2026 in Focus Where Optimism Meets Uncertainty

[music] Thanks very much for being here everyone. It's really hard coming on the back of a session on fast cars. But what I'm going to talk about is equally interesting. I'm going to talk about global markets and how we think about how to invest in the year ahead. Equities, fixed income commodities including gold um and also uh also credit.

So let's start with five key messages that we're hoping to deliver to you. Um we think the equity market is not in a bubble but over the next couple of years returns are likely to slow down right and especially here and now I think we still have to pay the piper for the tariffs which was one of the biggest themes this year that could have been but wasn't. I think that theme is likely to come back and be an influence on the markets in the very near term but moving forward we are looking for reasonable returns from markets as well. Um in fixed income we are actually looking for the opposite which is in the near term we're looking for decent returns uh over the next 6 months but over a one-year horizon fixed income is going to give average returns. So if I'm thinking US treasuries we're thinking about 3 to 5% returns not much more than that.

So, we're looking for pretty modest returns in fixed income. And as far as the currency market goes, this year has been a weak dollar environment, and many people are thinking that we're at the beginning of a long-term trend decline in the dollar. We would disagree. We think the dollar is going to be in a range through the course of next year uh against the euro. We'll likely see some depreciation against the yen, but we'll probably be strong against most emerging market currencies.

So, we're looking for a reasonably flat dollar. We don't think we're at the precipice of a multi-year decline in the US dollar. In commodities, we have been very long precious metals, particularly gold, for the better part of the last four years. Um, and I think at some point we're going to outlive our welcome in this trade, but we still think that you have time remaining for gold to go still higher. I'm going to talk a little bit about that.

And lastly, when we speak about emerging markets, I actually think we should probably retire that term because we think of them as one homogeneous group, emerging markets. Do we want to, you know, invest in developed markets? Do we want to invest in emerging markets? I think that's redundant. I think that's paray.

that world has moved on because within emerging markets you have this behemoth China along with Korea and Taiwan which not only comprise 70% of the market cap of emerging markets but more importantly China is if I could be slightly politically uncorrect has has been eating other emerging markets as lunch in that it has been so hyper competitive that it is compromising many other emerging markets is competitiveness Malaysia, Mexico, India uh Philippines, Indonesia most of them are seeing their export growth, their investment growth and therefore their markets, their currencies and their equity markets be compromised because of a hyperco competitive China. And so that's why we have to make some choices within emerging markets. And that's something that I will discuss as well. But let's start with a the question that we've get most often from clients. You know, are we in a bubble?

And the reason they asked this question is pretty simple because nine companies out of Russell 3000 Russell 3000 is the broadest measure of equity markets in the US nine companies have driven 72% of the upside over the last 12 months just nine companies. So if there was one metaphor in markets in economics, it's narrow. The leadership is narrow. Economic growth in the US is narrow. Right?

So it's been driven by a very small sliver of companies. And that's why people are saying this is much worse than the 1990s. Aren't we in a bubble? Now I don't want to sound like an English professor, but I think it's important how we use our words. We're not in a bubble because if we were in a bubble then first we should be running for the hills.

Not saying oh we're just in the third stage of the bubble. There are seven stages of the bubble. We don't know. We don't have a long enough history of bubbles to be able to sort of track where we are in the bubble. You know I don't want to go back 500 years and talk about the tulip bubble.

But in the last 50 to 60 years there have been three major bubbles in the market. the Nifty50 bubble in the 1970s, the Japan bubble in the late 1980s, and then the NASDAQ bubble, which we all know uh in the late 1990s, early 2000s. After each of these bubbles burst, the market came down not 5%, not 20%, but between 50 and 80%. 50 and 80. That's a bubble, right?

When it pops, the market comes down almost 80%. We don't think we have that kind of a situation today. Like if I was to compare the details of the companies of the 1990s which is in the gray bars and compare them to the details of the company today uh which is in the brown bars you find that companies today are in fact in much better health right these are the companies that are driving the gains but if you look at their margins considerably better if you look at their net debt it's negative because they're net cash positive right so the micro of these markets today is considerably better than the micro of the markets then. So I don't think we can compare. I don't think we're in a bubble.

