Grant Webster

Conflict-related commodity market disruption is just the latest in a series of shocks testing policymakers and unsettling investors. Yet a familiar pattern is playing out in markets.

Grant Webster, Co-Head of EM Sovereign & FX: “Historically, EMs have borne the brunt of supply shocks, but in recent years resilience has become a more common theme. From the post-COVID energy/inflation shock to last year’s trade tariffs and now war in Iran, the initial EM sell-off has been brief and EM outperformance has ensued. At the same time, developed markets have faced rising yields and higher volatility, blurring^[1] the traditional distinction between EM and DM risk. Behind this lies relative strengthening in EM, with prudent fiscal policy, healthier current accounts and proactive central banks all boosting resilience. Investors and rating agencies are increasingly recognising these improvements, with the current EM upgrade cycle among the strongest seen in recent decades. Given this relative policy strength and higher real yields, we believe that EMs are better placed to withstand inflation headwinds.”

Looking ahead, the key question is whether renewed supply shocks could trigger another inflationary episode similar to 2022, when inflation peaked at around 8% in EM^[2] and 7% in DM.

Webster continued: “There will be winners and losers, but the backdrop is very different to 2022 when inflation forecasts had already risen sharply before Russia invaded Ukraine. Since February, EM inflation expectations have only increased by c.50bps and while a further rise is likely, high real rates across EM give central banks a lot more room to manoeuvre than their DM counterparts.”

That resilience is also visible at the corporate level, where many EM companies are used to operating with higher rates and inflation than their developed market peers.

Alan Siow, Co-Head of EM Corporate Debt: “Coupled with the strength of activity data we see across much of the EM universe, that means that EM economies should be better placed to deal with inflationary pressures arising from the supply shock vis-à-vis their DM counterparts.”

Broader lessons from the Middle East

The market reaction to war in Iran is also informative through a more regional lens. While Middle Eastern markets initially came under pressure, the reaction proved short-lived. Credit spreads have already fallen back to pre-war levels, credit ratings have been largely unscathed and bond issuance is continuing and receiving strong investor demand.

Victoria Harling, CIO – Middle East and Co-Head of EM Corporate Debt: “The resilience we’ve seen in Middle Eastern markets reflects a macroeconomic transformation: many economies have worked hard to reduce their reliance on oil exports and that’s really paying off.”

The region is also benefiting from efforts to position itself as a strategic commercial and financial hub in an increasingly multipolar world^[3]. Drawing parallels with the City of London in the early 2000s, Alan Siow “Authorities have made it abundantly clear that the region is open for business, and the number of global companies establishing a presence there is rising. At the same time, the region’s bond markets are becoming bigger, broader and deeper.”

Alongside economic reform, the region is also undergoing rapid social and cultural change. Archie Hart, Emerging Markets Equity Portfolio Manager: “From the vibrant social scene in an increasingly multicultural Saudi Arabia to plans for the region’s first casino in the UAE, the Middle East is changing and fast. Coupled with a raft of favourable characteristics – from time zone to connectivity – this is one of the most exciting regions for investors today.”

Energy market dynamics – a structural growth story for EM investors

While the oil price shock is a global challenge, energy market dynamics are also providing a rich EM-centric opportunity set for investors. Rising energy demand is coinciding with constrained and disrupted supply. Crucially, this is coinciding with a clean tech sector transformation. Solar modules, batteries and electric vehicles (EVs) have become the cheapest options available for EM economic and sustainable development, as China’s ambitious manufacturing and deployment rollout has pushed prices down at extraordinary speed.

Matt Christ, Emerging Market Transition Debt Portfolio Manager: “These improved economics have expanded the commercial opportunity set in EM and many of the associated investment opportunities reside in the private credit world. We’ve made deals across the energy value chain – wind power generation in the Philippines, energy transmission lines in Brazil, a renewable data centre provider in Latin America, and Egypt’s first sustainable aviation fuel production facility.”

Private deals in emerging markets also offer investors a favourable risk/return profile^[4], which contrasts with a loosening of underwriting standards in the US. Alper Kilic, Head of Alternative Credit: “Across EM, we’re seeing investment opportunities that tick multiple boxes for investors: exposure to structural growth themes, attractive yields and strong deal protections – on loans to fundamentally strong borrowers.”

AI – a disruptor and enabler

The examples above help explain how the EM private credit opportunity set is inherently heavy-asset, low-obsolescence (HALO).

Kilic noted: “These capital-intensive, physically irreplaceable assets contrast with the asset-light, software services business models that are increasingly prevalent in the US private credit market and appear most exposed to risks from AI disruption.”

In EM equities, too, there are compelling comparisons to be made with the US around AI.

The AI boom increasingly depends on hardware. A small group of EM firms sit at the physical limits of that infrastructure; the “Secret Seven”^[5] may represent one of the most overlooked opportunities in global equities today.

“Against a backdrop of a global shortage of chips, AI-driven memory demand is creating an enduring tailwind for South Korea’s Samsung Electronics. SK hynix is another Korean firm benefiting from the memory upcycle underpinning AI infrastructure spend. Elsewhere, a number of companies are well-placed in the context of Taiwan’s AI-export complex and data centre supply chain demand. Some of these businesses trade at multiples that are just a fraction of the lofty valuations seen in the US today,” said Hart.

Meanwhile, CATL is an example of a listed Chinese company with a true global edge: its EV Qilin battery supports a 1,000 km driving range on a single charge. The pace of AI development in the physical economy in China is also accelerating rapidly, including advances in autonomous humanoid robotics, as evidenced by a robot breaking the human half-marathon record.

Hart: “There are increasing parallels with the dotcom bubble, when EM equity valuations remained relatively low while parts of the US stock market overheated. The years that followed saw strong EM outperformance after the bubble burst. Today, we see similar dynamics emerging, making this the most compelling entry point for EM equities I’ve seen in 25 years.”

Reasons to recalibrate investment views

From a more structural perspective, even as resilience strengthens the risk profile of EM assets, an enduring premium remains.  Siow: “While the EM corporate credit universe is highly diverse and it’s vital to take a selective investment approach, the overall compensation for risk is generous. Across the EM universe, country-specific concerns often overshadow a company’s underlying fundamental strength, pushing yields above those offered by DM bonds of a similar credit quality.”

