Where is the value in equity markets in 2026?

0:12Hello and welcome to the latest edition of the FTadvisor podcast. I'm David Thorpe, Senior Investment editor at FT Advisor. The topic today is the outlook for equities in 2026, a year which began with the FTSE closing at an all-time high and follows 2025 when despite myriad volatility in the world, equity investors enjoyed a strong year. And joining me to discuss the topic are Martin Conahan, joint manager of the Murray International Investment Trust, Fahad Gamal, Chief Investment Officer at Coots and James Barnes, head of the managed portfolio service at Evelyn Partners. Thank you all for joining me.

0:51James, thank you for being here. If we come to you first. Well, the AI trade-dominated news flow in 2025 returns from other markets were, in many cases, stronger, particularly for a sterling-based investor, as I'm sure many of your clients are. But is there more room for outperformance from global ex-US equities from here? I think the first thing I'd say, it was actually nice to see that switch happening for the first time in a long time. It was getting a bit boring having the U.S. lead the way for us. And, yeah, I think that we probably would say that, that we do expect other parts of the world to lead again this year, purely based on the fact that valuations are less demanding than they are in the U.S.

1:42and that sentiment is gradually improving. I mean, that's not us saying that we think that the US is going to be a bad place to be. We just think that there is more momentum behind other parts of the global markets. Thank you, James. Martin, the Murray International Trust has been, I think, rather sceptical or rather cautious in its exposure to, if I can call it that, the AI trade or the MAG7 trade. after the year that you've had. Do you retain the scepticism or are you starting to look again? I wouldn't say it's scepticism. I would say, you know, more international trust is a global income fund, first and foremost.

2:27So a number of those, you know, big players within the AI team don't have a level of dividend yield that would work for the mandate. So it's really just a case of, you know, They don't help us deliver what we tell shareholders we're going to try and deliver. Where we can gain access to it, where there is levels of dividend yield, then we do take that exposure. So we have names like TSMC. We have names like Hon Hai, which are involved in the manufacturing process on the EMS side. We have BE Semiconductor in the Netherlands as well. So not necessarily sceptical of the theme per se, just maybe a little bit more cognizant perhaps around valuation where the valuation of some of these companies have reached where expectations are.

3:19And when the slowdown does come, which it will come at some point, where is this at a natural level for some of the share prices? So sceptical, I wouldn't say so. It's really driven by the mandate that we're trying to deliver. And is your trust generally underweight the US market? We are generally. And again, when you're starting points, a global benchmark, that in our opinion isn't a difficult position to reach. When most global indices of 50, some have 60 % in the United States. There's nothing wrong with the United States as an equity market. You know, the US has some of the best-run companies in the world, but they're trading at pretty lofty multiples.

4:02and returns when multiples have been at similar levels historically going forward have been a little bit more muted. So again, the yield requirement of what we're trying to deliver perhaps inhibits us a little bit more there as well. As you know, the US isn't a high-shielding market in the world. So we have as high a weight in the US as we've ever had, but it's not a difficult position for us to be underweight when most benchmarks have gotten off the 50%. Thank you. And Fahad, Chief Investment Officer at Coots & Co. How is your exposure to the U.S. generally and to, I suppose, to the AI trade specifically?

4:42Very healthy and overweight. We've been overweight in the U.S. for the last two years. When it was unpopular, when it was popular, when it was unpopular again, when it got popular. We've been very consistently overweight in the U.S. And obviously, that's been a fabulous position to be in. I mean, some of the comments that have been made regarding valuations and eventually some of that is true. Obviously, nobody can discount the fact that on a historical chart, valuations look expensive. But as we all know, valuations are not a timing tool, right? And what is a more salient, shorter term mechanism is understanding the drivers of earnings growth.

5:23and the earnings growth from the Mag7 have been, I mean, really, they've been spectacular. There's no way to water it down. And that momentum remains very much intact. Obviously, a day will come where that momentum will break. But people have been betting on that day for a long, long time, and it hasn't come yet. And we think, and we've been right, that carrying on with that momentum by companies which are not quite mature and really do know what they're doing and are sitting on a transformational technology in which they seem to be deepening their moats to some degree. It's still the base case that we've got, and that has proved really fortunate and a really good position for us.

