Future-proofing portfolios in an age of disruption

SINGAPORE - 2025 has been a year of sharp disruption and strikingly strong markets. The artificial intelligence (AI) boom propelled equities to repeated all-time highs, fuelled by policy easing, corporate “self-help” strategies and reforms across major economies. Remarkably, gold – typically seen as a safe haven – has been the best-performing major asset, rising nearly 60 per cent in a year dominated by secular growth narratives.

This unusual mix of risk-on sentiment and gold leadership is a reminder that beneath the resilience, the global environment remains unsettled. Geopolitics has grown more complex as countries prioritise strategic autonomy and economic security. Supply chains are being reconfigured as companies balance resilience with cost efficiency.

Meanwhile, China still grapples with deflationary pressures, soft domestic demand and intense competition, even as the authorities work to counter “involution”, which refers to excess capacity and competition. More recently, the latest equity pullback has prompted questions over whether the AI trade has peaked.

So how should investors position for 2026? We suggest this strategy: stay pro-growth, avoid over-concentration and ensure portfolios are diversified with a robust liquidity strategy.

Pro-growth, long equities: AI effect still key

We remain constructive on global equities. The world economy is resilient, and the Fed remains in an easing cycle. A softening labour market should allow for two more 25 basis point (bp) cuts by the end of the first quarter of 2026. We expect the MSCI All Country World Index to rise by mid-teens per cent by end-2026. For the S&P 500, earnings should grow around 10 per cent, with the index reaching 7,700 by year end – about 16 per cent above current levels.

Much of this optimism reflects the AI effect, from data-centre investment to surging electricity demand. Indeed, we believe it is premature to call time on the AI boom. Compute demand remains insatiable as “agentic AI”, which performs knowledge work, and “physical AI”, which powers advanced robotics, gain traction.

Importantly, strong profits are still largely funding the capital expenditure (capex) cycle: the four major hyperscalers’ free cash flow (FCF) remains positive, and the IT sector’s FCF margin at 17 per cent is over five times the dot.com era’s 3 per cent. Tech valuations, in the high-20s on forward earnings, are elevated but well below past bubble peaks of 65x (dot.com era) and 35x (pre-pandemic).

Notably, the AI landscape is evolving along distinct regional lines. The US is investing in cutting-edge infrastructure and models, while China is prioritising algorithmic efficiency, self-sufficiency and industrial adoption. Beneficiaries span US hyperscalers, North Asian semiconductors, China’s tech stack, and global power and resources players.

Bullish does not mean ‘all-in’: Avoid over-concentration

Being positive on growth does not mean abandoning discipline. Portfolios with large equity allocations today are implicitly long AI, even without dedicated thematic exposure. To avoid concentration risk and potential drawdowns if the tech sector corrects, we recommend capping AI-linked allocations at around one-third of equity portfolios.

Diversification from mega-cap US tech is feasible both within and outside the US. Domestically, we see performance broadening into financials and healthcare. Internationally, Europe, Japan, and China offer compelling opportunities.

Europe, with its value-tilt, should see a profit recovery, supported by electrification, industrial reshoring, and substantial fiscal spending. We expect European companies’ earnings growth to accelerate to 7 per cent in 2026 and 18 per cent in 2027. Japan is notching a strong earnings rebound, with reforms likely to deepen, lifting returns and attracting long-term capital.

China, meanwhile, is far more than an AI story. Following a difficult but deliberate restructuring – shifting capital away from property, disciplining large internet platforms, and redirecting talent into advanced manufacturing – tangible payoffs are emerging. Its technology and internet sector, about half of MSCI China, should deliver nearly 40 per cent earnings growth in 2026, reversing years of contraction. Valuations are still attractive: MSCI China trades at a steep discount to the US, and China tech remains well below 2021 peaks.

Beyond AI, the mainland is progressing rapidly in electric vehicles, renewable technology, industrial automation and robotics. Capital-market reforms are also improving funding for early stage innovators through more flexible Hong Kong listing rules and streamlined STAR and ChiNext board processes.

This creates a broad investment opportunity set: leading AI and internet names, advanced manufacturing, select materials, new consumption leaders and high-dividend financials.

Diversify and maintain a liquidity strategy

Diversification remains key to safeguard portfolios in this time of disruption. Key risks include the AI trade unwinding, resurging inflation keeping rates higher for longer and US-China relations deteriorating ahead of the 2026 US mid-term elections.

Here, portfolio stabilisers can help counterbalance risks.

If the AI trade unwinds and economic growth slows sharply, the Fed would likely cut interest rates more quickly. In that scenario, quality bonds can act as stabilisers, offering income and potential capital gains. In the Asia-Pacific, we favour investment-grade issuers with five to 10 year maturities, and major bank and insurer Tier 2 debt. Selective exposure to high-yield bonds and direct lending can enhance returns, but avoid low-quality credits and lower middle-market segments vulnerable to late-cycle dynamics.

If inflation resurges, a constrained Fed may keep rates from falling. If so, gold and commodities offer valuable hedges. We think gold could trade at US$4,500 per ounce by mid-2026. Supply constraints and rising demand should support energy, metals and agriculture.

As for the US dollar, we expect some renewed weakness into the first half of 2026 as real rates fall and the Fed front-loads its dovishness, but no major depreciation. We are constructive on the euro and select commodity-linked currencies, notably the Australian dollar. In Asia, we see room for regional currencies to modestly appreciate, supported by a somewhat stronger yuan.

Alternative investments remain a core source of uncorrelated returns – we favour hedge funds and private markets, especially private equity. Even as investors deploy excess cash, maintaining three to five years of planned withdrawals in a liquidity strategy helps avoid forced selling during volatility.

Disruption and uncertainty should persist. Still, by staying pro-growth while avoiding concentration, diversifying across regions and asset classes, and maintaining a robust liquidity strategy, investors can future-proof portfolios and capture the opportunities of this new era.