Outlook 2026: Navigate new pathways

Strategic autonomy in action

“Looking at market structure, we currently see a more favourable situation in Europe than the US, primarily due to lower concentration risks. Unlike the US, where relatively few mega-cap stocks dominate the main indices, Europe currently offers a broader and more diversified set of investment opportunities.“

Michael Heldmann

CIO Equity

With Europe undergoing notable transformation as it seeks to reassert itself in the wake of geopolitical shifts, its equity market is once again positioning itself as a key part of the global landscape. In its quest for increased strategic autonomy, the region is embracing a more expansive fiscal policy, and significant spending initiatives – especially in Germany – are acting as a stimulus that is not just about defence and military hardware, but also revitalising the continent’s industrial base, infrastructure, and capacity for innovation. Alongside fiscal developments, monetary policy also continues to be supportive. With inflation under control, we are expecting dovish stances from both the Bank of England and European Central Bank to continue, further supporting valuations and positive sentiment.

Europe favoured over US

Looking at market structure, we currently see a more favourable situation in Europe than the US, primarily due to lower concentration risks. Unlike the US, where relatively few mega-cap stocks dominate the main indices, Europe currently offers a broader and more diversified set of investment opportunities. Alongside this, we believe European equities are, across sectors, currently more attractively priced than many US counterparts, giving them appeal in terms of both value and growth.

While US equities have rebounded significantly since the sharp declines in the wake of “Liberation Day”, underlying economic data suggests a more fragile economic environment. Indeed, with inflation likely to rise due to the continued effects of elevated tariffs, alongside a subdued growth forecast, the US faces stagflationary risks going into 2026. And while the US Federal Reserve is expected to continue cutting rates, concerns around political pressure on monetary policy decisions still have the potential to undermine market confidence.

In terms of valuations, we currently view US equities as richly priced. Combined with near record levels of concentration, a selective investment approach is required, focusing on companies that justify their premium while reducing exposure to those that lack fundamental support. While the US certainly retains long-term strengths – in particular in AI, a space that still offers ample opportunities for investors while also still dominating stock market related news flow – its current equity landscape demands caution and selectivity.

Indian equities: diverse and liquid

In Asia, India currently stands out as a market with high potential due to multiple tailwinds. Alongside extremely favourable demographics, India’s digital infrastructure is burgeoning – the country accounted for 46% of global real-time digital payments in 2023¹ – and it is the world’s largest supplier of vaccines and generics, with the US accounting for approximately a third of its pharmaceutical exports.² It is also perfectly situated to continue to benefit from “China + 1” strategies as global companies seek to diversify their supply chains and manufacturing bases.

India’s equity market is highly diverse and liquid, sharing many traits with more developed economies. With over 200 stocks exceeding market caps of USD 5 billion, valuations are also low compared to global benchmarks. Consensus estimates for GDP and earnings-per-share growth place India ahead of other emerging markets, reflecting its strong fundamentals, policy stability and vibrant entrepreneurial scene. Despite some potential bumps in the road due to ongoing tensions with the US, we thus expect India to remain an attractive destination for active management for some time to come. Recent setbacks due to US tariffs are also contributing to attractive entry points.

China: hope for stability

In China, the equity outlook is being shaped by a complex mix of head- and tailwinds. On the one hand, we are seeing foreign capital outflows as the future trade relationship with the US remains unclear, alongside some regulatory uncertainty in tech and property, as well as demographic pressures from a rapidly ageing population. However, the Chinese government is responding to these challenges with targeted stimulus, including rate cuts, government-backed purchases of exchange-traded funds (ETFs), and supportive liquidity measures. With these initiatives, we will hopefully see a return of consumer confidence, unlocking high household savings and greater stability in the economy.

China’s equity market remains deep and attractively priced, as well as under-owned by foreign investors, presenting contrarian opportunities for long-term capital flows The country’s innovation power, particularly in the AI field, remains underappreciated, while the potential for large pension reforms and significant strategic alliances away from the US also contribute to the country’s current appeal to investors. While performance has been volatile – and further news-driven volatility is to be expected – local Chinese equities have performed well in 2025, and the long-term trajectory remains positive, especially for investors focused on innovation, domestic consumption and strategic sectors (see Exhibit 2).

