The election results represent a resounding win for Takaichi, with the LDP alone winning a two-thirds supermajority in the Lower House. Together with their coalition partner, the Japan Innovation Party (JIP), Takaichi now effectively controls 76% of Lower House seats. While the LDP does not have a majority in both houses, the Lower House supermajority enables the LDP/JIP coalition to override any opposition from the Upper House.

Takaichi secured the election by pledging decisive leadership and a vision for a more self-sufficient and assertive Japan, while also addressing the country’s cost of living crisis. Opinion polls consistently indicate that inflation is the most pressing concern among voters. With the electoral mandate, Takaichi will be able to press ahead with planned reductions in consumption taxes, expand household subsidies, and implement strategic investments and reforms in sectors such as semiconductors, shipbuilding, and AI. Additionally, increased defense spending looks likely. All in all, fiscal spending may increase by 2%–3% of GDP.

While fiscal stimulus may boost near-term growth, which has helped Japanese equities outperform global equities by 6 percentage points this year, increased government spending comes with its own risks. Notably, Japanese bond and currency markets were initially spooked in mid-January following the announcement of the snap election, reflecting concerns about debt burdens, political pressure on the Bank of Japan (BOJ), and the prospect of higher inflation.

Fiscal crisis concerns, while relevant, are overblown. Japan’s debt-to-GDP ratio has been declining in recent years, and interest expense as a percentage of GDP is lower than in other developed countries. Additionally, foreign ownership of JGBs is relatively low, reducing the likelihood of a sudden fiscal crisis or a “Liz Truss moment” similar to what the United Kingdom experienced in 2022. The recent rise in Japanese bond yields has been driven by rising inflation in Japan and reduced bond purchases by the BOJ, which has sought to shrink its balance sheet. With core inflation running close to 3%, real interest rates in Japan are still low, which is partly why the yen remains under pressure.

Tackling cost of living concerns ultimately requires a stronger yen, as a weak yen is partly to blame for inflation pressures. The Japanese government has made it clear that it will intervene if the USD/JPY exchange rate approaches the 160 level. But such a level will be hard to defend in the absence of higher interest rates. Given the election all but guarantees increased fiscal stimulus, the BOJ will need to continue hiking rates, otherwise, it risks a further rise in inflation.

Continued BOJ rate hikes, combined with modest rate cuts by the Federal Reserve, would further narrow the yield gap between Japan and the United States, providing support for the yen. Additionally, higher government bond yields in Japan could prompt the repatriation of some Japanese overseas bond holdings, exerting further upward pressure on the yen.

Overall, we see the election outcome as positive for the Japanese economy and, by extension, the yen. To capitalize on this outlook, we favor strategies that are less sensitive to JPY appreciation. Specifically, we like Japanese small-cap equities, which are a significant component of our current tactical recommendation to overweight developed markets small caps, as well as private equity buyouts and activist strategies. These strategies are well-positioned to benefit from stronger domestic growth and the ongoing momentum in corporate governance reforms and merger & acquisition activity within Japan’s market.

The post Japanese Election Result Should Boost the Economy and Ultimately the Japanese Yen appeared first on Cambridge Associates.

This edition of VantagePoint offers a practical update on recent developments and highlights the most compelling opportunities for investors. We begin with a summary of the key shifts that have shaped Asian markets over the past two years, then outline our current views and how our thinking has evolved in response. We continue with outlooks for China, India, Southeast Asia, and Japan followed by cross-market themes: the spread of shareholder value and Asia’s role in the global artificial intelligence (AI) buildout. We conclude that while Asia has demonstrated resilience to economic and geopolitical challenges, risks remain, and we expect economic growth and equity beta prospects to moderate as the region faces headwinds from slowing export growth and cooling consumption. The most compelling opportunities lie in alpha generation rather than broad market exposure. The evolving opportunity set, and the potential for active managers to generate alpha are more favorable than they have been in years.

Evolution of key investment views on Asian public and private markets

Asia has weathered the US tariff shock better than feared, with China’s exports remaining resilient and regional growth holding up. The Trump administration’s stance on China has softened, with the October 2025 “trade truce” signaling a shift from abrupt decoupling to strategic de-risking. Meanwhile, the rise of AI has reshaped market leadership, creating new winners and losers across the region, while the push for greater shareholder value is creating new sources of alpha potential. Persistent US equity outperformance and dollar strength have given way to Asian market outperformance and USD weakness. A continuation of last year’s rotation away from US assets could create a positive cycle of Asian asset outperformance and currency appreciation. Nevertheless, these positive developments come as regional growth momentum is expected to moderate, with both China and India facing cooling growth, while export-dependent economies remain vulnerable to slower US consumption.

These developments have prompted us to recalibrate our positioning. We are now neutral on China public equities, reflecting a more balanced assessment of risk and reward, and remain neutral on Asian public equities overall. However, we have become more constructive on active management themes as the focus on shareholder value and corporate governance—initiated in Japan and now spreading to Korea and beyond—has broadened and deepened. This shift is creating fertile ground for active managers, especially those pursuing activist, event-driven, and small-cap strategies. While valuations are elevated relative to their own history, Asian equities still trade at a discount to global peers, particularly the United States, and value stocks offer active managers more reasonable valuations. Undervalued currencies add another layer of potential return for USD investors on an unhedged basis.

On the private side, we believe there are opportunities in China’s technology-focused venture capital (VC) and healthcare. However, we recognize that the geopolitical and regulatory risks may be too much to tolerate for some, especially US-based investors, and may be more available for global investors less sensitive to these risks. Our outlook for Indian private equity (PE) has grown more constructive as generational ownership transitions create new opportunities in traditional sectors, while we remain enthusiastic about Japanese buyouts, where corporate reform and a growing emphasis on shareholder value continue to unlock value. Across the region, local expertise and rigorous due diligence are essential to identifying and capturing the most promising investments.

Country and regional outlooks

China: Coming in from the cold

China has weathered the US tariff storm by redirecting exports through other markets and using stimulus judiciously to support the economy. As we noted two years ago, the depressed equity market was poised to respond sharply to increased stimulus, and the government’s clear shift toward a more pro-business stance in September 2024 set the stage for strong returns in 2025. China’s “DeepSeek moment” in early 2025 further reinforced its position at the forefront of tech innovation.