This phenomenon extends to the private market space.

“In the EM private credit world, the reason for the favourable risk/return profile is an enduring barrier to entry. The inherent complexity of these markets and the years required to build local expertise and origination networks mean competition remains limited, and the premium shows little sign of eroding,” said Kilic.

Taking a wider lens, with Hungarian 10-year government bond yields now within around 75bps of their UK equivalents, there is a strengthening case for taking a more holistic view of global investment allocations.

Jaspal Boparai, Co-Head of UK Institutional: “With supply shocks becoming the new norm, traditional asset class behaviour shifting and old EM/DM distinctions breaking down, investors must rethink how they build resilience and diversification in their portfolios while positioning themselves for a transforming world.”

———

Notes:
[1] https://ninetyone.com/en/insights/reframing-fixed-income-the-old-rules-are-no-longer-fixed
[2] Ninety One estimates exclude India (incomplete data set), Turkey (extreme values).
[3] https://ninetyone.com/en/insights/the-end-of-easy-globalisation
[4] https://ninetyone.com/en/insights/private-debt-hidden-strengths-in-emerging-markets
[5] https://ninetyone.com/en/insights/the-secret-seven-undervalued-firms-at-the-heart-of-ai-infrastructure

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Sahil Mahtani

The era of “easy globalisation” is over. Investors and policymakers now face a more fragmented, volatile and politically charged global system, in which long-standing assumptions about growth, inflation and market stability are increasingly unreliable.

In The end of easy globalisation^[1], Ninety One Investment Institute Director Sahil Mahtani sets out how the model that underpinned the global economy for the past three decades — characterised by US-led stability, cheap commodities and broad political consensus — is breaking down. In its place, a more complex and less predictable environment is emerging, shaped by geopolitical competition, resource constraints and rising domestic political pressure.

Sahil Mahtani, Director, Investment Institute: “Globalisation isn’t ending — but it’s no longer happening on easy mode.  The assumptions that defined the last 30 years are now being challenged all at once.”

Three structural forces are driving this shift.

First, the return of multipolar geopolitics. The post-Cold War era of US dominance is giving way to a more fragmented system, with power dispersed across the US, China and a growing group of influential middle powers across the Gulf, Asia and beyond. As a result, competition is increasingly playing out in “grey zones” — from trade policy and technology to cyber and industrial strategy — rather than through direct military confrontation.

Recent developments underscore this shift. The US has become more selective in its global commitments, prioritising key regions and pushing allies to take on greater responsibility, while China has expanded its economic and geopolitical reach through trade, industrial policy and strategic partnerships. At the same time, countries such as India, the UAE and others are exercising greater autonomy, pursuing more transactional relationships with major powers. “We’re moving from a unipolar world to a more competitive, multipolar system where friction is the norm, not the exception,” Mahtani said.

Second, a shift from commodity abundance to constraint. For decades, the global economy benefited from cheap and readily available energy and materials, enabling long, efficient supply chains and keeping inflationary pressures contained. That backdrop is now changing.

Demand for commodities is rising sharply, driven by electrification, AI infrastructure, defence spending and the reconfiguration of global supply chains. At the same time, supply is becoming more constrained due to underinvestment, long project lead times and increasing geopolitical intervention.

The result is a world in which energy, metals and critical minerals are no longer neutral inputs, but strategic assets. Export controls, stockpiling and industrial policy are becoming more common, while access to key resources is increasingly shaping both economic and geopolitical outcomes. Recent disruptions to energy and food markets following Russia’s invasion of Ukraine, alongside growing competition over critical minerals used in clean energy and technology, illustrate how quickly these pressures can translate into real-world shocks.

Mahtani: “What used to be plumbing — energy, metals, supply chains — is now strategy.  Access to resources is becoming a defining feature of both economic and geopolitical power.”

Third, the rise of an “age of grievance”, as stagnant living standards, rising inequality and rapid demographic change fuel public dissatisfaction across major economies. In many countries, real wage growth has been weak for over a decade, while wealth gains have become increasingly concentrated.

At the same time, large-scale migration and ageing populations are reshaping labour markets and social dynamics, while social media is amplifying political polarisation and dissatisfaction. Together, these forces are contributing to a more volatile policy environment, with governments under pressure to prioritise national interests, economic security and domestic stability.

This shift is already visible in the retreat from free trade orthodoxy, the rise of industrial policy and growing scepticism towards global institutions. Trade relationships are becoming more transactional, and economic policy is increasingly intertwined with national security.

“Public dissatisfaction is no longer a background issue — it’s a primary force shaping markets, policy and international relations,” Mahtani noted.

Taken together, these forces point to a “fourth systemic crisis” — a crisis of global integration, in which economic, political and geopolitical pressures are becoming increasingly intertwined. Unlike previous periods of instability, this is not a single shock, but a broader regime shift in how the global system operates.

For investors, the implications are significant. Portfolios built for a world of stable inflation; predictable correlations and a single global growth engine are likely to prove less resilient in the years ahead. Instead, the environment is likely to be characterised by more episodic inflation, shifting correlations and greater divergence across countries and sectors.

Mahtani: “This isn’t a cyclical shift. It’s a structural reset in how the global system works.  Investors are navigating a world of higher volatility, fatter tails and greater dispersion — not a single, benign macro backdrop.”

Global integration is not reversing, but it is becoming more fragmented, politicised and harder to sustain. In this environment, resilience, diversification and adaptability are likely to become increasingly important as markets adjust to a more uncertain and uneven global landscape.

———-

Notes:
[1] The end of easy globalisation

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Alper Kilic

Private credit has grown into a roughly US$3 trillion global asset class since the Global Financial Crisis – but it’s now facing its first serious test. In the US, high-profile bankruptcies, a record credit default rate, and the increased use of payment-in-kind (PIK) structures^[1] are starting to expose the costs of loose underwriting in this increasingly crowded market. Exposure to AI disruption is adding further pressure. In contrast, dynamics are very different in emerging markets, which are relatively uncrowded and are dominated by asset-heavy, cash-flow generative borrowers.

