12 Jan 2026
If there is one lesson from the past year, it is that the world is moving faster than ever and stability no longer comes from predictability. The only constant is the pursuit of national interest. The investment experience of 2025 reflected this shift in a rare way. Almost every major asset class delivered positive returns. This environment is often described as reflation, where supportive policies, rising growth, and improving risk appetite lift a wide range of assets at the same time.
Precious metals performed strongly, global equities outpaced US markets, emerging market debt beat US Treasuries and corporate bonds had a good year. Crypto stayed largely on the sidelines, while Japanese government bonds lagged. This unusually broad optimism was driven by pro-cyclical and reflationary policies across major economies, low energy and commodity prices and a subtle but meaningful change in the global order.
As 2026 unfolds, several forces are reshaping the landscape. One of the most important is the evolving relationship between the United States and China. After years of escalating trade and technology tensions, both sides appear to be shifting towards pragmatic engagement. The US is turning inward, prioritising domestic manufacturing and political stability. China is recalibrating towards its own economy, focusing on domestic demand and confidence. This does not mean rivalry has ended, but it does suggest that cooperation and managed competition are increasingly aligned with national interests.
China’s policy shift is visible in markets. As property investment channels narrow and policy remains supportive, Chinese equity markets are attracting fresh liquidity. This echoes the US experience after the 2008 financial crisis, when easy money flowed into equities and drove consolidation. In China today, similar dynamics are emerging, particularly in technology and electric vehicles, where weaker players are being absorbed and stronger firms are gaining scale and pricing power. The policy focus is slowly moving from growth at any cost to improving returns on capital.
At the same time, a Eurasian realignment is taking shape. Russia, China and India are drawing closer, each contributing a different strength. Russia brings commodities and energy, China brings capital and manufacturing capability and India brings labour, demand and a growing market. Russia’s traditional commodity flows to Europe have broken down and are being redirected towards Asia. Over time, improved connectivity through pipelines, logistics corridors, digital infrastructure and transport links will support a more integrated Eurasian economic network. Even basic gaps, such as limited direct connectivity between major Asian cities, highlight how much potential remains untapped.
In developed economies, fiscal policy has moved to the forefront. Ageing populations mean fewer workers supporting more retirees, putting pressure on welfare systems. Governments are responding with higher spending, looser fiscal stances and greater tolerance for deficits. This has steepened yield curves and supported sectors like financials, which benefit from higher nominal growth. However, it also raises longer-term concerns around debt sustainability. For now, markets remain focused on growth and liquidity rather than restraint.
Overlaying these trends is the rapid rise of artificial intelligence. AI has added trillions of dollars to US market capitalisation and transformed expectations around productivity and earnings growth. However, this transformation is capital-intensive. McKinsey estimates that global data-centre investment could reach $6.7 trillion by 2030. If AI revenues or infrastructure fail to keep pace with this level of spending, the risk of a sharp correction increases. While AI is clearly transformative, history shows that even powerful technologies can overshoot before settling into sustainable growth.
Currencies sit at the centre of this new regime. A key theme for 2026 is a potential shift in foreign exchange dynamics. The US dollar appears to be entering a phase of structural weakness, driven by large twin deficits and policy choices that prioritise domestic objectives over global stewardship. At the same time, China is allowing the renminbi to strengthen. This tolerance for Chinese RMB (Remnibi) appreciation marks a departure from past cycles, when currency weakness was used as a shock absorber. Allowing the RMB to firm may signal confidence and support a shift towards domestic consumption.
If the renminbi continues to strengthen, it could lead to broader Asian currency appreciation. In that case, global investors may seek assets that offer reliable yields in local currencies, such as quality dividend-paying equities and domestic-currency debt. If RMB appreciation is capped, excess liquidity is more likely to chase growth equities across Asia. Either way, the currency backdrop remains supportive for emerging markets.
For India, this environment is particularly favourable. If energy prices remain contained, the rupee could remain stable or even strengthen modestly. This is a positive scenario for the Reserve Bank of India, supporting risk assets, limiting imported inflation and attracting foreign capital. Importantly, India’s upside is driven less by exceptionalism and more by flow mechanics. As global investors increase allocations to emerging markets, often to gain Asia or China exposure, India benefits because of its significant weight in emerging market benchmarks, which is around 13%. Even without being the most exciting emerging market, India is likely to receive incremental flows simply due to how global portfolios are constructed.
China’s policy pivot also faces challenges. While authorities are shifting focus towards boosting domestic confidence and consumption, psychology remains uneven. Urban baby boomers and Gen-Z consumers are relatively optimistic, while many big-city millennials burdened by expensive housing and rural elders feel left behind. Policymakers are likely to respond with targeted measures to ease cost pressures on young urban households and encourage savings to move into equities and consumption.
In this environment, traditional portfolio construction may need adjustment. A balanced approach today often implies a higher allocation to equities, around 65–70%, with exposure to reflation beneficiaries such as financials and commodity producers. Holding 20–25% in energy-related exposure can help hedge against price spikes. Within equities, high-dividend-yielding stocks often offer better risk-reward than bonds in a world of fiscal expansion and moderate inflation. For Indian investors, quality, diversification and awareness of global macro forces remain critical.
Risks remain. An energy price spike is the most immediate threat to the reflation narrative. Strength in metals such as gold, silver, copper and nickel could spill into energy markets and quickly change conditions. US equity valuations, particularly in AI-linked sectors, are another vulnerability. A renewed US credit crunch or a deflationary surge driven by rapid AI productivity gains and infrastructure bottlenecks could also disrupt markets.
As 2026 progresses, change will remain the only certainty. Alliances will evolve, policies will shift and markets will adapt. For India, the opportunity lies in staying agile, leveraging its benchmark weight and responding thoughtfully to global shifts. In a world where permanent interests matter more than permanent friends or rivals, those who understand the regime they are in and adapt accordingly will be best positioned to thrive.
This Article is based on insights presented by Louis-Vincent Gave, Founder and Chief Executive Officer, Gavekal Research.
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