Following a roughly 60% rally from 2024 lows, Chinese equities are no longer depressed or cheap, but they remain under-owned, particularly by non-Asian investors. Most inflows to Hong Kong–listed Chinese equities have come from onshore investors via the South-Bound Stock Connect program. While emerging markets (EM) and Asia-dedicated funds have narrowed their underweights to China, they remain, on average, below benchmark weight, leaving scope for further inflows. However, earnings have not kept pace, as persistent deflationary pressure has hurt margins. Easing deflation is critical for sustained earnings growth and outperformance, but this may not materialize in 2026. The government continues to prioritize export and tech-driven growth over boosting domestic consumption. We remain neutral as the balance of risks do not justify avoiding or explicitly underweighting the market, especially given the Trump administration’s less hawkish stance.

Turning to Chinese private markets, we are more constructive on China VC and healthcare-focused funds than China buyouts and growth equity. Fundraising is showing tentative signs of recovery, supported by robust IPO activity in Hong Kong. In 2025, China’s approval for companies to list abroad helped Hong Kong lead the world in IPOs, with over 100 companies raising more than $35 billion and another 300 in the pipeline. Healthcare IPOs reached 14 in 2025 (up from 4 in 2024), with 73 biotech and medtech companies in the pipeline, and multinational pharmaceutical companies have been making acquisitions and in-licensing deals with Chinese drug producers. While China VC fundraising remains tepid due to concerns about US restrictions on investing in AI, semiconductors, and quantum computing, managers raising new funds are highlighting broader opportunities in robotics, advanced manufacturing, clean energy/electric vehicles, and companies applying AI, rather than developing it. Additionally, funds seeking international capital have developed structures to comply with US investment restrictions, keeping the asset class actionable.

Traditional China PE fundraising and deal activity, however, remain depressed despite low valuations and interest rates. China PE funds have lagged returns in other regions, while Pan-Asia PE funds are investing less in China, favoring opportunities elsewhere with less geopolitical baggage. Although there are opportunities for domestic funds to acquire the China operations of multinationals exiting the market, the overall opportunity set for China PE seems limited, and few managers appear to be returning to market in 2026.

India: Disappointing the bulls and the bears

India’s growth has moderated from 8% to around 6% over the past two years, as government spending and business investment cooled. Despite still-solid growth, Indian equities have underperformed broader emerging markets, with high valuations remaining a persistent headwind. The positive macro story was already priced in, and valuations remain disconnected from economic reality.

A major surprise has been the United States’ abrupt shift from pro-India policies to imposing a 50% tariff, among the highest in Asia, threatening India’s manufacturing ambitions and contributing to stagnation in foreign direct investment (FDI) since 2021. While these tariffs may be negotiated lower, especially in the event of an end to the war in Ukraine and ban on Russian oil imports, the impact on sentiment and capital flows is clear. The successful IT outsourcing sector faces new risks from AI, though it may also find ways to harness the technology.

Slower growth and cooling inflation have allowed the Reserve Bank of India to cut rates to support growth, but this has helped drive the rupee to new lows, making it the worst-performing Asian currency in 2025. The weak currency risks stoking inflation pressure and may limit further rate cuts, complicating the monetary policy outlook.

Foreign investors remain net sellers of Indian public equities, especially as they seek to close China underweights, but domestic capital now drives the market—a structural shift unlikely to reverse. Regional managers remain bullish long term but are selective, given challenging valuations. Most managers, both public and private, focus on domestic demand themes rather than export plays and cite a deepening opportunity set in India.

Said differently, India is experiencing a soft patch, not a reversal and thus continues to disappoint both bulls and bears. We remain neutral on public equities due to elevated valuations and slowing earnings growth but see more attractive opportunities in private markets (PE and VC), particularly in traditional sectors undergoing generational ownership changes.

Southeast Asia: Politics getting in the way

Two years ago, we highlighted Southeast Asia’s rare combination of rising FDI, trade flows from China decoupling, and attractive equity and currency valuations. Yet, small market size and illiquidity led us to maintain a neutral stance and favor exposure through regional funds, both public and private. This view remains unchanged. The region has continued to underperform, hampered by limited tech/AI exposure and political instability in Indonesia, the Philippines, and Thailand. These concerns have driven foreign investors to pull back, resulting in valuation de-ratings and capital outflows. Singapore stands out as a beacon of stability, attracting the bulk of FDI and capital, while Vietnam remains a bright spot, though its market is still small. ¹

The region was caught off guard by the 2025 US tariffs, which initially targeted rerouted Chinese exports. Although the tariffs were painful, especially after prior US encouragement to shift production from China, subsequent negotiations have eased the burden, and Southeast Asia has weathered the shock relatively well.

Managers remain disappointed with the region’s overall performance but continue to find idiosyncratic and company-specific opportunities. Low valuations in select markets and sectors keep managers engaged, though they remain highly selective in both public and private markets. Additional Federal Reserve rate cuts and resumed USD weakness should provide some relief by enabling domestic rate cuts and currency stability, but a sustained re-rating will require greater political stability and pro-growth policies.

Japan: Corporate reform, market opportunity, and the activism advantage

Japan appears to be emerging from decades of deflation. Expectations of further fiscal easing under new Prime Minister Sanae Takaichi—who has called for snap elections on February 8 to strengthen her legislative support—has seen Japanese equities rally amid renewed yen weakness. For foreign investors, yen weakness has eroded unhedged returns, offsetting otherwise strong local currency performance in recent years. We anticipate that continued growth and inflation will exert pressure on the Bank of Japan to normalize policy and raise rates, which should support the yen, now at depressed valuations. While a stronger yen would benefit foreign investors through positive currency translation, it has historically been associated with weaker returns for large-cap Japanese equities, which tend to be negatively correlated with the currency. This dynamic is particularly relevant now, as large-cap valuations are starting to look expensive relative to their own history. By contrast, small-cap Japanese equities have more attractive valuations and are less sensitive to movements in the currency given their domestic focus.

Japan continues to stand out in Asia for expanding alpha opportunities tied to its corporate governance revolution. Public and private regional managers are committing more capital, citing rising mergers & acquisitions (M&A), buybacks, payout ratios, and improved capital management. Investor engagement and activism are becoming mainstream, benefiting activist, event-driven, and small-cap public equity strategies, as well as buyout managers.