6:05Thank you, Fahad. So we've got an overweight and underweights around the table. It's like we planned it this way. Fahad, if we stay with you for the second question, if we come to you first. more broadly on the US equity market do you see opportunities I mean there's even an argument that the AI trade is broadening out and starting to impact areas such as energy stocks because of the power consumption required and industrials because of the buildings needed for data centres but what for example of US consumer stocks or the broader US market away from those tech names? Yeah, look, I mean, obviously, you know, the real game here isn't about chips being sold, right?

6:55I mean, the real game is obviously productivity transformation across the economy. And that undeniably, I think, is coming. You know, you've spent five minutes on ChatGPT, the free version in your phone, and you know something pretty profound is occurring, right? I mean, it's quite intuitive. Now multiply that by 493 other companies other than the Mag7, all employing massively productivity-enhancing technology across their processes, operations, etc. I mean, how it's going to happen, when it's going to happen, all amazing questions will speculate. But I'm pretty sure that over the course of the next two to five years, companies are going to be starting to adopt AI quite meaningfully.

7:37and it's going to lead to productivity gains that we already have begun to see in our daily lives. So that's the game changer. That's what's coming. And that's, I think, the real win. It's not just the S7 companies selling chips and cloud storage. It's everybody using it to enhance the output that they've got and to do things in a better way. That's the win. Thank you, Farhad. Martin, you mentioned that your trust has its largest exposure for a long time to the US. What does that exposure look like? Is it the US consumer? Is it the US economy? The US cyclical sectors? It's a bit of a mixed bag.

8:15You know, we have Broadcom, which is very much another AI-driven story, but we brought Broadcom back in the height of the COVID sell-off, and it's yielding 7%, not what it's yielding today. So that's a big position, although we have been taking it down into the strength that that stock's been exhibiting. There are some consumer stocks there as well. We have Philip Morris International. again for the yield we have lows um on the financial side we have things such as cme on the exchange side um we have um yeah so a number of sort of different uh u.s businesses coca-cola um across the across the industries really um and on the sort of consumer side i think that's that's going to be really much more and has been and continue to be much more stock specific um whether it be you know you've seen very quite despite like a spread of performance from the names you know you look at things like dollar tree or dollar general in the u.s very very domestic focused and more down at the value spectrum really really strong performer last year but then some of the other ones have been you know struggling at times have been more global and having issues with their brand or having issues with supply chain or inventory management so i think sort of execution on the consumer stock side will be a much bigger driver of how those stocks behave.

9:31Thank you. James, the US exposure that you do have, obviously, at Huffington Partners, you invest in other funds, not individual stocks, but what does that exposure look like? What are you looking for when you're building the US exposure you do have in the current climate? Yeah, I mean, as a firm, we do invest in individual stocks as well, but obviously in the NPS, we are fund-based. I mean, we came a bit more nervous of valuations in the tech sector in the first half of last year, and then had the big sell-off post-liberation day, moved back up to more equal weight in tech. But we had been thinking prior to that about, again, relative valuations in the US.

10:17We just felt that things looked good for the US to continue going along quite nicely in terms of growth, et cetera. And we just felt that at some point, other sectors in the US that had been left behind would probably start to catch up, either from the tech stocks coming off or just from them maybe holding water for a bit and other stocks catching up. So we were, you know, that had moments of looking really good last year. and then eventually, obviously, tech sort of did sort of reassert itself. But we're pretty balanced across the board, again, with that sort of that same view that we are just conscious that we need to see that earnings growth continue to come through in these tech stocks to justify the valuations that they're at.