Weakening dynamics in the US contrast with strength in emerging markets

Last year, two widely publicised failures revealed how recent trends in the US private credit market have allowed borrower distress to go undetected until it is too late. Key among these trends is the growth in ‘covenant-lite’ loan structures, which strip out the maintenance covenants – early warning systems for lenders.

While many considered these failures – of sub-prime auto lender Tricolor and auto-parts group First Brands – to be anomalies at the time, headlines and developments since the start of this year suggest they were early signals of a broader deterioration of credit standards. According to Fitch Ratings, the US private credit default rate reached 9.2% for the 12 months to January 2026^[2], its highest level since the index’s inception, while payment-in-kind¹ usage has risen sharply across publicly traded private credit vehicles (BDCs). What we are seeing today are the structural consequences of a market that grew too quickly – where competition has driven down yields and weakened structuring standards in a ‘borrower’s market’.

The US market’s exposure to AI disruption is concentrated in software as a service (SaaS) and business services — sectors where cashflows are less predictable and barriers to entry are falling. For investors, the contrast with emerging markets is increasingly stark.

In emerging markets, lending standards remain high, with lenders able to stipulate robust collateral protections and strong covenants. Deals are often made in collaboration with other banks, and stronger bargaining power allows lenders to take a conservative approach to underwriting deals. Furthermore, the opportunity set is dominated by asset-heavy, cashflow-generative borrowers with limited exposure to sectors most vulnerable to AI disruption.

For example, Ninety One recently provided a senior term loan to fund the expansion of a solar power operator in Brazil. The loan is backed by a portfolio of operating and development-stage solar assets across Latin America, offering robust collateral coverage and a full payment guarantee from the borrower’s US-listed parent company.  By focusing on the gaps in physical digital infrastructure and the associated energy demand, we believe the portfolios are aligned with the tailwind of AI disruption.

Alper Kilic, Head of Alternative Credit: “Unsecured term lending in emerging markets is rare, and borrowers tend to have much lower leverage, – typically 3-4x, compared to 6-7x in developed markets – and lower loan-to-value ratios – typically sub-40%, compared to 50-60% in developed markets – alongside durable market positions. In addition, loans are normally structured under US or UK governing law, with leading international legal firms and Big Four auditors involved. This is a very lender-friendly market.”

Today, it is not unusual to see well-known names – including the world’s biggest sovereign wealth funds – as deal sponsors and co-lenders, a clear vote of confidence in emerging market private credit. However, success depends heavily on structuring expertise and local market knowledge.

Nathaniel Micklem, Co-Head of Emerging Market Alternative Debt: “Building on almost two decades of experience, we make sure our investments feature multiple layers of protection. We look for borrowers with low corporate leverage, favour blue-chip market leaders, and structure deals to include robust covenants. Limited competition gives us good bargaining power, while a focus on strong sponsors and markets where infrastructure assets enjoy sovereign support provides an additional level of comfort.”

Senior-secured yields, without the structural compromises

What makes the emerging markets private credit opportunity particularly striking is where the return premium sits in the capital structure. In US direct lending, achieving attractive yields often requires accepting structural subordination or levering a fund vehicle. In emerging markets, the premium is available at the senior and senior-secured level – a reflection of origination complexity and lender bargaining power; investors are compensated for expertise and access, not for taking on additional credit risk.

“The yield pick-up in emerging markets is significant, despite strong borrower fundamentals. For example, one of our US dollar-based loans – to fund an ambitious EV expansion programme in a Turkish city – provides 200bps more yield than the public bond issuance from the same municipal issuer,” said Matt Christ, Portfolio Manager, Emerging Market Transition Debt.

Structural growth is creating compelling investment opportunities across key themes

Private credit in emerging markets is supported by powerful structural tailwinds. Growing populations and rising demand for utilities, goods and services are fuelling financing requirements, with private credit increasingly financing renewable energy generation, digital connectivity infrastructure and electric mobility platforms across the developing world. In addition, the rapid growth of AI is creating new investment opportunities; last year, Ninety One lent to two data centre operators in Latin America that have committed to maintain or increase the share of their energy sourced from renewables to 100%.

Crucially, these sectors benefit from powerful structural demand growth while offering lenders stable cashflows and tangible collateral.

Kilic: “The emerging market private credit opportunity set is inherently asset-heavy – think power generation, transmission infrastructure, water and industrial transition projects. These capital-intensive, physically irreplaceable assets contrast with the asset-light, software services business models prevalent in the US private credit market, which are more exposed to AI disruption.”

Example deals across Ninety One’s platform include:

• Senior secured debt finance for a Vietnamese renewable company with >100MW of operational assets seeking to raise platform financing to support platform expansion.
• A senior investment loan to fund infrastructure development and facilitate the building of apartments targeting low- to middle-income homeowners in South Africa.
• A senior secured term loan to a leading third-party cold storage logistics supplier for the food and agriculture business in Latin America.

Martijn Proos, Co-Head of Emerging Market Alternative Debt: “Expanding infrastructure requirements are creating an abundant deal pipeline. And by directing capital towards essential transport, energy, water, urban infrastructure and digital communication infrastructure, investors also contribute to social& economic development and environmental sustainability.”

Experience is an enduring barrier to entry

The inherent complexity of these markets and the years required to build local expertise and origination networks mean competition remains limited, and the premium shows little sign of eroding.

Investors need local-market experience to recognise where risk is mispriced and extensive expertise in deal structuring. Today, only a limited number of investors are seasoned in this space. A broad and deep origination network – something that cannot be bought or created overnight – also helps to ensure diversification and allows lenders to select the best opportunities.

Kilic concluded: “Developed markets private credit has become a crowded trade. In emerging markets, it remains a lender’s market – and that makes all the difference.”

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Sahil Mahtani

War in the Middle East and the disruption of energy flows through the Strait of Hormuz has potentially introduced a stagflationary shock at a time when markets were positioned for a goldilocks or reflationary backdrop. There are three parallels to the early 2020 dynamic that investors should note, according to Sahil Mahtani, Director, Investment Institute.