Japanese PE returns have improved over the last decade, closing the gap with US and European peers despite pronounced yen weakness. M&A activity accelerated in fourth quarter 2023 after new guidelines required boards to consider credible offers and engage independent committees. While global M&A also improved, it remained relatively soft.

Challenges persist, such as slow progress on board diversity and uneven corporate governance enforcement, but the trajectory is positive. Japan’s experience is now a reference point for the region, and Pan-Asia PE managers are committing more capital, confident that ongoing improvements in governance, macro fundamentals, and shareholder returns will continue to drive opportunity across the market-cap spectrum.

New Asia themes

Beyond the individual country outlooks, several structural themes are reshaping the investment landscape across Asia. Chief among these is the region’s accelerating focus on shareholder value and its evolving role in the global AI ecosystem. These cross-cutting themes are creating new opportunities and risks for investors.

Korea and the spread of shareholder value

Korea’s transformation was remarkable in 2025. After years of skepticism and persistent valuation discounts, investor sentiment has shifted decisively with the equity market returning an eye-catching 100% in USD terms—driven by AI enthusiasm, especially in Samsung Electronics and SK hynix. However, the market’s inflection point arguably began in April, as foreign investors poured in following the impeachment of President Yoon Suk Yeol, ending the constitutional crisis that followed the failed attempt to declare martial law in late 2024. Fresh elections allowed investors to refocus on Korea’s strategic position in the global tech supply chain and meaningful corporate governance reforms.

The South Korean Corporate Value-Up Program, launched in 2024, followed by legislative changes to the Commercial Code in July 2025 have been central to this shift. These initiatives, backed by all major regulators, aim to boost shareholder returns, strengthen board independence, enhance transparency, and increase minority shareholders’ voting power. The South Korean Corporate Value-Up Program was fully voluntary, while more recent legislative changes have real consequences for non-compliance, making directors legally accountable for protecting shareholder value and treating all shareholders equally.

While these changes alone won’t fully align chaebol ² interests with minority shareholders, progress is evident. Activist campaigns have surged, and board independence and transparency are improving. Further reforms, such as tax changes and stewardship code updates, will be needed to sustain momentum. Skepticism remains about the depth and durability of reforms, but the market’s response has been overwhelmingly positive.

The focus on shareholder value is spreading, though unevenly, across Asia. In China, the government’s February 2024 “9 rules” policy signaled intent to improve governance and shareholder returns, especially among state-owned enterprises and large listed companies. There are isolated cases of increased dividends, buybacks, and responsiveness to investors, but these are not yet widespread or market-defining. Activism remains rare, and most engagement is “soft” and behind the scenes.

Elsewhere, especially in Southeast Asia, the shift is more subtle. Managers report that companies are more receptive to investor suggestions on how to improve efficiency and returns, often through collaborative engagement rather than hardline activism. This is most evident in markets with deepening capital markets and a growing institutional investor base.

Overall, the shareholder value “playbook” is most advanced in Japan and Korea, with China showing selective progress and Southeast Asia demonstrating increased openness to investor input. For investors, this means alpha opportunities from governance reform and event-driven strategies are expanding but remain concentrated in North Asia.

Asia’s role in the AI tech stack

Asia has become indispensable to the global AI ecosystem. While the United States and China dominate the headlines and the development of foundational AI models, the rest of Asia plays an important role. Taiwan and Korea anchor advanced chip and memory production, with TSMC, Samsung, and SK hynix critical players. Japan is a leader in robotics and “physical AI,” as well as industrial applications. Singapore, Malaysia, and Indonesia are rapidly scaling data center infrastructure, while India’s AI opportunity is primarily in applied AI, especially in data-rich sectors like fintech, health tech, logistics, and SaaS.

For investors, an allocation to Asia now brings considerable exposure to AI. In fact, some Asian markets, especially Taiwan and Korea, are even more concentrated in AI-related names than the US market, which is home to the Magnificent 7. While Asian AI equities are somewhat less expensive than their US peers, they are not immune to the risks: if the AI trade falters, Asian AI stocks will also be vulnerable.

We are not recommending an overweight to Asian AI themes but highlight that investing in Asia provides meaningful exposure to the global AI buildout. For most investors, Asia offers a way to round out AI exposure, diversify beyond US-centric portfolios, and access the hardware, infrastructure, and applied innovations that underpin the sector’s growth.

Conclusion: Alpha and activism are alive and well

Asia is surviving the tariff storm better than expected. With the Trump administration striking a “trade truce” with China and shifting focus away from Asia, the outperformance of most Asian markets in 2025 was well supported. Still, economic growth will likely face headwinds in 2026 as export growth slows after front-running tariffs, and US consumption growth moderates. China and India are both likely to see growth cool further, while Taiwan and Korea remain leveraged to the AI spending cycle. Japan is both exposed to exports and is the odd man out facing rising interest rate pressures, albeit from a low base. Growth in Southeast Asia remains constrained by political headwinds.

After a strong year, Asian valuations are higher than two years ago, but outside of pockets like India and AI-related sectors, they are not excessive. The impact of a weaker US dollar on capital flows to Asia remains uncertain, but managers consistently reference increased investor interest in the region. While Asia is not immune to a US slowdown or a deflating AI bubble, the region is well positioned to weather volatility and may benefit if US AI enthusiasm fades and capital rotates to less expensive markets.

Even as growth and equity beta prospects moderate, alpha opportunities have improved, driven by rising activism and a stronger focus on shareholder value.

We reiterate the following investment views:

• China is not “uninvestable.” While we are neutral on Chinese equities, we would not shun this market, especially as part of regional Asia or EM funds. While China PE faces increased headwinds, China VC and healthcare merits closer attention for those willing to bear the geopolitical/regulatory uncertainty.
• India public markets remain expensive as earnings growth expectations still seem too high, leaving us neutral on public equities, but private market opportunities (both PE and VC) focused on domestic demand and business succession are attractive for long-term investors.
• Asia overall, particularly India, Taiwan, Japan, and Korea, look expensive. As such, Asia value strategies, which are more fairly valued in absolute terms, can tilt exposure toward less expensive, less tech-centric segments.
• Pan-Asia PE may be more effective than single country or regional approaches for China and Southeast Asia, and most Pan-Asia managers are also increasing their exposure to India and Japan.
• Japanese large-cap public equities are expensive and vulnerable to yen strength. We believe buyouts, activist strategies, and small- to mid-cap equities are better ways to access Japan’s ongoing governance and M&A themes.
• Asia event-driven strategies offer exposure to the activist/shareholder value trend, while renewed capital markets activity in Hong Kong has created opportunities for Asia hedge funds, which outperformed regional peers in 2025.
• Asia provides meaningful AI exposure, rounding out global portfolios and providing differentiated opportunities beyond US-centric AI plays. However, investors should not expect this diversification to provide much ballast during an AI downturn, as Asian AI equities are likely to be affected alongside their global peers.
• Asian currencies are cheap and could boost returns for Asia assets if USD weakness persists. Leaning into non-USD assets, including Asian equities, may be a way to benefit.

