Navigating 2026: International Opportunities Amidst US Economic Shifts

Deep Dive

The equity and fixed income markets are positioned for a challenging 2026, with high valuations and tight spreads creating vulnerability to geopolitical risks and liquidity concerns. While the US economy has shown resilience, portfolio managers face a bifurcated landscape where success in 2025 may not translate to gains in the following year. This environment necessitates a shift in investment strategy, prioritizing opportunities outside the US and exploring specialized credit instruments that offer attractive risk-adjusted returns.

Opportunities in international markets are particularly compelling. As Japan encourages companies to move away from hoarding cash, the Nordic high-yield market and debtor in possession financing for Japanese companies present unique avenues for investors. Debtor in possession financing, typically secured and prioritized in bankruptcy proceedings, offers a lower risk profile than its high yield spread might suggest, especially when backed by established institutions. The Nordic market, in particular, is attractive due to companies with fundamentally sound operations but potentially strained balance sheets, a scenario that can yield significant returns for astute investors. This contrasts with some US companies facing bankruptcy, which may be perceived as merely delaying inevitable issues.

The US economic outlook, while resilient, faces headwinds. Economic growth is expected to soften in Q4 2025 due to factors like the prior government shutdown, but 2026 anticipates a broadening recovery driven by lower interest rates. However, a softening labor market, evidenced by rising unemployment rates among minority groups, suggests that the Federal Reserve may need to provide further economic support. The transition in Fed leadership also introduces potential volatility, as markets anticipate a shift towards lower interest rates, raising concerns about the politicization of monetary policy. The consumer remains a key driver, supported by asset price increases, particularly in the stock market, which benefits retirees. However, lower and moderate-income consumers are under pressure from the cost of living.

Retail spending demonstrated resilience through the holiday season, exceeding analyst expectations, though characterized by practical purchases like sweaters and gift cards. The increasing adoption of AI by both retailers and consumers is reshaping the landscape, enhancing productivity and personalization for businesses while assisting consumers with tactical purchasing decisions and navigating returns. This AI integration is crucial for retailers seeking to reach consumers across an omnichannel environment, from traditional social media to emerging AI-powered platforms. Meanwhile, the trend of "Dry January" highlights a consumer focus on health and reduced spending, underscoring a continued sentiment of frugality.

The mergers and acquisitions (M&A) environment is poised for an uptick in 2026, driven by a more favorable antitrust regime that allows for strategic consolidations. While the cost of capital has not been a primary inhibitor, a slowdown in the past two years was due to companies acquired at high multiples in 2021-2022 needing time to grow into their valuations. This extended holding period for private equity funds is expected to normalize as more companies become available at more sensible prices. Emerging growth areas include pharma services, where the convergence of technology, generative AI, and drug development presents significant opportunities, alongside continued advancements in automation and wealth management.

The core takeaway is that navigating the complexities of 2026 requires a strategic pivot towards international markets and specialized credit opportunities, while remaining attuned to the evolving dynamics of the US consumer and the M&A landscape. Investors must adapt to a market where traditional growth strategies may falter, seeking out undervalued assets and leveraging new technological advancements to drive returns.