However, I think many of the comparisons to the 1990s are slightly contrived. They're slightly forced because while the micro is better, the macro is much worse. And this is why I say this is as interesting as a session on fast cars because this almost beggars belief that there's such a big chasm, such a big gap between what's happening in the macro and what's happening in the micro. If you think about the US consumer, he or she has been more depressed than at any time except for the global financial crisis. That's what this chart shows you, right?

Whereas in the 1990s, the consumer felt really confident. Today the consumer feels especially pessimistic about future job opportunities. It could be a function of AI. Whereas in the 1990s the consumer felt really really confident and the fiscal situation was at the best level in a 100 years in the 1990s today clearly it's at the worst level. I'll speak a little bit more about that.

So while the micro is much better the macro is much worse. So if we were to put ourselves today on a 1990s scale, where in the 1990s cycle are we? Right? Um for for those of you who didn't follow the markets very closely then the markets rallied from 95 onwards till 2000 and they rallied quite aggressively. We have used a mathematical technique called similarity analysis here and that tells us this looks like a climate change chart.

All it is is it's going through one correlation matrix after another to answer a simple question. When did the markets last trade like this? The markets, equities, sector styles, industries, but also commodities also credit also FX. When was the last time the markets felt like this? And we've asked similarity analysis.

We've used that technique. So we just this is just math. This is not experience of gray hair. No, this is just math. And it's telling us that we are trading most similarly to about March 98.

Right? So that also gives us a little bit of hope that we're not already at the precipice of the bursting of a bubble. So as I said, we're looking for modest returns. We're not looking for very aggressive equity returns. One of the things that we have to be quite careful about is that tariffs could still hurt the US economy through higher inflation.

So far these tariffs have all been absorbed by the margins of US companies and that's the red part of of this of this chart. But this is likely to go towards consumer prices. So more and more companies like Walmart are likely to start pushing these prices higher given give them to the US consumer which is the brown part and that could compromise consumer spending in the US a little bit more. So I think in the near term that's a challenge for the markets as well. I want to now move to fixed income.

And this is where I think for those of you family offices that don't just look at the next 3 months or the next 12 months but are considering how to invest over the next 5 years. I think one of the most difficult questions that we're going to have to answer in finance is what if the risk-free rate is no longer risk- free. Right? And this is something that no one in finance, I don't care how old you are, no one in finance had had to answer, right? The risk of the world for most models, for most analysts, for most investors is the 10-year US Treasury.

And chances are that it's not likely to remain risk-free. Why do I say that? The US became a nation in 1776. In 1789, the US Treasury issued paper for the first time. So issued a bond for the first time between 1789 and today.

So what is that roughly 235 years? They have issued 27 trillion in debt in today's money. 27 trillion over about a 236 year period. In the next 10 years they will issue the next 27 trillion. What they've done in 236 years they're going to issue in the next 10 years.

which means the supply of paper, the supply of bonds in the US is going to go exponential. I think it's really important to try and time that. We don't think it's going exponential. This is a chart till 2027. It's increasing, but we don't think this is going exponential just for the sake of our sanity.

I'm not showing you what this is going to look like over the next 15 to 20 years, but that number begins to go exponential from 2028. And that gives us a really important uh corollery, a really important consequence which I think many equity investors do not consider which is even if the Fed was to cut rates, the Fed, as you can see out here, the blue line has cut rates in three cycles through the last um 25 years. So the better part of this century, what we think is from this time onwards, you are not likely to see long and yields coming lower. This is getting slightly technical, so please bear with me. What I'm saying is that you would have heard from many people in finance, bad news is good news.

What does that even mean? How can bad news be good news? They say bad news is good news because what they're implying is that if you get bad data, central banks are going to cut very aggressively and that's going to lead to market valuations going higher. Except the central bank rate is not your cost of equity. It is not your discount rate.