Justin Hopfer and Graham Landrith also contributed to this publication.

Footnotes

1. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
2. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post VantagePoint: Asian Equities Revisited appeared first on Cambridge Associates.

Their conversation covers the evolving regulatory landscape, the ongoing challenges and opportunities presented by climate change, and the contrasting approaches to sustainable investing in the United States and the United Kingdom. As they look ahead to 2026, Liqian and Annachiara identify key trends and areas of growth that are shaping the industry.

Together, they examine how new regulations increase data availability, enhance transparency, and enable more informed decision-making for investors and stakeholders. Liqian and Annachiara also cover the rapid advancements in renewable energy technologies and the critical need for continued investment in grid infrastructure to support this growth.

Sustainable and impact investing at Cambridge Associates focuses on helping clients invest in ways that support positive social and environmental outcomes alongside financial returns. Sustainable Investing in Focus is designed to make these topics accessible to everyone by explaining key concepts in a clear and simple way. By sharing practical examples and expert insights, the series helps viewers understand how sustainable investing works, why it matters and how it’s changing. Watch the first episode in our video series below.

The United States vs The United Kingdom

Regulation

Climate Change

Opportunities in SII

SII 2026 and Beyond

Footnotes

1. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
2. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post Sustainable Investing in Focus: The Road Ahead appeared first on Cambridge Associates.

Turning first to the sources of upside risks to growth, greater US government support is one potential driver. This comes despite an already elevated and expanding budget deficit, with the fiscal impulse expected to swing from a drag to a boost in the first half of 2026 because of the One Big Beautiful Bill Act. In this context, US President Trump has proposed increasing the military budget by approximately 50%, to $1.5 trillion. If this proposal finds support, which is not certain, it may not materially affect the economy until 2027. However, at more than 1.5 percentage points of GDP, it would nonetheless be sure to have a more immediate financial market impact.

To boost growth more immediately, ostensibly influenced by low approval ratings ahead of the mid-term elections, the Trump administration has taken several actions. A presidential directive instructed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities, which has helped bring 30-year mortgage rates down toward 6% and aims to stimulate homebuyer activity. Lower mortgage rates could also support discretionary spending, a goal further targeted by the proposed 10% cap on credit card rates. This proposal follows the Federal Reserve’s Senior Loan Officer Survey showing that banks are now tending to ease lending standards for consumer loans after a prolonged period of tightening.

Furthermore, political pressure on the Fed to deliver easier monetary policy has intensified to a degree not seen in recent decades, with President Trump and other administration officials advocating for rate cuts. Our base case is that the Fed will remain independent, with economic data remaining the primary driver of monetary policy decision. Nonetheless, the chances of political considerations influencing policy assessments have increased at the margin. Even without these various policy initiatives and interventions, financial conditions in the United States have been steadily easing in recent months. This broad-based easing, inclusive of appreciating risk assets, falling yields, and a weakening dollar, was already shaping up to be an activity tailwind.

Despite recent positive developments, left-tail risks persist, as the US economy remains distinctly “K-shaped.” This term refers to a scenario in which high-net-worth households continue to benefit from asset appreciation and strong wage growth in knowledge sectors, while low- and middle-income earners face increasing pressures. Indicators such as extremely low consumer sentiment and personal savings rates highlight this divide, as does the fact that wage growth for the lowest quartile of earners has lagged all other groups for the past 15 months. Aggregate data can mask this underlying fragility. While headline consumption and growth figures remain positive, the widening gap between the “upper” and “lower” arms of the economy creates a brittle foundation. As a result, overall growth may obscure systemic vulnerabilities.

Several labor market indicators highlight these underlying vulnerabilities. Over the past three months, nonfarm payrolls have declined by an average of 22,000 jobs. While private payrolls have increased by 29,000 jobs, only slightly below most estimates of the new break-even level, much of this growth is concentrated in the education and healthcare sectors. Although the recent rise in the unemployment rate has been modest, there are signs that the gig economy may be concealing deeper weaknesses. This is evidenced by increases in the number of people working part-time for economic reasons, the unincorporated self-employed, and those holding multiple jobs. Though layoffs remain relatively subdued, there has been a modest uptick. The ongoing decline in job openings, hires, and quits also suggests a lack of confidence among both employees and employers. The key concern is that if layoffs begin to accelerate, downside risks could quickly become more pronounced.

Recent developments have shown that geopolitics also remains a significant concern, contrary to hopes for a more stable outlook. On the trade front, the threat of new tariffs has resurfaced, even if some have since been revoked, underscoring persistent policy uncertainty that continues to weigh on hiring and investment. Immigration policy also contributes to this uncertainty, creating insecurity for lower-income earners and their employers. Additionally, the proposed cap on credit card rates, though intended to support consumers, could lead banks to restrict credit. This would pose further challenges for those most vulnerable in the economy. Indeed, even if other policy measures succeed in boosting growth in the short term, their impacts on markets are not guaranteed to be positive. For example, investors may push yields higher in response to renewed inflation pressures and a growing deficit, potentially dampening the benefits of these policies.

Taken together, both upside and downside risks to the US economy have become more pronounced in our view. Given the increase in tail risks, diversification should continue to serve as a guiding principle for investors, a point we emphasized in our 2026 Outlook. In this context, we continue to recommend maintaining a modest underweight to US equities and USD exposure.

Footnotes

1. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
2. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post Have Tail Risks to the US Economy Increased? appeared first on Cambridge Associates.