At first glance, early 2020 may seem an odd analogy for the current moment. The Iran crisis of 2026 is not a natural disaster or an accident but a deliberate act. And the economic transmission mechanism is different: while the Covid lockdowns created both a supply and demand shock, this is primarily a supply shock. But the comparison is still useful because, in both cases, markets may have recognised the event without fully pricing the second and third-order implications.

The first reason this could prove to be an early 2020 moment is simply the starting point. In both cases, this inherently stagflationary shock has arrived as markets were positioned for a Goldilocks environment. In early 2020, markets expected S&P 500 earnings to grow around 9% while interest rate markets were positioned for one cut by the end of the year. At the start of 2026, the S&P 500’s 2026 and 2027 year-on-year earnings estimates are +16%. For the ACWI, it is 17% and 14%, respectively. Meanwhile, SPY/TLT, which measures how US stocks are performing relative to longer-term bonds and is a simple measure of market expectations for future growth, is down just 5% from the February peak, while the dollar has firmed.

In other words, markets were pricing in above-trend growth, mild disinflation and a healthy backdrop for cross-asset returns despite elevated valuations.

Part of the reason for the sanguine price action is that markets have internalised the lesson of fading geopolitical shocks. Strategists are showing variants of the same table itemising previous geopolitical risk episodes and making the case that risk markets have typically ended up higher 12 months after previous such episodes. The Atlantic energy benchmarks that financial markets typically look at are also not reflecting the disruption to energy markets as much as Asian energy and product benchmarks. For instance, WTI ended last Friday (March 20) lower than the previous week, even as Singapore jet fuel rose 12% in the same period.

The second reason this could be an early-2020-type moment is that markets may be pricing the wrong policy destination (partly because they are underestimating the hit to growth). Currently, pricing transmission seems to be higher oil prices, higher headline inflation, more hawkish central banks and higher yields. That is due to some early economic data, but primarily hawkish central bank speak. Hence markets have priced in three more hikes this year in the UK, three in the eurozone, and at times have leaned toward a hike in the United States. Ultimately, we think markets are assuming a more hawkish central bank reaction function than will eventually apply.

Indeed, the initial headline inflation shock could be large, especially in Europe and Asia. In Europe, the inflation shock is likely to be around 150bp. But there is likely to be much less persistent pass-through to inflation than in the wake of the 2022 Ukraine war shock, given restrictive monetary policy and more limited pandemic-style fiscal intervention. Should worse war and energy scenarios materialise, financial conditions will tighten further, and the growth impact will ultimately be weaker. Should European central banks worry about the un-anchoring of inflation expectations, they will hike. But the combined effects of energy and terms-of-trade shocks, along with tighter financial conditions, would, in our view, push economies towards very weak growth and create medium-term downside risks to inflation

The third reason we may be in an early 2020 moment is that the commodity shock is likely to reverberate for months in ways not captured by the Atlantic benchmarks alone. True, the oil intensity of global GDP is far lower than it was in the 1970s, but product markets are already showing the non-linear effects of the shock. Jet fuel, bunker fuel and naphtha have risen faster than crude. Nearly half of global methanol supply comes from the Gulf region and the Gulf accounts for 43% of global urea, 44% of global sulphur and 27% of global ammonia supply. Those inputs run through plastics, packaging, fertilisers, construction, chemicals and transport. Meanwhile, markets are still trying to price the impact of global plant closures or plant damage in the Persian Gulf.

Countries have already begun introducing export controls (Thailand, China), price caps (South Korea), reserve releases (IEA 32-country coordinated release), tax cuts (Vietnam, Austria), shorter workweeks (Thailand, Philippines, Pakistan, Bangladesh) and coal or nuclear restarts (Japan and South Korea). That is exactly what one would expect when a physical energy shock starts pushing governments to act. This is concentrated in Asia more than in other places because that is where energy resources that pass through Hormuz primarily flow.

The closure of the Strait of Hormuz is one of two geopolitical events that strategists have always worried about (the other being Taiwan), and the removal of 10-15% of global oil flows and 3% of global natural gas consumption is a major shock even to hitherto oversupplied energy markets. If energy product market stress persists, if more countries intensify demand-restraint measures, and if financial markets continue to treat the episode as a manageable inflation scare rather than a growth shock, then the gap between physical reality and financial pricing could close abruptly.

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If Iran were to, for example, use drones to close shipping lanes, that would be a major escalation. It would also be met with massive retaliation, not to mention the fact that Iran’s own oil exports rely on the Strait. Historically, the Iranian regime has not been a reckless gambler and has been more likely to play for time than to pursue actions that pose existential risk. Retaliation has frequently been more performative than escalatory. However, given the death of most members of the leadership team, the behaviour of Iran’s current leadership is untested. Already, Iranian foreign minister Aragchi has noted that some of Iran’s military units are independent and isolated, acting on their own with general instructions provided in advance.

Devolution of authority to local units has allowed Iran to avoid the paralysis it exhibited on the first day of the 12-Day War in June 2025, but it also increases risks. Ultimately, a Hormuz closure scenario remains a low-probability, high-impact tail risk. That is the critical variable for whether attacks remain contained or spiral into a broader conflict. As of the night of Sunday, 1 March, we expect that the conflict will last weeks, not days. However, the critical variable is not length but intensity. There are significant downside tail risks if the domestic transfer of power in Iran were to be contested with force, leading to a Syria-type civil war. There are, however, upside tail risks if the new Iranian leadership were to change its attitude towards the United States and negotiations were to commence.

In the short term, should an Iranian response to the American and Israeli operation, which has been planned for months, include closing shipping lanes or attacks on regional infrastructure in Saudi Arabia and the UAE, the impact on financial markets would operate mainly through the oil price, which has already priced in higher risk premia despite efforts by OPEC to increase supply. Macroeconomically, it would operate through the uncertainty channels as embedded in the US Federal Reserve Board and New York Fed models. The effect would be stagflationary, i.e., inflation rising and growth slowing.

A 30% real increase in oil prices would, on those estimates, lift headline inflation by around 1 percentage point over a year while reducing output growth by roughly 0.13 percentage points, with the uncertainty channel amplifying these effects further. The effects on inflation expectations could also be significant, depending on the size and duration of the ultimate shock. That may complicate the Fed’s path lower this year. However, energy equities and energy-linked sovereigns can benefit, even as energy importers (such as Japan and India) face a higher import bill.