Exhibit 2: Chinese equities have performed strongly since mid-2024

Source: LSEG Datastream, Wind, Allianz Global Investors, as at 31 July 2025

Three regions offer compelling framework

Taking a comparative outlook, Europe offers a structural revaluation opportunity, driven by fiscal expansion, defence spending and supportive monetary policy; India represents a long-term growth engine, combining demographics, digital expansion and further integration into global supply chains; and China represents a long-term opportunity, with deep market potential, leadership in innovation and policy support. Together, these three regions form a compelling equity allocation framework for navigating the shifting global order. With the US facing valuation and policy headwinds, Europe, China and India offer diversified, resilient, and forward-looking investment opportunities.

Diversified and active for resilience

“Developed economies are expected to grow close to their trend pace, while emerging markets maintain a clear growth premium, led by India and parts of South East Asia. This divergence creates opportunities for selective duration and credit positioning across regions.“

Jenny Zeng

CIO Fixed Income

Global growth in 2026 should remain resilient, underpinned by largely pro-growth policy settings in the major economies. Central banks in developed markets are likely to have normalised policy rates towards neutral levels, following the aggressive tightening cycle of prior years. Fiscal policy continues to lean towards an accommodative stance, with governments prioritising infrastructure and strategic investment to counter lingering trade and geopolitical uncertainties. We think inflation will continue to be asynchronous – likely to rise in the US, remain moderate in the euro area, and be subdued in Asia and major emerging market countries.

This growth and inflation combination underpins an overall benign environment for fixed income. We expect some divergence in growth and inflation dynamics, as well as policy trajectories, which will create opportunities for selective duration and credit positioning in active portfolios.

Nonetheless, volatility is likely to rise amid tight valuations. We think institutional resilience and policy flexibility will continue to be tested – as will the global economy’s ability to adapt to a more fragmented world. This calls for vigilance, not indulgence, quality over imbalances, active over passive, and liquid over illiquid.

Policy support counters growth pressure

Growth remains under pressure, but targeted fiscal and monetary policy and investments in technology provide support. Developed economies are expected to grow close to their trend pace, while emerging markets maintain a clear growth premium, led by India and parts of South East Asia. This divergence creates opportunities for selective duration and credit positioning across regions.

In monetary policy, we also see divergence, especially between developed and emerging markets.

• Developed markets: Policy rates are expected to fall further, with the US Federal Reserve cutting towards 3% and the European Central Bank below 2%. We think the Bank of England may cut more than currently priced against a very tight fiscal stance. In Japan, meanwhile, pressure to normalise policy continues to grow given heightened inflation risks.
• Emerging markets: Despite the disinflation momentum slowing, several central banks retain room for more easing, given positive real rates. A number of countries, including Brazil, Mexico, India and South Africa, are positioned for incremental cuts, which should support the performance of local currency debt.

Tight credit spreads call for vigilance

In credit, spreads remain historically tight, reflecting resilient fundamentals and strong technicals amid increasing investor demand. However, we see cracks emerging given late-cycle dynamics, and these warrant caution. There are signs of stress in sectors that are highly interest-rate sensitive, with lower-quality issuers that are more aggressive, more stretched and (potentially) fraudulent starting to fail.

At this point, we believe the systemic risk is small. Banks’ exposure to these kinds of sectors – in terms of total loans and capital – seems manageable and across the banking system we see broadly solid fundamentals. In general, public credit remains in good shape. While fundamentals are moderating from high levels, and dispersion is rising across sectors, leverage is lower than in prior cycles, interest coverage is healthier and the high-yield index quality has improved as weaker issuers are taken out (partially by private markets).

Nonetheless, valuations leave little cushion against macro shocks. This is an environment that calls for vigilance, but we think it is too early to give up on carry.

Active, diversified, risk-controlled

In this complex environment, we believe there are several tangible takeaways for fixed income investors.

• Active management is critical. Tight spreads and asymmetric risks demand rigorous credit selection and dynamic allocation.
• Diversification across regions. Developed markets duration offers resilience, while emerging market debt can provide yield enhancement and diversification.
• Liquidity and risk controls. We think it’s important to maintain flexibility and liquidity to navigate potential dislocations from policy surprises or geopolitical shocks.