Thus far, the market reaction has been limited. The most notable moves have been equity price increases among defense and oil companies, the latter of which may benefit from increased access to Venezuela’s large oil reserves. Still, oil price movements have been modest, reflecting Venezuela’s neglected infrastructure and reduced output to just 1% of global supply. With oil prices declining by nearly 20% last year, markets were already signaling that oil supply was expected to be more than sufficient to meet global demand. Even if instability or new sanctions follow, the direct impact on global oil supply and prices should remain limited. Sunday’s OPEC+ meeting, where quotas were held steady amid oversupply concerns, reinforces this view. Conversely, in a best-case scenario, a rapid, peaceful leadership transition and lifted sanctions could allow Venezuela to double oil production within one to two years, according to Wood Mackenzie, though significantly more infrastructure investment would be required to reach historical peak levels.

The diesel market, however, may be more exposed to disruption. Venezuela’s heavy crude is essential for diesel production. With supply already tight and alternatives limited, further sanctions or blockades could quickly drive diesel prices higher, increasing transportation costs and goods prices. Nevertheless, there have not been substantial price increases in key diesel benchmarks in recent days.

Beyond immediate market moves, the operation reinforces a shifting geopolitical environment, where great power competition and direct intervention are increasingly shaping global affairs. With Delcy Rodríguez now serving as acting president and senior officials from Maduro’s administration still in control, it remains to be seen how collaborative the new leadership will be with the United States. It is also unclear how far the United States will go to secure greater influence and encourage a shift away from US adversaries such as China, Cuba, Iran, and Russia. This evolving landscape brings heightened uncertainty and the potential for further disruptive maneuvers, especially as President Trump, facing a possible loss of Congressional control as a result of the November US midterm elections, is likely to double down on foreign affairs to shape his legacy. As is typical for presidents in their final term, diminished domestic leverage often prompts a greater focus on international policy.

Political shocks reinforce the importance of broad, global portfolios that avoid overexposure to any single asset class or region. As highlighted in our 2026 Outlook, with equity valuations stretched, market concentration elevated, and economic signals mixed, many portfolios may be less resilient to adverse shocks—geopolitical or otherwise—depending on how they are positioned. Now is a timely opportunity for investors, especially those sensitive to drawdowns and not facing significant tax implications, to reduce outsized equity exposures and seek differentiated sources of return. Diversification remains the most effective way to build resilience and position portfolios for a wider range of outcomes.

Footnotes

1. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
2. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post US Military Operation in Venezuela Strengthens Case for Diversification appeared first on Cambridge Associates.

Footnotes

1. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
2. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post 2026 Outlook: Finding Value Amid the Hype appeared first on Cambridge Associates.

by Kevin Rosenbaum

Many investors have seen the share of their portfolios invested in equities—both public and private—increase over the past decade. This shift was fueled partly by the maturation of private investment asset classes, the growth of passive investing, and low bond yields that accompanied extraordinary fiscal and monetary stimulus, all of which contributed to robust equity returns and reinforced higher allocations. However, the landscape has changed meaningfully in that time. Elevated valuations, increased market concentration, and mediocre macroeconomic conditions underpin our view that equity risks are heightened. For investors whose equity allocations are at elevated levels, 2026 presents a timely opportunity to reassess policy allocations and embrace greater diversification.

The upward shift in equity allocations is apparent across different investor types. For example, our analysis of a consistent group of 247 US endowments and foundations reveals that their average allocation to public and private equity increased from 51.7% in June 2015 to 64.8% in June 2025. This pattern is echoed among US households, who, according to the latest Fed data, held a record proportion of their financial assets in equities as of second quarter 2025. The magnitude of these changes suggests that many portfolios globally may now be less resilient to adverse market events.

This shift has occurred as the likelihood of such an event has increased. Valuation measures across equities signal caution in virtually any way you look at them, reflecting both years of strong performance and the recent surge of enthusiasm around AI. The excitement surrounding AI has also contributed to greater market concentration, with the ten largest US companies now representing 22.2% of total global equity exposure—one of the highest levels on record. At the same time, recent data trends suggest that labor markets may be more likely to weaken than strengthen in the coming months, a development that often serves as a key indicator of the global economy’s direction. Collectively, these factors point to elevated idiosyncratic and systemic risks compared to historical norms.

To be sure, the future is uncertain. That uncertainty is why we seek diversified exposure rather than allocating solely to the next best-performing investment. While we cannot predict the future, we can assess the factors likely to shape the range of potential outcomes. In today’s environment, these factors point to a distribution of expected equity returns with a lower median than typical and greater negative skewness. Still, the possibility of an equity rally remains within that distribution, despite heightened risks. For long-term investors able to withstand volatility, or those facing substantial tax implications from reducing equity exposure, maintaining current allocations may be appropriate. However, for investors sensitive to drawdowns—due to spending needs, risk tolerance, or other constraints—now may be an opportune time to reassess equity allocations if they are currently elevated.

Any shifts in policy allocations should reflect not only the outlook for equities, but also the relative attractiveness of other asset classes. Assessing these opportunities requires weighing how new exposures align with portfolio constraints, enhance diversification, and offer potential for manager value add—considerations that are often unique to each portfolio. One area that merits consideration in the current environment is hedge funds. They can provide differentiated sources of return and help reduce drawdown risks, particularly as many strategies are adept at navigating market inefficiencies and macroeconomic uncertainty. In addition to the potential for compelling returns, a thoughtfully constructed sleeve of hedge funds, or broader diversifying strategies, can also deliver substantial value add. We explore our hedge fund perspective, along with considerations across other asset classes, throughout the rest of this publication.

Once policy allocations are set, investors may also identify tactical opportunities that further diversify risks and support value add. By broadening diversification and thoughtfully adjusting policy allocations, investors can strengthen portfolio resilience and better navigate changing market environments. As risks shift, so should our thinking.

Investors should lean into AI thoughtfully in 2026

by Celia Dallas

Artificial intelligence is rapidly emerging as one of the most significant disruptive transformations to the technology ecosystem, with the potential to reshape business models, drive productivity, and address demographic headwinds. The sector’s promise is substantial, but the current investment environment is marked by exuberance, with capital flowing into AI infrastructure and applications at an unprecedented scale. Investors must balance optimism with caution, seeking exposure that is both strategic and disciplined.

The four largest hyperscalers (Alphabet, Amazon, Meta, and Microsoft) are projected to spend $350 billion in capital expenditures in 2025, with cumulative investment reaching trillions over the next five years. This capex boom echoes historical technology revolutions—railroads, telecom, dot-com—where transformative innovation led to overinvestment, excess capacity, and ultimately poor shareholder returns for the builders. Today’s AI leaders are shifting from asset-light, high-ROIC models to asset-heavy, capital-intensive businesses, a transition historically associated with deteriorating fundamentals and lower free cash flow.