The crisis in Iran was well telegraphed, but it arrives at a time when markets are already digesting significant churn beneath the headline index numbers. Under the surface, fragility has been evident in sharp first-quarter sector rotations, most notably the sell-off in software and emerging cracks in developed-market private assets. The spread of agentic AI has prompted a reassessment of traditional SaaS moats. The IGV software ETF is down around 20% year to date, and valuation multiples for prominent software names have compressed. That weakness has spilt over into publicly listed developed-market private credit vehicles with heavy software exposure, particularly US Business Development Companies. At the same time, investors have reassessed businesses with tangible assets and lower perceived obsolescence risk, amid concern about rapid AI diffusion, especially across labour markets. Some software firms have responded by cutting headcount and trimming future stock-based compensation.

There was also a marked sell-off in metals prices in January after a sharp run-up. The dollar remains lower year to date. In short, markets were already adjusting before this latest geopolitical escalation. That adjustment has been partially absorbed because growth remains firm and inflation is easing. There is also a reflexive element. Strong asset prices have coincided with a low savings rate, supporting consumer spending in the upper half of the K-shaped recovery. The key question now is whether events in Iran disrupt that balance, and we will update our views accordingly.

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Deirdre Cooper

Sentiment towards decarbonisation has weakened in recent years, but underlying earnings performance has remained resilient. High-quality enablers of the energy transition have continued to deliver strong, above-market earnings growth, even as valuations compressed amid policy uncertainty and higher interest rates — creating what investors see as a compelling entry point.

“Sentiment may have faltered over the past few years, but earnings have not,” said Deirdre Cooper, Head of Sustainable Equity. “High-quality enablers of decarbonisation have continued to deliver strong, above-market earnings growth, even as valuations compressed amid policy uncertainty and higher interest rates.”

Recent months have seen a recovery across clean-tech markets. While some lower-quality companies may simply be rebounding from oversold levels, others are demonstrating a more durable path to long-term value creation. Improving sentiment has been driven by structurally rising power demand in developed markets — particularly from data centres and industrial electrification — alongside accelerating, cost-driven adoption of clean technologies in emerging markets.

“What we saw in 2025 was an energy transition increasingly driven by economics, technology and efficiency gains, rather than policy cycles,” Cooper said. “We expect this shift to continue this year and beyond, with the clean-tech market projected to triple in value to >US$2.1 trillion by 2035.”

An accelerating transition with new growth engines

The energy transition continues to advance, but its drivers are evolving. Emerging markets are now a central force, with clean technology reaching cost parity — or better — with fossil alternatives across much of the developing world.

“The energy transition is still on, and it is accelerating in new ways,” said Cooper. “Emerging markets have become the growth engine of the transition.”

China’s scale and cost leadership in solar, wind, batteries and electric vehicles is reshaping global adoption patterns, enabling countries to electrify and industrialise more cleanly and affordably. Nearly half of China’s clean-tech exports now go to emerging economies, accelerating deployment across markets such as India, Thailand and Brazil.

Cooper continued: “Emerging markets are transitioning not primarily due to policy, but because clean technology makes economic sense.  China’s scale and cost leadership in solar, wind, batteries and electric vehicles are transforming access to affordable clean energy across the developing world.”

Developed markets face rising power demand and efficiency needs

In parallel, developed markets are experiencing a sharp inflection in electricity demand after decades of flat consumption. Artificial intelligence, data centres, electrified heating and cooling, and industrial reshoring are driving a renewed focus on power generation, grids and efficiency.

Cooper continued: “This has turned utilities, grid operators and efficiency specialists into some of the most important enablers of the next economic growth wave. From Amazon to Coreweave, investors in AI datacentres are increasingly calling out access to power as the key bottleneck to delivering on their plans.”  This combination of rising demand and decarbonisation goals is creating significant opportunities for utilities, grid operators and companies enabling energy and industrial efficiency.

“With policy headwinds fading and fundamentals strengthening, we think developed-market clean-tech leaders have potential for a more sustained phase of growth than the broader market appears to believe as part of an all-of-the-above energy solution,” Cooper stated.

Technology expands the investable opportunity set

Advances in electrification and efficiency are broadening the scope of decarbonisation across the global economy. Today, more than 75% of final energy demand can be electrified, up from around 50% in 2000, creating new opportunities across industrial electrification, power semiconductors and energy-efficient infrastructure.  Cooper noted: “Efficiency is a critical lever both for reducing emissions and enabling new sources of power demand like data centres in an increasingly electricity short world. This creates opportunities for companies whose technologies enable smarter, cleaner and more efficient use of energy across industries.”

Beyond power and industry, innovation is also unlocking differentiated opportunities in areas such as precision agriculture, where targeted solutions can address emissions from food systems, which account for around 30% of global emissions.

Positioning for the next phase of the transition

Portfolio positioning reflects this evolving landscape, balancing defensive exposure with structural growth opportunities while increasing emphasis on emerging markets.  “Our focus remains on identifying companies with structural growth, durable competitive advantages and the ability to compound returns through cycles,” Cooper said. “The portfolio is balanced between defensive utilities that meet surging power demand in developed markets, and high-growth enablers of electrification, resource efficiency and indu

After a period where sentiment diverged sharply from fundamentals, markets may now be turning in favour of active investors.  “The ‘transition of the energy transition’ — from developed to emerging, and from policy to technology and economics — is creating new opportunities for high-quality decarbonisation solution providers,” Cooper concluded.

The post Sustainable Equities 2026 Outlook: Investing in an evolving energy transition appeared first on AdviserVoice.

Darpan Harar

After a strong run for global credit markets in 2025, investors heading into 2026 face a more complex and selective environment.  Credit markets delivered robust total returns last year, supported by tightening spreads that ended 2025 near 10-year lows in some segments. However, with valuations now stretched and the risk of spread normalisation rising, investors will need to work harder to protect capital and generate returns.