Looking ahead into 2026, our key insight is that the environment offers a supportive yet nuanced backdrop for fixed income investors. While global policy remains accommodative and growth expectations tilt in a positive direction, tight valuations and emerging credit stresses underscore the need for vigilance, diversification, selectivity and active risk management.

As far as diversification goes, we continue to see emerging markets and Asia as excellent mid- to long-term investment destinations given structurally improving macro fundamentals. Meanwhile, investors should also consider diversifying portfolios using different instruments. For example, we see a good case to selectively add floating rate notes, high-quality securitised credits and convertible bonds as diversifiers to multi-sector, income-generating portfolios. As corporate credit spreads compress, securitised credits remain relatively more attractive on a duration and rating-adjusted basis. In general, we believe a truly globalised, diversified and high-quality portfolio with active duration management is strongly positioned to generate income with resilience in today's macro backdrop.

A tale of two realities

“To prepare for any potential swings in stock prices, we will continue to take a robust approach to stock selection and overall AI exposure – built on the combined strength of our fundamental and quantitative analysis.“

Gregor MA Hirt

CIO Multi Asset

As we look ahead to 2026, the global investment landscape continues to be shaped by a complex interplay of geopolitical tensions, economic readjustments and technological disruption. The year promises to be one of contrasts – where optimism and caution coexist, and where markets may dance between resilience and recalibration.

The geopolitical environment remains fraught with uncertainty. But markets have grown accustomed to the rhythm of confrontation and compromise – particularly in the ongoing tango between President Donald Trump and his global counterparts. The balance of power, especially in trade and strategic resources like rare earths, has shifted. China, having this time anticipated and prepared for renewed tensions, has forced a reassessment of US policy, leading to a more balanced global dynamic.

Surprising resilience – for now

But despite the tax burdens and protectionist policies of the Trump administration, the global economy has shown surprising resilience. Traditional industrial growth metrics in the US remain subdued, but technology and AI continue to be powerful engines of expansion. However, the question is how long this momentum can be sustained.

Especially in an environment like this, an agile approach can be an effective way to negotiate the uncertainty. That means drawing on the strengths of a well-diversified investment mix and placing greater emphasis on active portfolio management.

Monetary policy is already acting as a tailwind for global liquidity. We anticipate further rate cuts from both the US Federal Reserve (Fed) and the European Central Bank (ECB), particularly in the first quarter. In Europe, inflation data could surprise to the downside, prompting an even more dovish stance from the ECB. Meanwhile, fiscal policy in the US is expected to be most impactful in the early part of the year, though its long-term effectiveness remains less clear.

Correction risks amid US stock market strength

US equity valuations remain elevated, but strong earnings growth, especially in the tech sector, provides a rationale for continued market strength. Importantly, investor positioning is not yet overstretched, suggesting room for further upside. We expect many market participants to take advantage of short-term pullbacks to re-enter the market, particularly over the next three to six months. Looking further ahead, the picture becomes more nuanced. We do not foresee a “Minsky moment” driven by financial overleverage – a key difference from 2008. Still, there is a growing risk of a correction if earnings were to disappoint.

As markets begin to recognise that valuations of AI and related technologies may already reflect their true earnings potential, a normalisation phase could follow.

To prepare for any potential swings in stock prices, we will continue to take a robust approach to stock selection and overall AI exposure – built on the combined strength of our fundamental and quantitative analysis.

We maintain a constructive view on emerging markets as a complex. Despite significant differences between countries, the asset class remains under-owned, attractively valued, and supported by a weaker dollar. China continues to stimulate its economy and favour the AI/tech segment, adding to the appeal of the world’s second-biggest economy.

Strategically, we remain a touch more cautious on US equities due to market concentration, high valuations and underestimated stagflation risks – particularly in the latter half of 2026. Europe presents a more favourable outlook. Earnings momentum is improving, and Germany’s fiscal support should provide a meaningful boost. However, France is likely to remain in a holding pattern until the 2027 presidential elections – a source of uncertainty to watch closely in the coming quarters.

