Our outlook on risk assets remains broadly positive heading into the year. But we are watching four key risk factors that every investor in this environment should have firmly on their radar.
Looking at the unprecedented number of geopolitical developments that have unfolded over the last two months, it wouldn’t be an exaggeration to say that 2026 is off to a high-octane start. Amid this backdrop, our 2026 outlook for financial markets remains fundamentally constructive. We expect equities to continue to inflate, bonds to be an attractive source of yield, and gold and other alternatives to perform their expected roles as portfolio diversifiers, despite some speed bumps along
After three consecutively strong years for risky assets, it’s only fair to question what factors could pose a threat to this outlook. Let’s discuss what could go wrong in 2026 and what investors can do to safeguard themselves from these risks.
Wheeling out the pessimists
I often joke that, when it comes to putting together annual investment outlooks, there is never a shortage of risks to worry about. Even though AI-related risks dominate the discourse today, there are many other risk scenarios to consider across the policy, macro and corporate spaces.
Here are the four key risks that we believe are worth monitoring as the year progresses:
First is the risk of a significant, and potentially systemic, credit event. In such a scenario, a default event triggers contagion across markets because of investor linkages that turn what could be a standalone default event into a more systemic risk. We’ve seen this before in emerging market (EM) debt, where a default in Russia led to the American hedge fund LTCM’s collapse in 1998. Despite vastly improved measures to limit such a contagion scenario, risks arguably persist in rapidly growing areas, such as private markets, or due to geopolitical trends that threaten global cooperation.
Second is the risk of an unexpected inflation rebound resulting from one of several potential triggers – stronger-than-expected economic growth, the transition to a new Fed chair or the introduction of new trade policy measures. Students of history would point out how the 1970s witnessed a second inflation surge, just as markets believed the first surge had been brought under control. While we believe a relatively weak labour market makes such a renewed surge less likely, it nevertheless makes it to our list of potential worries, given US inflation remains above the Fed’s 2 percent target.
Third is the risk of reduced global liquidity as a result of the Bank of Japan’s monetary policy tightening. Many reports have pointed to the gradual creep higher in Japanese government bond yields, which have now moved higher than comparable bond yields in several other key markets, such as China. While the absolute gap between US and Japanese yields remains sizeable, there is a risk of the yield gap eventually reaching a tipping point, resulting in significant yen gains, removing one key source of liquidity for global markets.
Fourth is the risk of a significant AI disappointment. Given the tremendous focus on AI in recent years, investors seem preoccupied with the question: Is the AI boom a bubble waiting to burst? Our biggest concern is bullish expectations rising to a level so high that even a very good earnings or investment outcome results in a disappointment for markets.
There are undoubtedly many other candidates for this list across geopolitics, debt levels and policy, but we believe the four outlined above should rank highest on investors’ priority list.
Portfolio strategy: Where optimists and pessimists meet
Thinking about things that could go wrong can help build investment portfolios that remain resilient in a wide range of scenarios. While the bulk of our asset class views centre around our more constructive base scenario, accounting for the most significant risks can strengthen a portfolio.
In the context of the key risks, a mix of three approaches can enhance portfolio resilience:
Adding alternative strategies as diversifiers: Gold remains the most popular ‘alternative’ in recent years, given the growing demand from central banks, but other major alternative strategies can help build diversified sources of return that can perform well in various scenarios.
Looking beyond US (primarily technology) within equities: While we expect the market to continue performing well, adding non-US equities provides additional sources of return that are less correlated to the AI theme.
Considering an allocation to EM local currency bonds: While most dollar-denominated bonds are ultimately influenced by Fed policy, non-dollar bonds offer exposure to different interest rate cycles while benefiting from our expectations of a weak US dollar.
Given all of the above, our 2026 outlook is that of optimism, while we hedge risks through diversifiers and alternative strategies.
For more information on the 2026 market outlook and investment opportunities, email wealth.kenya@sc.com.