11:05Thank you for that. Martin, you mentioned Murray International is an income vehicle. One of the factors that impacted everybody around the table, but maybe impacts a dividend paying vehicle even more, is the currency, is the relative weakness of the dollar last year. And if you're getting dollar dividends, for example, and translating them back to sterling for sterling based clients, that has an impact. But more broadly, returns in dollar denominated assets were lower. but is that something you have to think about? Is currency exposure something that's relevant? It's very relevant from the point of view as we kind of look at it in the hit that we take to the revenue account when the dividends are coming in and has that been a tailwind or a headwind with regards to the income picture of the trust.

12:00But we are a global trust so we're exposed to about 17 currencies about 93 % non-denominated in sterling so it is a truly international exposure. When it comes to the currencies, we focus on companies themselves. Where are their revenues coming from? What is their base currency? Where are their costs? Do they hedge? What currency is the debt in? In terms of the overall positioning, we don't hedge and we never have. There is an element, it appears, when we look at very, very long-run attribution reports that there's almost a natural hedge to being exposed to that basket of global currencies over the very, very long term.

12:41Yes, we can have years like 2024, which is quite an unusual year in that sterling was very strong against most currencies. Normally there's a more balanced picture to it. Some win or some losers. And that's what 2025 basically ended up as. Sterling was up against some, down against others. And we just accept that that is the way the currency is going to play out. But where we see it impacting on a sort of longer term basis, then we would perhaps think about hedging. But it can impact on the short term. But over the long term, it tends to come out in the wash. Thank you. Fahad, is currency exposures that you have to think about in client portfolios?

13:22Do you hedge or would you? We think about it deeply. We do hedge. So we obviously have a large exposure to the dollar. So that's the one currency that we probably think about. The most, though, obviously, we think about other majors as well. And last year, so we were obviously overweight U.S. equities, as I've said, but we had hedged a significant portion of that position, so obviously win-win, amazing. Last year, we put that position on early last year. And I guess this is the key point. We won't do any hedging on currencies until we think that there's a really asymmetric upside to do so. I mean, obviously, it's hard to judge currencies engaged, but at 121, where it was at this time last year versus the dollar sterling I'm talking about, it did seem by any historic basis, any valuation multiple, anything that it was very, very cheap and undervalued.

14:18And that came good. So we're very, very pleased with that. Obviously, that case is much less compelling today. we still hold the hedge that we had put on because it's still quite undervalued but not nearly as much as it was when it was at 121, obviously. But no, we do think about it, as I said, but it's, look, currencies are the hardest thing on earth to gauge, to get right, etc. So we will certainly hedge, but only when, as I've said, that the case to do so becomes really asymmetric. Thank you. And James, how do you, I mean, presumably most of your clients are sterling based or they want their returns on sterling.

15:02So how does that impact how you see the world? I think really similar to Fahad. I mean, we don't think we've got any particular edge in currency views. And I think in the last 15 years, I can think only two times we've given really strong guidance on currency. and the first one was Japan over 10 years ago where we felt that for the Japan market to actually move ahead, the currency was going to weaken and so we did actually have guidance to hedge a decent chunk of our Japan exposure. Within six, nine months, it had got to that sort of middle ground where we had absolutely no edge we felt at that point.

15:39People probably generally took the hedge off at that point but it had obviously benefited from the initial weakening. um late 22 when sterling collapsed against the dollar we gave guidance if anyone had overseas bonds that would be a dollar bonds that would be a great time to actually bank that and get back into either corporate bonds or hedged share classes and that's been our guidance for fixed income for the last few years has been all our overseas bond allocation is hedged we just feel that the currency moves can dwarf the sort of the reason for holding bonds in a portfolio therefore maybe take that risk away but generally with equities we just we roll with it because our benchmarks are unhedged and therefore we don't necessarily need to do anything unless there's a really really extreme situation.

16:32Thank you and James we'll stick with you for the for the next topic area. 2025 was a year where emerging market equities delivered not just strong returns but were considerably ahead of the world benchmark. But is this an area that's providing greater interest for you now and how would you think about an EM allocation? Would it be generalist EM funds or region specific, country specific or thematic? Actually this ties in a bit with our view on currency is that we haven't done any hedging of dollar equity, but we've been more enthusiastic about Asian EM equity, which would also probably benefit from any dollar weaknesses.