Valuations for core AI infrastructure stocks are elevated, and the competitive arms race among Big Tech resembles a prisoner’s dilemma: firms feel compelled to overspend to avoid losing market leadership, even at the expense of collective profitability. The risk is that inflated multiples and massive capex may not be justified by future growth, echoing the dot-com bust. Asset lifecycles are shortening, with rapid depreciation of AI hardware requiring faster returns and exposing investors to higher risk if growth slows. Funding quality is shifting, with more reliance on private credit and securitized finance. Additionally, the ecosystem’s “circularity”—where companies are simultaneously customers, suppliers, and investors in one another—can mask underlying demand and profitability issues.

For now, most of the large public AI players have been living within their means, but operating cash flows are increasingly consumed by capex, share buybacks (in part to offset dilutive effects of share-based compensation), and acquisitions, all of which are strategic investments to remain competitive in this race to dominate the AI landscape. On average, capex accounts for 75% of cash flow from operations across these five companies, up from 45% in 2024.

Beyond the mega-cap tech firms, for companies broadly able to leverage the technology, AI is not just a source of top-line growth but also a powerful lever for cost reduction and margin expansion. Such opportunities are difficult to recognize at this stage of AI development, giving skilled managers with appropriate insights the potential to invest in such companies at relatively attractive valuations.

The buildout of AI physical infrastructure is creating new opportunities in power generation, grid modernization, and energy efficiency. As data centers and AI workloads drive up electricity demand, companies focused on improving access to power—whether through renewables, grid upgrades, or distributed energy solutions—stand to benefit. Even if AI promises are delivered more slowly than anticipated, such investments would still benefit from other electricity demand drivers like electrification of transportation and digitalization trends. These segments are essential to the sustainable scaling of AI and may provide more stable, diversified returns than the core technology providers.

Venture capital plays a critical role in the AI ecosystem, serving as the engine for innovation and disruption. Many of the most transformative companies of the internet era—such as Amazon and Uber—were venture-backed disruptors that redefined entire industries. Today, venture capital is fueling the next generation of AI innovators. These companies are often the source of breakthrough technologies and new business models that can reshape markets and create outsized value. However, the surge of interest in AI has led to a dramatic escalation in venture capital valuations requiring discipline to separate hype from legitimate opportunity.

AI’s investment frontier is rich with potential but fraught with complexity. The sector’s productivity and economic impact may take longer to materialize than current capex and valuations imply. Thoughtful AI exposure requires diversification beyond the largest AI-exposed names. Success will require partnering with skilled managers, maintaining price discipline, and staying adaptive as the landscape evolves. By eschewing hype, focusing on fundamentals, and diversifying exposure—especially toward asset-light early adopters, power and energy efficiency themes, and innovative venture-backed disruptors—investors can position themselves to outperform as the AI era unfolds.

Investors should invest across the electricity transmission food chain in 2026

by Simon Hallett

Much attention has been given to AI’s growing appetite for electricity and the resulting demands on grid capacity to support new, power-intensive data centers. However, AI is just the icing on the cake for an industry that, until now, was considered mature but is now poised for multi-year growth. Investors should prioritize cross-asset exposure to the expansion and modernization of electricity grids.

Grid operators need to build capacity and connect different locations at a pace not seen since the 1960s. This rapid expansion is straining supply chains for equipment and materials, leading to growing order backlogs and firm pricing for equipment manufacturers. At the same time, technological solutions are essential for operating smarter, more efficient grids that maximize existing capacity and seamlessly integrate multiple distributed and intermittent power sources.

Twin sustainability trends essential to a low-carbon transition are (1) the build out of renewables on global power grids, and (2) the expansion and redesign of grids to integrate this distributed power from new locations. This includes the addition of storage, load balancing, and “smart grid” technologies necessary to maintain stability with intermittent generation. These trends are deeply interconnected. As noted in a 2023 International Energy Agency (IEA) report, “Grids need to both operate in new ways and leverage the benefits of distributed resources, such as rooftop solar, and all sources of flexibility.”

The changing nature of electricity supply is a major driver of grid investment, but rising demand is reinforcing this need. After years of flat growth—when efficiency gains largely offset increased usage—global electricity demand is now accelerating as more activities, such as transportation (notably electric vehicles), heating, and industrial processes, become electrified. The most widely discussed theme is the AI-driven surge in data centers, which require not only more power but also new connections to the transmission system in previously unserved locations. While there is some risk that advances in technology and efficiency could eventually render certain data centers surplus to requirements, the growth in electricity demand extends well beyond AI alone.

Meanwhile, electricity grids worldwide have suffered from years of underinvestment. According to the IEA, while investment in renewables has doubled since 2010, capital expenditure on grids has remained largely flat. As a result, grid operators are now playing catch-up. Both the IEA and BloombergNEF estimate that grid capex must double by 2030, requiring an additional $300 billion in annual spending.

This is good news for a range of players. Utilities can expand their regulated asset bases at an unprecedented pace. Equipment makers and contractors are building order backlogs several years long, as are gas turbine makers. The situation for wind turbine makers is less clear, given political and regulatory changes have caused a swath of project cancellations, but growing demand outside the United States is underpinning recovery. For us, the clearest and most robust opportunity from electrification is in the grid itself rather than generation, considering the combination of historic underinvestment, new technologies and the need to “re-wire” many developed countries to cope with a completely different pattern of supply/demand.

Investors can access this opportunity through thematic strategies spanning a wide range of assets, from infrastructure to venture capital. Public equity managers focused on the energy transition may invest in large industrial companies supplying grid equipment, as well as the utility operators building out the grid. Similar opportunities exist in private markets, including private infrastructure funds and select buyout managers. Venture and growth equity managers with transition expertise are also active, targeting grid-enhancing technologies and unlocking the potential of demand response and energy storage through digitalization. One risk to note is the recent surge in public market valuations for some large industrial stocks tied to grid spending. Public market investors may benefit from waiting for a pullback or being highly selective.

The expansion and modernization of electricity grids is a broad theme with several distinct, independent drivers. It is not solely about AI or renewables; rather, it encompasses a range of factors shaping demand and investment. Additionally, the long timescales for infrastructure investments and equipment lead times suggest this will remain a multi-year opportunity.

