recurring supply shocks.

In this new regime, diversification becomes paramount. Over the past few decades, much of the Western world has become overly reliant on the US - as a consumer of goods, a source of innovation, a supplier of arms and a destination for investments. As national economies and businesses seek better diversification, so too should global investors.

AI diffusion

The drive to build out artificial intelligence (AI) is, without doubt, leaving its mark on economic data and market performance.

We expect this trend to continue, as the pursuit of technological leadership has become an issue of national security and, for many businesses, a necessity to survive and thrive.

Meanwhile, the quest to reach or even exceed human level intelligence carries on and, by many measures, still has a long way to go.

Here, smaller and more targeted models have outperformed very large language models on multiple fronts, keeping competition alive.

This, in turn, may call into question the massive capex spending of the hyper-scalers and add to lingering concerns over returns on investment.

While our baseline view is that the buildout push is continuing for now, we also see two ways that this could go wrong: a classic over-investment bust or, alternatively, mass disruptions and labour displacements on the back of precipitous AI diffusion.

While AI continues to drive the rally in risk assets, we will likely see shifts in the market narrative around this technology.

We think that more weight will be placed on the diffusion, adoption and implementation of AI tools going forward.

Today, a fair amount of scepticism abounds both among business leaders and investors when it comes to efficiency gains outside the technology sector itself.

If AI outlays start proving their worth, however, the equity rally could continue to broaden beyond the US tech sector, where market valuations are less demanding.

China, for instance, is pushing hard for fast adoption and may even be ahead of the US, while Europe lags behind but has potential.

Moreover, AI itself needs to become more efficient, especially in terms of its immense computing and energy needs.

Innovation - and disruption - therefore need to churn at a fast rate, and we recommend a barbell investment approach.