Darpan Harar, Portfolio Manager, Multi Asset Credit: “Credit markets delivered robust total returns in 2025, after shrugging off short-lived wobbles around political risk. If spreads widen and revert to more ‘normal’ levels this year, investors could see these gains eroded – that’s an important risk to navigate.” 

Credit still offers income, but not all yield is equal

While government bond yields remain elevated, volatility and growing concerns around public finances have undermined risk-adjusted returns in sovereign markets. Against this backdrop, credit continues to offer an attractive source of income — provided investors are selective.  Justin Jewell, Portfolio Manager, Multi Asset Credit: “Credit still offers a great source of income, which is a key driver of long-term investment returns, but not all yield sources are equal.”

Rather than narrowing opportunity sets, selectivity requires casting a wide net across global credit markets, including specialist areas that may offer diversification and protection against interest-rate risk.  “By exploring specialist areas of the market, investors can limit their exposure to interest-rate risk relative to more mainstream markets,” Jewell noted, highlighting the role of floating-rate structures in an uncertain monetary policy environment.

Systemic risks remain contained, but fundamentals matter

Recent high-profile stresses in parts of the US private credit market have raised concerns about broader systemic risks. These pressures remain contained and are largely explained by excesses built up during the leverage buyout boom of 2020–2022.

“We do not think this is a systemic issue,” Harar continued. “Stress has been relatively contained and is largely explained by a hangover from the leverage buyout boom.”  Public credit markets present a different picture. Despite becoming more expensive, areas such as high yield have generally maintained stronger average credit quality, with the riskiest lending increasingly taking place outside public markets. Even so, careful analysis of underlying fundamentals remains essential given the wide dispersion in creditworthiness.

Shifting supply and demand will increase dispersion

After several years of supportive technical conditions, supply-and-demand dynamics are set to change. Increased issuance — particularly linked to investment in artificial intelligence — will lift supply, while a fall in yields may dampen demand.  With credit spreads anchored at historically low levels, this combination points to higher volatility in parts of the investment-grade market. More favourable technical conditions are expected to emerge in specialist areas such as loans, bank capital and selected segments of the high-yield market. 

Positioning for a more demanding year ahead

As the era of “easy income and capital growth” draws to a close, credit investors will need to work harder. Tight spreads mean mainstream credit indices are likely to disappoint, while divergence across sectors and issuers is set to increase.

“A key characteristic of the environment in 2026 is likely to be increasing divergence across economic sectors,” Harar concluded, pointing to shifting consumption patterns and a widening gap between winners and losers across the corporate landscape.  This divergence creates a rich opportunity set for bottom-up investors. Portfolios are best constructed around a core of high-yielding issuers with defensive characteristics, while remaining active and flexible in capturing opportunities as they arise across the global credit universe.

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Archie Hart

Emerging market equities enter 2026 with a compelling combination of improving fundamentals, greater policy visibility and deep structural growth drivers. Despite geopolitical noise and macro uncertainty in 2025, the asset class delivered robust performance, supported by pragmatic policymaking, resilient domestic demand and valuations that continue to stand in stark contrast to stretched levels in parts of the developed world. With diversification already beginning to broaden global market leadership, emerging markets are increasingly positioned to benefit from shifts in global capital allocation.

The macro backdrop also appears increasingly constructive. The current US-dollar cycle has extended far beyond its historical average and now shows signs of reaching maturity, with rate differentials, capital flows and policy dynamics beginning to look similar to previous turning points. Historically, such conditions have tended to favour non-US assets, particularly emerging markets, where valuation starting points are far more attractive.  This combination of cyclical support and improving structural foundations gives EM a stronger starting point than in previous years.

Strong foundations and clearer policy signals support momentum

Emerging markets demonstrated notable resilience last year, with performance comfortably ahead of developed markets. A series of macro shocks failed to unsettle the asset class, largely because investors were able to look through short-term disruption and focus on stronger underlying fundamentals.

Archie Hart, Co-Portfolio Manager, Emerging Markets Equity: “2025 was a strong year for emerging markets, which outperformed their developed counterparts comfortably,” adding that despite tariff noise and regional tensions, “markets looked through near-term disruptions.”  Policymaking across major emerging economies continues to be anchored by stability, transparency and long-term economic competitiveness. China’s renewed emphasis on the private sector, India’s unprecedented scale of infrastructure investment and the Middle East’s acceleration of economic diversification are reshaping growth dynamics across the developing world.

Structural advantages support long-term performance potential

A combination of higher real rates, conservative policy stances and ongoing reform momentum continues to underpin confidence in the asset class. Regions such as the UAE and broader Middle East stand out as structural winners, supported by economic diversification and growing integration with Asia. In South America, improving policy credibility and falling rates are paving the way for renewed domestic and foreign investment.

Hart said: “Emerging markets are benefiting from a powerful combination of reform momentum, policy clarity and increasingly resilient domestic growth. From infrastructure investment in India and economic diversification in the Middle East to improving governance and capital market reform elsewhere, these structural shifts are broadening the opportunity set and strengthening the foundations for long-term growth.”

Beyond technology, reforms across multiple regions, from fiscal consolidation and financial-system strengthening to targeted industrial strategies and deepening trade links, are laying the groundwork for more durable structural growth. These shifts are expanding the opportunity set by improving macro stability, enhancing competitiveness and supporting greater long-term investment.

AI leadership emerges as a critical engine of growth

A significant driver of optimism for 2026 is the scale and depth of emerging markets’ involvement in the global AI value chain. While the conversation is often dominated by US mega-caps, several Asian and emerging market companies have become indispensable to AI hardware, infrastructure and power-intensive ecosystems.

Juliana Hansveden, Portfolio Manager, EM Leaders: “Select companies in Asia and other emerging markets have quietly become indispensable players in the global AI value chain,” supported by established leadership, strong moats and durable competitive advantages.

The performance of the so-called “Secret Seven” – key technology and semiconductor firms across Taiwan, China and South Korea – reflects this shift, with several matching or surpassing the achievements of their US counterparts over the past year.  These companies sit at the centre of the world’s most advanced technology manufacturing cluster, benefiting from deep engineering expertise, tightly integrated supplier networks and some of the highest R&D investment levels globally. They provide the critical bottleneck components, from leading-edge logic and high-bandwidth memory to advanced packaging, switching and datacentre power systems, that determine the pace at which global AI capacity can scale.