Emerging market debt set to benefit

In fixed income, we favour euro zone bonds – especially German Bunds – where inflation is under control and fiscal stimulus is set to expand market breadth. Our top pick remains emerging market debt, which benefits from a weaker dollar, growing domestic demand, and relatively disciplined fiscal and monetary policies compared to developed markets.

We continue to like investment grade credits and crossovers (bonds rated between investment grade and high yield), though see limited potential in further spread tightening, so it becomes pretty much a carry story. High yield spreads are expensively priced in our view, but absolute yield may remain attractive for retail clients. But we stay neutral and, as multi asset investors, prefer equities, which are easier to exit in times of crisis.

Opportunity to reconsider US dollar exposure in portfolios

Currency markets are set to play a pivotal role again in 2026. We expect renewed weakness in the US dollar – though likely on a more moderate trajectory than in 2025 – driven by inflation differentials favouring Europe and political pressure on the Fed. This environment calls for a reassessment of large US dollar exposures in portfolios. In equities, investors rarely hedge their dollar positions, even though US-listed stocks typically represent more than 70% of major indices. Similarly, bond allocations often lean heavily towards US issuers, with some indices exhibiting significant dollar concentration.

We think a more measured level of US exposure may be warranted, complemented by the benefits offered by other currencies and regional bonds. The Japanese yen, for instance, could further consolidate its safe-haven status – supported by political stability and the Bank of Japan’s shift in response to higher core inflation – especially if confidence in the dollar erodes further.

Gold remains a key diversification tool for us, though it may have reached near-term peak levels. We continue to hold positions but are also exploring alternatives such as silver and gold miners. The latter remain attractively priced relative to the rise in the yellow metal and benefit from lower interest rates, which ease the burden of their capital-intensive operations.

Elevated single-security volatility

Volatility remains a central theme in our investment strategy – we consider it as a separate asset class. Indeed, the past two years have seen below-average index volatility punctuated by sharp spikes during market corrections. This environment has allowed us to stay invested in equities even after phases of strong upside swings, while tactically taking profits during periods of disruption. However, beneath the surface, single-security volatility is elevated, and low correlations between securities are masking broader risks. This fragile dynamic could act as a catalyst for a more sustained correction if market breadth narrows or macro shocks emerge.

Zeroing in on opportunities

“Infrastructure stands as a cornerstone of resilient portfolios. Driven by the energy transition and digitalisation, the asset class can offer long-term, inflation-protected cashflows and low correlation to traditional markets. With global policy support accelerating, infrastructure is no longer just supporting economies – it’s shaping tomorrow.”

Marta Perez

CIO Infrastructure

“Private credit continues to evolve as a key financing channel. Success in private credit increasingly depends on disciplined underwriting and identifying resilient segments of the market – such as European and Asia private credit, secondaries, and other areas where structural demand and attractive risk-adjusted returns remain intact.”

Sebastian Schrof

CIO Private Credit & Private Equity

As we move into 2026, private markets continue to drive long-term portfolio performance. Global alternative assets are expected to reach USD 30 trillion by 2029, up from USD 18 trillion in 2024, making private markets a mainstream part of diversified portfolios.³ The next phase of the development of private markets will be shaped by slower exits, evolving liquidity dynamics, broader investor participation and new investment opportunities.

We see five key trends driving markets in 2026:

1. Secondaries mature into a core allocation
   With limited options available to exit markets and a lagging in the payment of returns, investors are looking for other ways to realise profits and improve portfolios. In the current environment, secondaries trading of existing investment fund shares and continuation vehicles (that extend the holding period of assets) are evolving from emergency liquidity tools into core portfolio management instruments.
   
   Investors increasingly use secondaries to rebalance vintages, manage concentration risk, and gain access to seasoned portfolios. For general partners (GPs), continuation funds allow extended ownership of key assets and give liquidity to early investors. The secondaries market now plays a crucial role in adding flexibility to private markets. Private equity remains the most scalable and established part of the secondaries market. Looking ahead to 2026, secondaries, especially in private debt and infrastructure, present strong investment potential.
2. Diversification across strategies and regions
   Allocators are expanding beyond traditional buyout strategies to include infrastructure, private credit, trade finance and real assets. Each of these asset classes is expected to grow at a high single-digit pace through the decade. Geographical diversification is also accelerating as Asia captures a larger share of inflows, supported by stronger local markets and maturing regulation. Attractive investment opportunities are emerging in Asian private credit as traditional lenders withdraw and demand for tailored non-dilutive capital rises.
   