Investors should underweight the US dollar in 2026

by Aaron Costello

After experiencing a decade-long bull run that started in 2011, the US dollar (USD) weakened sharply in 2025, falling by 10% at one point. We believe the US dollar has begun a multi-year bear market, but given recent oversold momentum, we expect the dollar will rally at some point in 2026. This is consistent with historical trends, whereby the US dollar tends to stage a rebound after experiencing declines of 10% or more. However, we do not think investors should try to market-time any USD rebound, due to the inherent uncertainty in the duration of any such rally and the fact that the US dollar remains overvalued, with ample scope to decline over the coming years. Instead, investors should underweight the US dollar relative to policy targets and use any rebound as an opportunity to initiate or add to USD underweights, with non-US equities and unhedged non-US sovereign bonds as two potential implementation options.

For 2026, the US dollar could strengthen if US economic growth remains resilient relative to elsewhere. Indeed, non-US economic growth faces headwinds in 2026 as the boost from tariff front-running fades. Relatively stronger economic momentum in the United States would also place less pressure on the Fed to cut rates, resulting in higher US rate differentials versus elsewhere and lending support to the US dollar, a dynamic that has already started to play out in late 2025. Conversely, the US dollar has historically rallied at some point during a US recession, albeit sometimes only briefly. While a recession is not our base case, the US dollar could still jump amid a growth scare in the United States triggered by further weakness in the US labor market spilling over into lower consumption and investment.

But investors should not chase any such rally. This is because we expect the dollar to remain in a downtrend over a multi-year horizon. The US dollar still faces headwinds from economic policy uncertainty, overvalued assets, and fiscal sustainability concerns, factors that dampen the attractiveness of US assets relative to elsewhere and therefore demand for the US dollar. The US dollar has benefited from equity-related portfolio inflows and given the growing froth in US equity markets, anything that shakes confidence in the AI theme could see reduced flows and a weakening US dollar. While the US dollar has benefited recently from a reduction in Fed rate cut expectations, this could change over the course of 2026 as a new Fed chair (and potentially two other Fed governors) will be appointed by the Trump administration. These upcoming appointments may bias the Fed toward more aggressive easing and narrowing of interest rate support for the US dollar. Regardless of who chairs the Fed, lower interest rates and a weaker US dollar are a stated goal of the Trump administration to help narrow the US trade deficit and spur a revival of US industry.

Overall, we expect the US dollar will weaken. Counter-trend rallies are common amid multi-year USD bear markets and despite the recent decline, the US dollar remains 32% overvalued in equity-weighted terms. Non-US equities and unhedged non-US sovereign bonds have typically outperformed during USD bear markets, especially when relative valuations are in their favor, making them effective potential options for implementing a dollar underweight. While we acknowledge the likelihood of a USD rally at some point in 2026, investors should remain underweight the US dollar because of the scope for continued USD weakness over a multi-year horizon.

Footnotes

1. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
2. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post 2026 Outlook: Portfolio-Wide Views appeared first on Cambridge Associates.

by TJ Scavone

Yields on most major developed market (DM) sovereign bonds reached a multi-year high in 2023 and have since held just below those highs, trading in a relatively narrow range. We expect this pattern to persist into 2026, supported by a resilient yet uncertain economic and policy backdrop, fair valuations in most markets, and ongoing yield curve pressures. Investors should keep allocations to high-quality sovereigns closely aligned with policy guidelines.

Looking ahead to 2026, the environment for most high-quality sovereigns remains broadly supportive. Economic growth is healthy but slowing—DM real GDP is projected to rise 1.7% in 2025, down from 1.9% in 2024, with most of the deceleration in the United States. While US consumer spending remains supportive, the labor market has softened, and the full impact of tariffs remains uncertain. These dynamics are likely to keep the Fed and other major central banks biased toward modestly easing in 2026, despite persistent inflation concerns. Overall, softer labor markets, tariff headwinds, and resilient but softer growth—supported by healthy consumer spending, AI capex, and easier policy—should limit both recession and inflation risks, resulting in modestly lower policy rates in many markets and rangebound sovereign bond yields in 2026.

Given this backdrop, we recommend maintaining exposure to high-quality sovereign bonds, with duration risk kept in line with benchmarks. The case for a short-duration stance has weakened as short-term rates have declined and yield curves have steepened, raising the opportunity cost of holding cash. Likewise, the case for adopting a long-duration stance is not compelling. Long duration typically outperforms when growth slows and central banks ease, but we anticipate only limited monetary easing. The European Central Bank and Bank of England have already delivered most of their anticipated cuts and markets are pricing in around 75 basis points (bps) of Fed cuts in 2026—a scenario that looks optimistic, considering current risks. Additionally, sovereign bond yields in key markets, like the United States and euro area, are currently in the bottom half of what we consider their fair value ranges, leaving little room for further declines absent a recession.

There are risk factors that warrant close attention. We have recently seen longer-duration sovereigns underperform as a range of influences—including fiscal concerns, elevated macro volatility, and cyclical factors—have put upward pressure on yields further out the curve. Fiscal pressures in particular have repeatedly made headlines in recent years, with many DM countries facing challenging fiscal outlooks and heightened volatility around budget stand-offs. While fiscal pressures warrant monitoring, market pricing does not signal imminent fiscal crisis, nor are they the sole driver. Elevated macro volatility, structural headwinds, and cyclical factors like monetary policy have also contributed. Many of these influences should reverse in a growth shock, allowing bonds to rally and provide portfolio ballast, as seen at points this cycle. However, with these crosscurrents, investors should demand more attractive yields before adding exposure. For context, yields would need to rise another 130 bps–180 bps to reach the upper end of their implied fair value range in the United States and Germany. Some regions offer more value, but domestic and currency risks need to be considered. In most cases, we recommend waiting for more attractive US Treasury valuations—given global spillover effects—before extending duration risk.

Overall, we anticipate that bonds will outperform cash in most major markets—supported by steeper yield curves—and should maintain their defense role in a downturn. However, since current bond yields are not especially attractive relative to our fair value estimates, we recommend maintaining allocations at policy levels, and keeping duration risk closely aligned to benchmarks.