At the same time, the traditional defensibility of software is being eroded as AI lowers barriers to entry, increasing the importance of upstream hardware ecosystems where EM companies hold structural leadership.

Market conditions set the stage for broader global allocation shifts

As global investors navigate stretched valuations in developed markets, particularly in US AI-related equities, emerging markets stand to benefit from even modest reallocation flows. The asset class remains relatively discounted while offering broader economic exposure and a more diversified earnings base.

Varun Laijawalla, Co-Portfolio Manager, Emerging Markets Equity: “It is important to note the parallels with earlier market cycles. AI is going to be incredible for the next 25 years, but that does not necessarily make this a good time to buy developed market AI-related securities that already look overstretched.” Even a small shift in global asset allocation — such as 5% moving out of US equities — could translate into a meaningful inflow for emerging markets.”

There is historical precedent for such a shift: after the peak of the dot-com cycle, emerging markets went on to outperform developed markets materially over the subsequent decade as global leadership broadened and capital rotated toward undervalued regions.  Today’s backdrop of stretched DM valuations, concentrated leadership and a potentially moderating US dollar shares several characteristics with that earlier transition.

Navigating risks while securing long-term advantage

While emerging markets remain attractively valued on a relative basis, risks such as renewed tariff uncertainty or short-term volatility linked to US market corrections could create temporary disruptions. However, the structural economic base, diverse earnings profiles and lower starting valuations give emerging markets greater potential to rebound swiftly relative to more concentrated developed markets.

Hart stated: “US policy in South America has also gained attention following recent actions in Venezuela, but this does not change the generally positive view on the broader emerging market asset class. Arguably, if the US erects a security umbrella over the Western Hemisphere and acts to install or maintain western and market-friendly regimes, this could be positive for South American markets.”  While there has been some speculation that a stronger security focus on South America may lead to a weaker focus on other geographies, the status quo in areas such as the South China Sea or Taiwan is unlikely to change in the medium term, with deterring conflict remaining a US priority.

“Pockets tied too closely to a single narrative could face disappointment if growth assumptions cool,” but the broader asset class retains significant resilience. Emerging markets are positioned for stronger recovery potential because “valuations start from a lower level” and the underlying real economy is “far broader based than in the US,” Laijawalla cautioned.”

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Sahil Mahtani

Sticky inflation, rising fiscal strains and weak growth are eroding the role of bonds as a portfolio ballast, forcing investors to rethink defensive diversification, according to Sahil Mahtani, Head of Macro Research.

You hold government bonds for their ballast: they’re meant to rally when growth wobbles and equities sell off. That premise looks shaky these days. Medium-term inflation has not been durably contained; the fiscal arithmetic is deteriorating; and trend growth is too soft. Put together, these forces push term premia up and keep stock–bond correlations higher than the pre-2020 norm. This blunts bonds’ ability to offset equity drawdowns. So do you need them at all?

Start with inflation. It has eased from its 2022-2023 peaks but remains stubbornly above target in many advanced economies. In the UK, despite the lack of a feared wage-price spiral, inflation has been particularly sticky, with services inflation still hovering around 3.5% yoy. Sticky inflation has been driven by regulation – for example, five years of fast-paced increases in minimum wages, excise duties, packaging rules and loose fiscal policy, layered on top of higher global costs. That has interrupted disinflation and kept long-dated gilt yields higher.

In the US, fears of persistent inflation have deferred policy easing, despite cooling growth momentum, providing one reason why long-term Treasury yields are near cycle highs. Even in the euro area, where falling inflation has allowed a sizeable cutting cycle, disinflationary base effects have now played out and the bar is high for inflation not to rise into year-end 2025, especially with rising credit and money supply. As we get a wave of new capex cycles driven by the AI build out, deglobalisation and increased geopolitical tensions, the age of a higher, more volatile inflation regime is at hand, making the case for a new, higher normal in yields.

A second headwind is fiscal vulnerability. Across the OECD, the median real 10-year yield is now positive (roughly 1-2%) vs where it was in the late 2010s, pushing up the effective cost of debt. In 2024, interest payments consumed about 3.3% of GDP, up from 2.7% in 2015–2019. This rise is projected to continue. OECD refinancing requirements have risen from US$7.5 trillion in 2019 in the OECD to $13tn in 2025, a product of higher borrowing and a shift towards issuance of shorter maturities during the pandemic. Central bank holdings are also drifting lower, forcing more supply onto more price-sensitive private balance sheets, ergo increasing term premia.

The recent UK OBR long-term forecast underlines the long-term risks. At end 2024, the UK government deficit stood at 5.7% of GDP, debt was around 94% of GDP, and the 10-year gilt yield at end June was 4.5%, the third-highest borrowing costs among advanced economies. The OBR notes debt has ratcheted higher over decades. Stabilising it now requires a primary surplus of about 1.3% of GDP, a sharp swing from the current -2.2% deficit, because debt dynamics have worsened: real borrowing costs now exceed real growth rates. Meanwhile, the UK increasingly looks like a country attached to a health service, with health spending plausibly doubling over the long term. Due to ageing, chronic illness and low productivity, NHS spending will rise from 7.9% of GDP in 2025 to 14.5% by the 2070s, according to the OBR. By then, debt is projected to be 270% of GDP.

The third headwind is weak growth, which offers little relief. Euro-area real GDP growth is projected at just 1.1% for 2026 (with significant downward revisions since January), despite rising public spending. In the US, 2026 growth is only 1.7% even after modest upward revisions since May. Of course, this is a late cycle environment, and recession risks may well derail these fair-weather consensus forecasts. The result, weak trend growth with higher real rates, is exactly the combination that worsens debt dynamics and keeps term premia elevated

When inflation is sticky, deficits persistent and growth subdued, owning duration does not reliably cushion risk-asset selloffs in portfolios. Should the factors outlined above persist, bonds simply become a lower-returning version of equities. There is no meaningful diversification when the stock/bond correlation is as high as 60% (as it is in some countries, having risen materially since 2022). Duration no longer protects against recessions because policy cuts are too shallow, meaning the rally does not arrive when needed.

