Sebastian Mullins
Investors are facing a fundamentally different market environment in 2026, with structurally higher volatility, greater government intervention and a need for more selective asset allocation, according to investment experts at Schroders.
Sebastian Mullins, head of multi-asset and fixed income, and Ben Arnold, investment director, global equity, say the post-GFC era of low inflation, low volatility and passive returns has given way to a new regime that demands a more active approach.
Mullins says that markets have transitioned into a period that more closely resembles historical norms than the unusually benign conditions of the past decade.
“We’ve moved into a new investing regime, one with higher inflation, more government intervention and greater volatility. That’s not a short-term phenomenon, it’s structural.”
Mullins notes that fiscal policy has become a central driver of liquidity and market outcomes, overtaking the role traditionally played by monetary policy. Defence spending, energy security, supply chain resilience and AI infrastructure investment are all contributing to sustained government intervention and higher debt levels globally.
“The invisible hand of free markets has been replaced by a very visible hand of government. That has far-reaching consequences for asset allocation. In this environment, inflation is likely to remain higher for longer, as governments seek to manage rising debt burdens through economic growth rather than fiscal restraint.”
While equities remain attractive relative to bonds, Mullins cautions that traditional diversification assumptions can no longer be relied upon.
“Investors should think of fixed income as an income strategy rather than a source of portfolio protection in an inflationary environment. Bonds now pay you income, but they no longer provide the protection investors once relied on.
“Asset allocation needs to be far more dynamic,” he says.
Arnold says artificial intelligence continues to be a powerful driver of earnings growth, but investors must be increasingly selective.
He points to rising leverage and unprecedented capital expenditure among some technology companies as early warning signs, noting that long-term winners will be determined by real-world adoption and sustainable margins rather than headline investment announcements.
“The key question isn’t how much companies are spending on AI, it’s whether adoption and returns justify that investment. Adoption will ultimately determine which companies succeed and which fall behind.”
He says the dominance of US mega-cap technology stocks is starting to unwind, with performance diverging significantly within the group commonly referred to as the “Magnificent Seven (Mag 7)”.
“Lumping all mega-cap tech stocks together is risky. These are very different businesses with very different outcomes, and the market is becoming more discerning. Five of the seven Mag 7 stocks underperformed the broader US market last year, highlighting the growing dispersion within mega-cap technology.
“Lower correlations within mega-cap tech signal a healthier equity market and reinforce the case for active stock selection,” he says.
Both Mullins and Arnold highlight improving opportunities outside the US, particularly in parts of Europe and select emerging markets, where valuations remain more attractive and earnings upgrades are emerging.
“You don’t have to own US mega-cap tech to access growth,” Arnold says. “There are compelling opportunities across Europe and other regions that investors have overlooked in recent years.”
Arnold says select European financials are examples of businesses benefiting from structural reform and earnings upgrades. He points to Italy’s Intesa Sanpaolo for its transformation into a stronger asset management-led business, and Austria-listed Erste Bank as a market leader across parts of Eastern Europe benefitting from earnings upgrades not yet fully reflected in market valuations.
Mullins notes that peripheral markets such as Italy and Spain delivered strong returns, challenging outdated perceptions of the region.
“The PIGS are now flying. These markets were up 60 per cent last year. There are compelling opportunities across Europe for investors willing to look beyond the obvious.”
Turning to domestic markets, Mullins says Australia stands out among developed economies for persistently high inflation, increasing the likelihood of further interest rate hikes, the opposite of that of the United States, where rate cuts are increasingly expected.
“Australia’s inflation challenge sets it apart from global peers. That has important implications for local interest rates and asset allocation decisions.
“With inflation still above target and employment running strong, the RBA has limited room to ease, making the outlook for Australian rates very different from the US.”
He adds that while global opportunities are broadening, Australian investors must remain focused on balancing income, inflation protection and risk as markets move further into a new cycle.
“Investors can’t rely on old playbooks in this environment. With inflation higher for longer and correlations changing, portfolio construction needs to be more deliberate and more dynamic.”