Investors should underweight public corporate credit in 2026

by TJ Scavone

At present, the public credit universe offers few compelling opportunities. While returns have been solid and fundamentals remain sound, public credit is increasingly a one-sided trade. Spreads for both investment-grade and high-yield corporates are near historic lows, and the economic backdrop is turning less supportive. We see potential for spreads to widen in 2026 and beyond, and as a result, we favor higher-quality spread products that offer better relative value and more diversified return streams.

US investment-grade corporate bonds returned 6% annualized over the trailing three years as of November 30, and US high-yield bonds returned 10%. These strong returns were driven by high starting yields and a significant narrowing in credit spreads—down 52 bps for investment-grade and 179 bps for high-yield. The tightening in spreads, a pattern that was evidenced across most regions and instruments, was justified by robust economic and earnings growth, resilient corporate fundamentals, and subdued issuance, but yields are now less compelling, and spreads are historically tight across public credit.

While spreads could drift lower in the near term, upside for public credit is limited and downside risks have increased. The environment is more fragile, with slowing growth and emerging stress in the labor market and among low-income consumers and select corporate borrowers, highlighted by recent high-profile defaults. Riskier assets look increasingly vulnerable after the sharp run-up in equity valuations, as discussed earlier in this outlook, and the potential for slower growth and elevated costs could pressure corporate earnings and margins. Although material spread widening is not our base case, the credit cycle is maturing and risks favor wider spreads, supporting an underweight stance in public corporate credit within core fixed income.

Despite expensive public credit markets, select spread products offer compelling relative value. We favor US agency mortgage-backed securities (MBS)—particularly higher-yielding current coupons—and US municipal bonds (munis). We believe current coupon MBS are higher quality and well positioned to outperform if spreads widen, providing defense without sacrificing yield. Notably, current coupons (4.9%) now yield more than corporates (4.8%). Historically, at these levels, current coupons have outperformed corporates 62% of the time over the next two years, with returns ranging from -3% to 11% per year. Their spreads, unlike corporates, remain above historical lows with room to tighten as rate volatility subsides. Although rate volatility has declined since its recent peak, it remains somewhat elevated. With quantitative tightening ending and further modest rate cuts likely once tariff-related inflation pressures ease, there is scope for both volatility and MBS spreads to compress further, supporting returns.

Munis also offer attractive relative yields for taxable investors. For high-tax-bracket US families, munis have consistently delivered stronger after-tax returns than Treasury bonds and corporates. After adjusting for taxes, the yield advantage for munis is unusually wide—currently about 185 bps versus Treasury bonds and 93 bps versus corporates, among the widest taxable-equivalent spreads since the Global Financial Crisis, excluding isolated stress periods. Many taxable investors reduced muni holdings over the past decade, favoring Treasury bonds or, in some cases, even reaching for yield in credit, as low yields limited their tax advantage and valuations were less compelling. That is no longer the case, and the current environment favors shifting back toward munis at the margin.

Against this backdrop, it is important to recognize that public credit markets overall offer limited upside and heightened downside risk as spreads remain tight and the economic outlook softens. In this environment, we recommend a defensive posture within core fixed income, emphasizing higher-quality, more resilient sectors, with attractive relative value. US current coupon agency MBS and municipal bonds stand out for their relative yield advantage and diversification benefits. For those investors for whom these investments are appropriate, focusing on them may help position portfolios for more balanced risk-adjusted returns in 2026.

Investors should lean into private asset-based finance strategies in 2026

by Wade O’Brien

In 2026, credit investors face challenges such as expensive valuations, moderating growth and falling yields. Recent bankruptcies like First Brands and Tricolor also highlight the risk of weaker underwriting in at least some segments. We believe the solution is focusing on less correlated private credit strategies such as asset-based finance (ABF), insurance-linked securities, and litigation funding. Some of these strategies can be accessed via semi-liquid vehicles, freeing up illiquidity budgets for other parts of the portfolio.

Less correlated private credit strategies are attractive relative to expensive public credit assets. Strong demand has pushed spreads on assets like US high-yield and investment-grade bonds near the bottom decile of historical data, as we discuss elsewhere in this outlook. While demand across products is likely to be underpinned by yields near historical medians, returns are vulnerable if the pace of expected Fed cuts disappoints.

ABF funds offer investors the ability to diversify portfolios away from cyclical and expensive corporate lending. These funds lend against a variety of assets including consumer loans, real estate, and equipment leases. Underlying loans are less economically sensitive and have shorter maturities, allowing lenders to reprice them more quickly as conditions change. Accelerated cash return can also help investors concerned about slower distributions in other parts of their private portfolios. Recent bankruptcies have drawn attention to the ABF market, but were idiosyncratic, given the fraud and business practices involved. Still, they highlight the importance of careful manager selection, as both cases involved red flags that were ignored by markets. Fundraising by dedicated ABF funds has picked up but remains a fraction of the volumes seen in other private credit strategies.

While direct lending funds are currently less attractive in our view than less correlated private credit strategies, they remain attractive relative to comparable public credits. Fed rate cuts and lower spreads will impact returns, but fundamentals have been stable and defaults limited. The biggest near-term challenge for direct lending funds is competition from both the syndicated loan market and retail-targeted vehicles. Semi-liquid retail funds, including private business development corporations (BDCs) and interval funds, had accrued around $350 billion in assets by year-end 2024, a 60% increase in just two years. Reduced buyout volumes have cut supply and added to pressure on spreads, but resurgent M&A activity as rates decline and tariff uncertainty clears may help. Lower middle market lending funds, which offer higher spreads and better protections for lenders, are preferred to upper middle market.

Investors can access direct lending and ABF via open-ended vehicles as well as traditional closed-end funds. Private BDCs and interval funds may charge higher fees but offer investors the ability to more frequently adjust exposures. Investors that can access lower fee institutional evergreen funds may find them an attractive substitute for liquid credit assets featuring low spreads and yields.

Other private credit strategies—such as royalties, litigation finance, and insurance-linked securities—also have appeal. They tend to have resilient income streams insulated from the economic cycle and less sensitive to corporate fundamentals. Returns for these strategies have compared favorably with other types of private credit in recent years. These markets require highly specialized expertise, making their return streams less vulnerable to rising competition or surging demand from retail-targeted offerings.

In summary, with public credit markets offering limited value and increased competition, investors should look to private credit—especially ABF and specialized strategies—for better diversification, resilience, and risk-adjusted returns in 2026.

Footnotes

1. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
2. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

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