17:14There's a sort of natural trade or hedge in that. I think the way we do it, we've got a range of options. There are country-specific funds we like, mainly India or China, but the vast majority of our funds we're looking at will be generalists. Although within that, there'll be value options, growth options, multicap, etc. I think it just boils down to the preference people have or how big their allocations are for a particular risk profile. So down at the lower risk end, you may have one or two core holdings to give you that general exposure. At the higher end, when there's a larger weighting, people have the ability to go to an element of country-specific if they want to.

18:02And I'd say from my desk point of view, we've got one of our NPS ranges does have that. And we dialed down our India exposure in 24, and we were gradually building up China at a time when everyone was claiming that China was uninvestable, which generally feels quite interesting to me, trying to be looking at an asset class. Thank you. Martin I saw you get quite I saw you perk up there when we mentioned emerging markets so I presume you've you've got a good story to tell about that I don't know about that but I mean emerging markets are obviously an area that we have liked and continue to like you know we have you know getting towards probably 30 % of the fund within emerging markets both in Latin America and in Asia and the Latin American exposure was the best performing region you know for the for the portfolio last year it was up 33 % sterling terms.

18:56And it's only a handful of companies. So you don't necessarily have to take a... For us, it's the bottom up. It's driven by the stocks. That's what ultimately makes us take the positions. But we've got reasonable allocations to Brazil and Mexico, both in terms of consumer-type stocks, financial-type stocks. And in Asia as well, you can gain access to some of these AI trends via stocks in Taiwan, for example, or in Korea with Samsung. or in the Middle East with regards to some of the financials and energy companies that you find. So for us, it's driven by the fundamentals and the valuation opportunity.

19:34The allocation to emerging markets has been pretty stable for us, though. We tend not to try and jump in and out of it as an allocation. I think whether it comes to EM or small cap or many of those sorts of allocations, I think just time with the allocation as opposed to timing the allocation is the right way to play that. Our annualised returns over the last 22 years from that Latin American exposure is nearly 17 % annualised, which is way ahead of any other regional allocation probably running at about 10 or 11 % in any benchmark. So if you can find the right business and you're comfortable with the risks inherent in it, and that should be the case regardless of where it's listed, then we're quite happy to have and maintain a reasonable weight to emerging markets because we think that with sentiment changing potential for a weaker dollar rates to come down more perhaps in em and other parts of the globe and you know fund flows perhaps turning positive there you know sentiment could just be in the early stages of shifting thank you fahad how have the events of 2025 in emerging markets impacted your thoughts on the asset class if at all so in terms of geopolitics very little um in terms of earnings growth momentum in EM massively.

20:52So that's, I think, the key point is that as a house, we are very, a big part of our thinking, specifically regionally, is earnings momentum and the ability of the business cycle to be supportive of that earnings momentum. So EM has suddenly become, it's sort of ticking all the boxes, frankly, because you've got wonderful earnings momentum that's coming through. You've got an economic and macro picture that's stabilizing and coming out of some of the doldrums of when China was considered uninvestable, etc. And the things are looking really good. We have been neutral on EM. We still are. But that's an area where we're strongly considering adding.

21:37I will say, however, that while our position was neutral last year, our fund selection was very good. And our funds generally were overweight Korea, overweight Taiwan, overweight China, underweight India, which has been a great position last year. So that's something we're very keen to explore further and be constructive on for all the reasons I mentioned. Thank you. Speaking of markets that had a good 2025, James, the FTSE 100 in particular performed well, some might say, despite the wider economic environment. but how do you think about domestic exposure right now? When a market hits a record high, it might cause people to pause, but do you see opportunities there?

22:27I mean, it's great to see the FTSE hitting record high. Lots of other markets have done the same thing, so I don't want to get too bogged down in that, I don't think. It's also been nice to see the UK doing well compared to other markets for the first time in 10, 12 years. In terms of domestic, I think we are seeing that when investors start moving back into an asset class, which suggests people are looking at the UK more than they have been for a number of years, they're going to go to the big cap stocks first, which are much more international. And the mid-250 and small cap didn't do badly last year, but they obviously lagged.

