Forecasting is a mug’s game when markets have a habit of wrong-footing even the most seasoned strategists. Yet as December rolls around, everyone wants to know what the coming 12 months might bring.
That doesn’t mean all fund managers’ annual outlooks should be overlooked or written off as marketing fluff. I particularly enjoyed Man Group’s this year, where chief market strategist Kristina Hooper presents three distinctly different scenarios for how 2026 could unfold.
The range between them shows the reality facing investors today: enormous uncertainty with dramatically different outcomes, each demanding fundamentally different positioning. (Full disclosure: I lean bearish. More on that later.)
Base case: Mild US recession, tepid global growth
Man Group’s central scenario anticipates a shallow US recession as tariffs disrupt trade flows, immigration restrictions tighten labour markets and unemployment creeps higher. The Federal Reserve eases modestly, but inflation remains sticky enough to limit how far rates can fall.
Meanwhile, the firm sees the rest of the developed world taking a different path. Europe and Japan accelerate on the back of substantial fiscal stimulus, particularly defence spending as geopolitical tensions reshape budget priorities. China sees stable-to-slightly-lower growth as fiscal measures offset persistent property sector weakness. The UK muddles through with flat-to-modest growth, helped by an accommodative Bank of England. Emerging Asia benefits from a weaker dollar and favourable regional dynamics.
This is a world of divergence, where monetary policy fragments, growth patterns split and the old correlations break down.
If this scenario plays out, how to position is straightforward: look outside the US.
Man Group favours developed market equities excluding the US, especially the eurozone and Japan, where fiscal stimulus should generate momentum and valuations remain attractive. UK equities also merit attention given low valuations, high dividend yields and the potential for positive earnings surprises if the Bank of England eases more than expected.
Chinese tech stocks could present an interesting opportunity. They trade at lower valuations than their US counterparts while benefiting from government policy support for strategic industries.
Within styles, Man Group expects quality to outperform. Stocks with strong balance sheets should outperform as concerns about AI-related debt and softer global growth weigh on more leveraged names.
In fixed income, European investment-grade and high-yield debt look appealing given the positive growth backdrop in the eurozone. Man Group sees potential for a gradual yield curve steepening, suggesting shorter-duration positioning makes sense.
Currency markets should favour the Japanese yen and euro over the dollar as the Bank of Japan tightens from its ultra-accommodative stance while the European Central Bank holds steady.
For alternatives, equity market neutral strategies suit an environment prone to both rallies and sell-offs. Diversified multi-strategy portfolios make sense given the uncertainty and potential for market rotations. Selective private credit offers diversification benefits and tends to perform well when volatility is elevated. Precious metals with industrial uses (gold, silver, palladium, platinum) straddle both safe-haven and pro-cyclical characteristics.
Upside scenario: Capex supercycle and détente
In Man Group’s upside scenario, the opposite happens. Trade wars end, and artificial intelligence capital expenditure not only continues but accelerates. Emerging markets, including China and India, see growth pick up meaningfully. The eurozone and Japan get a GDP lift. The US experiences modest growth as the Fed eases.
In this world, where markets go full risk-on, emerging Asia takes centre stage. Indian and domestic Chinese stocks look attractive. Chinese tech and US tech stocks both perform strongly. European cyclicals are well-positioned to benefit. Global small-caps and mid-caps outperform as risk appetite returns.
Cyclical sectors shine. Man Group highlighted industrials, materials, energy services, semiconductors and semiconductor capital equipment, shipping and logistics and selective financials as the areas that benefit most when economies expand and confidence returns.
Fixed income shifts towards risk. Global high-yield bonds and emerging-market bonds (preferably hard currency) appeal, as these assets historically perform well in risk-on environments. Emerging market local currency debt becomes interesting if real interest rates rise and credible disinflation takes hold.
Currency markets favour commodity-exposed currencies like the Canadian and Australian dollars, which outperform when demand for industrial commodities picks up during economic expansion.
Alternatives focus on the real economy. Industrial commodities and energy present opportunities as these assets typically see significant price increases when growth accelerates. Trend-following strategies allow investors to participate robustly in a sustained risk-on environment.
Downside scenario: Policy errors and AI capex stall
But there’s also the potential for a bear outcome. In Man Group’s downside scenario, policy mistakes compound, the artificial intelligence capital expenditure boom collapses as companies fail to realise expected returns, and the US enters a deep recession.
The Federal Reserve wants to cut rates but can’t because inflation remains persistently elevated. Even substantial fiscal stimulus in the eurozone, Japan and China only partially cushions the blow. In this environment, markets go risk-off and stay there.
When positioning for this scenario, defence becomes paramount. In equities, Man Group suggests only select large-cap names in defensive sectors: consumer staples and regulated utilities. These are businesses with stable demand regardless of economic conditions.
Fixed income focuses on capital preservation. Inflation-protected securities perform relatively well in a higher-inflation setting, while sovereign debt with high credit ratings offers resilience in the face of a major economic downturn.
Currency markets separate true safe havens from false ones. Man Group holds a preference for the Swiss franc, Japanese yen and euro, but is cautious about the US dollar given some erosion in confidence.
Alternatives emphasise protection. Gold holds up well in a risk-off environment. Trend-following strategies and volatility risk management strategies can provide downside protection.
A Grinch’s Reflection
I should admit my bias: I instinctively lean bearish. I'm a perma-bear Grinch by nature.
In 2025, I positioned accordingly. I sat almost entirely in cash, convinced that the rally couldn’t last as valuations were stretched and risks were underpriced.
I was wrong, obviously. While markets climbed, I watched from the sidelines. Even the Grinch eventually learned that maybe he'd been looking at things wrong all along.
Maybe my New Year's resolution should be to channel a bit more Whoville optimism? The Whos down in Whoville didn’t spend their time worrying about worst-case scenarios.
That doesn’t mean abandoning risk management or ignoring genuine threats. But it might mean staying more open to different outcomes. Diversifying not just portfolios but perspectives. Considering that the bulls might have a point, or at least that the future isn't predetermined to disappoint.
Man Group’s three scenarios serve as a useful reminder. Nobody knows which path 2026 will take. The honest position is to acknowledge the range of possibilities and position flexibly enough to adapt as the year unfolds. Perhaps the real lesson isn’t in picking the right scenario, but in staying humble enough to adjust when the evidence changes.
And for this particular Grinch, that might mean letting a bit more optimism in. After all, sitting in cash all year while everyone else prospered isn't nearly as clever as it felt at the time.
Gary Jackson is head of editorial at FE fundinfo. The views expressed above should not be taken as investment advice.