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It was a quieter week this week. I would add this is (normally) better news for investment portfolios (as it was this week). Less drama typically means lower volatility and positive returns. It is also the time of year when economists and strategists start looking ahead to 2026. In that spirit, here are Torsten Slok’s (ex of Deutsche Bank, now at Apollo Asset Management) 5 key risks for 2026:
I thought this was an odd list because I would be pretty happy if 1 and 2 happened. I certainly think they would be good for equity markets. That said, it is worth remembering that (even for the UK!) there is a risk things can go right. And being positioned for those scenarios can be as important as thinking about all the problems out there. When I think back to the outlooks for 2023, 2024 and even this year it has been the upside risks that have mattered more than the downside ones.
The new Fed Chair is a harder one to assess. He will certainly be more inclined to cut interest rates (and be in line with Trump’s preferences). But (i) it’s a committee (ii) Kevin Hassett (if it is him) is a respected economist and (iii) the Fed did a pretty good job protecting the underlying economy from the ups and downs of Covid and inflation. This helps protect its credibility with markets and, for now at least, loss of Fed credibility does not feel like a major 2026 risk to me.
That then leaves my big 2: AI and government debt levels. On AI my view remains that if the technology starts to plateau then we probably are building too many data centres for demand and eventually an AI bust will accompany this boom. If, however, the technology continues to make step change improvements then it will start to look and feel like a useful employee that costs say £200 a month. In that world I’d guess we will have pretty much unlimited demand for data centres and the energy needed to power them. I do not know (nor, do I think, does anyone else) how fast the innovation will actually turn out to be. We therefore continue to have a meaningful allocation to large cap US technology combined with a meaningful diversification away from US assets. This approach has broadly worked for the last 3 years and I do not see us changing it now.
That said, my instincts are we have seen some plateauing in AI over the last 12 months. Models continue to be more and more impressive but they are not obviously more useful in a business context. As an illustration, corporate AI adoption rates look to be slowing:
AI overbuild risk remains real and charts like the one above (and our own lived experience at IPS) make sure it remains top of our risks for 2026.
That leaves high government debt levels as the final major structural worry. The main point for me here is that government bond markets have remained steady all year and are trading in fairly normal historical trading ranges. And the recent UK budget was not as bad as was feared. UK gilts yields are near their lows for the year (good) and we have even seen unloved long-dated bonds start to rally. As an example, the 2061 0.25% coupon gilt is now up over 7% for the quarter with much of that bump coming after the budget was out of the way:
For much of the year investors have been very happy to buy US equities on a 25 times trailing p/e which is equivalent to a 4% earnings yield (even with all the AI, Trump and tariff risks out there). At the same time it felt like no one wanted to touch long-dated gilts yielding over 5.5%. Part of this is just that investors like to buy things that are going up and to avoid things that are going down. Now that long-dated gilt prices are finally starting to rise I feel like this market has room to rally further. This should be, I am glad to say, a small tailwind for UK assets.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