The conclusion is challenging for many portfolios: without a decisive improvement in inflation control, fiscal consolidation, or trend growth, government bonds will continue to struggle in their traditional role as portfolio shock-absorbers. The UK’s unattractive cycle of high yields, difficult budget decisions, and worsening growth could well spread.

If sovereign bonds are compromised, how should investors diversify defensively in portfolios? Bonds are roughly half of the global market portfolio so cannot be ignored entirely. So, what can investors do within fixed income? First, use options strategically. If traditional diversification is at risk, replacing direct exposure with call-replacement or protection strategies can provide more reliable and occasionally cost-effective volatility reduction. Second, more esoteric fixed income exposure may offer something genuinely differentiated, for instance, some emerging markets and some dollar-bloc developed markets. Either way, things must change for everything to stay the same.

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Sahil Mahtani

Ninety One has published the latest in its research series examining the strategic implications of shifting macro dynamics for the US dollar and global portfolio construction.  The Shrinking Upside in the Dollar Story^[1], contends that while past cycles were defined by an unambiguous American overweight, the next may be shaped by a structural rethink of that allocation norm.

“Since the global financial crisis, allocating to US assets has been the easy trade,” said Sahil Mahtani, Head of Macro Research, Ninety One. “Yet as 2025 unfolds, that consensus is being severely tested.” Washington’s growing embrace of tariffs, a deteriorating fiscal position, and a more transactional foreign policy posture are all reconfiguring the strategic foundation of US asset dominance.

Dollar cycles typically span 18 years^[2] and only turn when four structural forces — geopolitics, growth differentials, investment flows, and currency interventions — realign within a narrow window. That condition is now taking shape. While turning points are rare, Mahtani has identified three reasons suggesting upside risk for the dollar is shrinking due to: the dollar’s valuation, normalisation of unusually high US investment allocations, and shifting sentiment in the dollar’s global role.  Trump could accelerate this trend by expanding fiscal deficits and compressing the US’s relative growth premium.

The US Dollar is now extremely expensive

The US dollar has appreciated over 40% since 2011, pushing valuations toward historically unsustainable levels — comparable to the peaks preceding the 1985 Plaza Accord and the 2001–2002 downturn. “Today’s ratios of PPP-based to USD-based GDP are at the highest levels in almost 25 years,” said Mahtani. On a purchasing power parity (PPP) basis, US GDP is equal to its nominal output, but China’s PPP GDP is double its nominal size, and India’s is four times larger.

“This overvaluation affects competitiveness. A further rise would exacerbate the growing competitiveness issue in the United States versus the rest of the world,” Mahtani continued.  A 20–30% correction could bring the dollar more in line with global cost structures.

The dollar is likely to fall

Moreover, portfolio rebalancing, hedge ratio normalisation, and benchmark weight adjustments are aligning to create multi-year pressure on the greenback.  Institutional investors — especially in Europe and Japan — have at times in 2025 incurred sizeable losses on unhedged US equity positions. For example, a 2025 YTD unhedged allocation to the S&P500 was underperforming the Stoxx 600 by over 20 percentage points in euros at one point in mid-April (and as of August 1 is underperforming by 12%). Mahtani: “If Europeans were to ‘normalise’ their US equity weight, roughly US$500 billion of stock would need to be sold.” At present, foreign investors hold around US$32 trillion of US securities, with about half owned by European and Japanese institutions.

Additionally, work by Wenxin Du and Amy Huber shows that hedge ratios — particularly in US bonds — have fallen since 2018. Simply rewinding those modest changes would prompt US$1 trillion in FX trades against the dollar.

However, a full structural downcycle likely requires broader valuation convergence. “Overseas investors rarely lighten US exposure while American firms dominate global earnings and innovation… Investors might do so if there are compelling opportunities outside the US. So understanding the path of the dollar requires understanding what the “phase II” AI trade looks like.” said Mahtani.

Downside risk to the dollar’s position in the world is becoming increasingly salient

This is not just a cyclical trade. Structural risks to dollar centrality are rising. “The prospect of a medium-term shift is more visible than it was even a few years ago.” The PBoC’s move toward greater currency flexibility, and the 2022 seizure of US$300 billion in Russian central bank reserves, have shifted perceptions among sovereign reserve managers.  Gold’s rise since 2021 — “in defiance of conventional models” focused on real rates — suggests it has overtaken the euro in the sovereign safe asset hierarchy. Countries like India, Brazil, Chile and Zambia, while nominally floating, continue to shape monetary policy around the dollar, making any softening of dollar dominance globally significant.

Stepping back from dollar centrality

Domestic signals matter too. The appointment of Stephen Miran as head of the Trump Council of Economic Advisors brought renewed attention to ideas like taxing dollar inflows. While Miran has since distanced himself from the paper, the mere fact the ideas are being discussed are an interesting signal. This logic of capital controls appeared again in Section 899 of the 2025 fiscal reconciliation bill, which would have raised taxes on foreign held US assets and removed sovereign exemptions. “Its inclusion underscores how quickly anti-inflow proposals can move from fringe policy papers into near-term legislative drafts.”

Eroding Fed independence

Institutional erosion also threatens the dollar’s appeal. The 2025 Wilcox Supreme Court case was a close call. Although the Court explicitly exempted the Fed from presidential removal powers, describing it as a “uniquely structured, quasi-private entity,” the ruling signalled that future challenges may still surface.

America’s debt trajectory

The fiscal position adds further strain. Stabilising debt-to-GDP ratios would require an improbable combination of very high real growth, very low rates, and substantial primary surpluses — conditions not currently supported by legislation. “Even including tariff revenues, fiscal risks are growing, not shrinking.”

Conclusion

A structural dollar weakening has become the most probable scenario. “There is no symmetry in the case of owning the dollar.” Left tail risks are growing — institutional, fiscal, and geopolitical — just as alternatives become marginally more investable.  Mahtani concludes: “If the age of the unquestioned American overweight is behind us, the implications will be profound.”

———

Notes:
[1]  The Shrinking Upside in the Dollar Story
[2] Dollar cycles typically span 18 years.

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