EPIC 2026 prospects

The old year ended on a strong note for equities. The leading western markets gave a return of around 20%, whilst Asia saw a range from a positive 9% for India to 76% for South Korea. China managed 18%, Hong Kong 33% and the US technology heavy Nasdaq 20%. The year was characterised by investor concerns over tariffs, their impact on growth, persistent geopolitics and uncertain Central Banks. Despite all these factors, markets climbed the wall of worry and gave good returns to most investors. 

The outlook for 2026 has similar themes. Worries over growth forecasts, persistent inflation in the US, UK and Japan, significant global political uncertainty, and Central Banks still unsure of what they should do next will colour the outlook. It is likely we will see further rate cuts in the US and UK. European rates have fallen faster but there may need to be more stimulus. Japan is trying to reel in its newfound inflation without overwhelming the bond market. China, with low inflation, can carry on with more tiny steps to looser policy. No major Central Bank wants to bring its economy to a juddering halt, owing to excess inflation or past monetary excess, while these problems are receding. 

There are worries that ‘dark pools’ of private capital conceal excessive borrowing and credit problems ahead. If they do, the Central Banks concerned are likely to be accommodating, wishing to avoid another credit led collapse. The Fed responded quickly when faced with regional bank stresses, and the Bank of England flipped policy during the leveraged gilts crisis in the pensions industry. Both Central Banks showed a wish to avoid a significant crash and are likely to take the same view if new difficulties emerge.

2026, like 2025, will be about assessing the impact of digital technology and artificial intelligence upon economies. The US giant corporations that dominate this space outside the China sphere have been super- charging revenues from expanding their offer of technology backup to homes and businesses alike. Corporates are also spending large sums from cashflows, and in some cases from new capital and borrowings, to increase their capacity to store and process data. This in turn is producing demand for more electricity generation and for the large sheds that contain the data centres. The US is busy attracting more capital and investment into this area. So far, the expansion has been highly profitable and has sustained higher share prices for the related tech sectors as their earnings have grown rapidly. 2026 may well deliver more of the same. Major tech companies’ quarterly earnings will be scrutinised hard: the market remains wary. 2026 may also see the stock exchange quotation of Elon Musk's SpaceX company. This would weigh in as a larger capitalised group than any quoted European company, with a valuation more than double the largest European quoted business. It will add to US technology dominance of the world equity markets. 

The scene is set for a year of more modest returns from equities after the hopes of lower rates stimulated higher prices in 2025. World governments remain highly borrowed, limiting scope for longer term interest rates to fall. Markets are adjusting the end of the quantitative easing era in Europe, Japan and the USA. It means higher and persistent long end rates for countries with debt above 100% of GDP and rising. The UK, France and the US all have budget deficit problems and will have to pay an interest rate premium to borrow all they need to meet their commitments. President Trump will be willing to run a large deficit, claiming faster growth and the attraction of US investment will see him through. France will rely on its membership of the Eurozone to assist, given the political difficulty in securing a budget to curb spending from a very divided Parliament. The UK government will continue to raise taxes and stick to somewhat loose fiscal rules to prevent a further expansion of yields. Germany is reflating after a long period of good spending and deficit control, having the fiscal space to do so. Japan is still borrowing on a large scale and is seeking to restore some discipline by edging the Central Bank interest rate up without causing a big sell off in the bonds they need to issue to sustain the deficit. China needs to relax more to encourage more domestic consumption. 

Investors can now get a real return on bonds issued by the higher deficit mature economies. In the sovereign bond arena, there is attraction in the higher yielding markets where bond prices still reflect the high levels of benefits from some further rate cuts, whilst longer bonds will be more reflective of inflation rate expectations and the anticipated level of new bond issues to cover large deficits. The US decision to change the government in Venezuela should increase their oil supply and help bring energy costs down further, in turn helping the battle against broader inflation. 

The main risks remain much as last year. Military conflicts cast a dark shadow, vulnerability to a credit crunch remains ‘live’, AI could lose its momentum and lead to a more sustained sell-off in big tech and related sectors, and global trade, already damaged by international politics, could see further hurdles. But all of this is well rehearsed, and 2026 could still deliver some decent returns for both equities and bonds.

About the author 

The Rt. Hon Sir John Redwood has been a long-standing member of the EPIC Investment Partners Advisory Board. 

John is a well known commentator on governments and economies, with long experience of investment markets. Trained as an analyst at Robert Flemings, he moved to N.M. Rothschilds where he became a Manager and Director of pension and charitable funds and Head of Equity Research. He was seconded to become Head of the Downing Street Policy unit before chairing a large, quoted UK industrial business. He served as an MP and a government Minister.  

In 2007 he set up Pan Asset with a colleague, an investment management business that pioneered active/passive funds and models in the UK. Following the sale of the business to Charles Stanley, a quoted investment manager in the City, he became their Global Chief Strategist advising on non-UK markets and economies. He also ran a demonstration fund for the FT, writing articles about it and illustrating the use that can be made of ETFs in portfolios. 

He is now an adviser to EPIC, providing insights into the big investment issues of the day from the debt and spending problems of the major governments to the green and digital revolutions which have so much impact on equity markets. He is a Distinguished Fellow of All Souls College, Oxford, where he helps with their Endowment investments and gives occasional lectures on modern economics and politics.