23:09At some point, if we keep up some momentum with money coming to the UK market, this will trickle down to the more domestic type stocks. So long as the domestic story doesn't get any worse, and you probably argue it probably has hit the bottom at some point in the last couple of years. So we aren't necessarily piling into mid and small cap, but are conscious that the valuations there are extremely attractive on a historic basis and on a relative basis to virtually everything else around the world. So at some point this year, perhaps if momentum keeps up, you may see us moving allocation more towards that.

23:49I would say that generally as a house, we do prefer active management. And therefore, particularly in the UK, we will be underweight the FTSE 100 by nature of the fact that virtually every active manager tends to be underweight the 100. but we may well make a bigger call to move more domestic at some point in the year, so long as things stay relatively steady. Thank you for that. Fahad, I think when you joined Coots, there was some changes to how the firm allocated and the UK exposure came down. But what are your thoughts on the domestic market now? We simply rebalanced or recalibrated our benchmarks to the way the world looks today, right?

24:35Not the way the world looked in some previous times. So that's all we did, simply. But yeah, look, the UK is, you know, obviously has had a great year. It was probably overdue a good year, frankly. And a lot of that good year, though, has been delivered by price appreciation, right? Without the commensurate earnings growth that we've seen in other regions. all else being equal we'd prefer price appreciation and earnings growth together which is something that we see in EM for example, something that we see in the US for example and a lot of that earnings growth if it comes through will be more constructive I will say that we are neutral on the UK got lucky here as well with fund selection frankly because our choice in the UK was a standout out performer largely because they had a position towards banks, and banks have had a spectacular year.

25:32So we've been meaningfully exposed to the upside in the UK as a function of where we've been allocated. So that's been very pleasing. But I think long run, structurally, we'd like to see more sustainable earnings growth, which I don't think is impossible. I mean, I think that a confluence of a few factors are certainly coming together. And should we see that earnings growth start to materialize, the UK will become a lot more exciting. Thank you. Martin, in your answers today, you've taken us through Brazil, I think Mexican airports, the US. What about the domestic market? How do you view the UK?

26:14Yeah, I mean, I just thought last year was really, really interesting to your point in terms of how the market performed. but when you read the headlines or every page you look at on LinkedIn it's just all very much a doom and gloom. But yeah, I think some of the points have been raised in terms of what worked in the market. It was always going to be a good year for the UK whether it be some of the larger mining stocks, the banking stocks, some of the insurance stocks all having pretty good years or one or two of the multinationals. And we remain overweight. In terms of listing, we are probably still more exposed to the sort of multinationals.

26:50So whether that be Unilever, which was okay, Diageo, which has been terrible. We've had a bit of a mixed bag in terms of our own stocks within the UK. It was probably one of the weaker areas of our portfolio in relative terms compared to how the wider market did. But yeah, sentiment still remains weak. To James's point as well, I think it is interesting when people do start looking a little bit further down that market cap. spectrum to see some of the businesses that are there, some of the smaller mid-cap businesses in the UK, because for all the doom and gloom, there are still some very, very well-run, very dynamic businesses within the UK that could just use a little bit more help and a real opportunity on the valuation side for some of those businesses further down the market cap.

27:41They're probably a little bit too small for us in terms of owning in Moray international and perhaps don't have a yield but in terms of just the strength and breadth of your own domestic market if those companies started to come across people's bows a little bit more then it could be a positive driver for the UK Thank you for that Martin Thank you all for listening to this edition of the FT Advisor podcast which previewed the equity market for 2026 the guests were Martin Conaghan, Joint Manager of the Murray International Investment Trust, Fahad Kamal, Chief Investment Officer at Coutts, and James Barnes, Head of the Managed Portfolio Service at Evelyn Partners.

28:26Thank you.

28:44Thank you.