It's the 10-year rate. It's the risk premium beyond that. And unlike 2000, unlike 2008, unlike 2020, we now think that even if the Fed cuts, we think the Fed cuts four times in the last in the next 12 months, even if the Federal Reserve cuts rates or other central banks cut rates because there's going to be such a big supply of bonds because of the fiscal deficits. Long end rates are not coming lower in a secular fashion. Right?

So the cost of equity is not coming down in a secular fashion. So this idea of the Fed is cutting and therefore we have to buy equities. We have to be a little bit more careful about that idea. I want to very quickly move on to currencies and then end with gold. How do we think about the dollar?

Like many people think okay if I have to pick one variable to drive the dollar. What is the biggest driver of dollar? US current account deficit our data tells us no. Federal reserve interest rates our data tells us no. The single biggest driver of the US dollar is what's happening in the rest of the world.

What's happening to growth in Europe? What's happening to growth in China? If trend growth in these regions is picking up, then investors are very happy to move to the rest of the world. And as a consequence of that, the dollar depreciates. We do not believe that trend growth in Europe or China is picking up.

We think there's cyclical improvement in Europe because of a fiscal stimulus, but we don't believe that there's trend improvement in growth in the rest of the world. And that's why we're looking for a pretty flat dollar. In simple terms, we think the dollar is going to hold up. It's going to be strong. And that's counterconsensual because many folks are looking for significant debasement in the dollar.

And one of the reasons they're looking for debasement in the dollar is gold, right? Because how look how well gold has done. And we think gold can continue to do well. But I think it would be a mistake to take gold story and superimpose that on the broad dollar story. Say look what's happening to gold.

The same thing's going to happen to the euro. The same thing's going to happen to emerging market currencies. No, gold is a special situation. Life for gold changed the day Russia invaded Ukraine or more specifically when Russia central bank reserves 550 billion in reserves was basically taken over by the US Treasury by her majesty's treasury and also by the the German finance ministry. So if at that point many asset managers, central banks, super nationals sat around a table and asked themselves a very simple question, what is money?

Because if treasuries are no longer money, I can't access that. If boons are no longer money, that's German bonds, I can no longer access that. If gills, UK bonds are no longer money, then what is money? Right? They didn't have a good answer.

Bitcoin was not the answer they were looking for. And that's why central banks started buying more gold, right? And they continue to buy more gold. And the relationship between gold and real interest rates, the gray dots before the invasion, which was a very steady relationship. You don't get too many of those in finance, then became completely distended such that gold stopped responding to higher real interest rates, but still responds to lower real interest rates.

And we think over the next 6 to 12 months, US real interest rates are going to drop. And that's why as a base case, as a base case, we think gold is heading towards 4,500. We're trading about 4,200 right now. We think gold is heading towards 4,500, about 4,750. That's my base case.

The risk to my base case is massively to the upside. So, it's not like a symmetric distribution. It could go 10% up, it could go 10% down. The risk is massively to the upside. So, having been long gold for nearly four years, as I said, we could be outliving our welcome.

We could be we should be making an elegant exit, but we are still greedy for more gains and we think precious metals, gold and silver can do quite well. I'm going to finish with what we think are the top trade ideas, investment ideas for next year. I'm we got 20 ideas out here. I'm not going to go through all 20 of them. The organizers will start throwing stuff at me, but I'll just highlight five ideas in red out here very quickly if I may, which is number one, a preference for equity over credit.

We don't think credit has good risk for all. That's the first trade. Number number the second trade is trade number three which is a strong preference for highquality companies which have significantly underperformed recently over lowquality companies. Right. Uh number seven is a preference for Chinese equities relative to other equities in EM.

And here we're picking uh unfortunately for me because I'm from there Indian equities as the short leg of that trade. So long China relative to India. In the near term, we're long US Treasury. So that's the 10-year Treasury long. And lastly, I'm going to highlight a long position on gold relative to other commodities as our favorite trade.

So clearly, there are many risks for the markets ahead, but hopefully that was a very quick but useful summary of the way we are thinking about different assets and how to trade them. Thanks very much for your attention. Thank you.

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