   Specialist funds in sectors such as climate technology, energy transition and digital infrastructure are gaining traction as investors seek targeted expertise and differentiated return drivers.
3. Managing volatility takes disciplined underwriting
   In uncertain markets, strict underwriting and thorough due diligence are essential to mitigate risk and capture opportunities. Outperformance depends on rigorous analysis, transparency, disciplined underwriting and alignment with long-term objectives – principles that should guide allocation decisions and remain core to our strategies.
4. Private wealth participation accelerates
   We see an acceleration in participation by individual investors as the asset class becomes more accessible thanks to semi-liquid fund structures and regulations like the European Long-Term Investment Fund (ELTIF) 2.0 in Europe. By the end of the decade, individuals may account for a quarter of private markets assets under management. This shift brings managers more long-term capital and new demands for liquidity, reporting and product innovation.
5. Macroeconomic and geopolitical realignment
   Reshoring, energy security and the regionalisation of production are shifting capital flows. By 2030, infrastructure and real asset strategies could double in size as private capital finances the energy transition, digital independence and logistics. Private markets are increasingly supporting companies as they grow – as traditional bank lending declines.

Infrastructure: energy and digital trends

Infrastructure remains a cornerstone of institutional portfolios, providing long-term contracted cashflows, inflation protection, low correlation to traditional asset classes and strong policy support globally. Europe, in particular, is set to capture a leading share of global growth as governments mobilise public and private capital to advance decarbonisation, energy security and competitiveness.

In 2026, two themes dominate:

• Energy transition. Huge demand for capital to fund projects may create more investment opportunities for private investors to step in. Strong policy support in Europe, and environmental, social and governance (ESG) targets in the private sector, continue to drive the energy transition. Energy infrastructure assets usually have long-term, inflation-indexed contracts, making them appealing in today's market. Additionally, energy transition infrastructure has little correlation with traditional assets, helping bring diversification to portfolios.
• Digital infrastructure. Data centres, fibre networks and 5G connectivity form the backbone of Europe’s digital sovereignty, supported by national and EU funding initiatives, as well as the digitalisation megatrend, including the push to provide reliable, fast services in the cloud. We continue to see opportunities, both within equity and debt, going into 2026.

Energy transition and digital infrastructure are increasingly intertwined. The rise of decentralised renewable energy systems depends on smart grids and real-time data management, while the rapid expansion of data centres – key enablers of digitalisation – drives significant electricity demand, reinforcing the need for clean, resilient energy sources.

Private credit: attractive yields and diligent underwriting

Global private credit is projected to more than double to USD 4.5 trillion in assets under management by 2030, up from USD 2.1 trillion in 2024, driven by higher interest rates, investor demand and capital market shifts.⁴ North America is expected to remain dominant while Europe and Asia continue to expand their private credit markets.

Despite macro headwinds, direct lending remains compelling thanks to attractive yields and the critical role of disciplined underwriting. We expect its growth to continue as private credit further replaces banks in financing companies.

As investors diversify beyond direct lending, we see increasing interest in infrastructure debt, liquidity solutions such as credit secondaries and trade finance, offering differentiated returns and low correlation.

Impact investing and blended finance – which mobilise capital for underserved projects and ensure measurable, transparent and lasting societal and environmental outcomes – remain in focus for many investors.

Private equity: rebound in exits?

The slowdown in mergers and acquisitions and initial public offerings has reduced exit opportunities and distributions to limited partners (LPs), shifting the focus to secondaries and continuation funds to address liquidity issues.

LPs increasingly seek lower fees and greater control over their investment decisions. Co-investments enable LPs to invest directly, offering enhanced transparency, influence and potential for higher returns – often with minimal fees and better IRR than traditional fund investments. In the current challenging environment, GPs offering co-investments can build stronger LP relationships and position themselves for market recovery.

We expect a progressive rebound in exits in the coming years, which will allow private equity fundraising to restart. This could be supported by further retail investor demand through evergreen or semi-liquid funds.