What is your assessment of equities in 2026?
We will continue with decent returns, but more mediocre returns in 2026 than in 2025 and in 2027 we see a stalling in returns. We are not saying, we will see an exponential rise and then a collapse. We don’t think there is a bubble. In fact, over the next 3 to 4 months, the markets are going to consolidate, and it’s only from the fiscal expansion of March that you are going to start seeing another demand impulse come through into the US economy, and that gives you mediocre returns of about 8-10% in US equities. Next year, emerging market equities and European equities will underperform US equities modestly.
What about India? Has risk-reward turned favourable for almost 15 months of underperformance?
I don’t believe it has as yet. Although the earnings prospects are looking a little better, there hasn’t been enough of a correction in valuations yet. We also don’t think the degree to which earnings expectations are high gives us any confidence, as market expectations of earnings are already quite high.
Also, the supply of equities in terms of new issuances is quite high. So, we think the risk-reward prospects for India in absolute terms are fine but they are not stellar. India lacks a strong relative case versus Asian peers as it does not benefit meaningfully from the AI trade and faces disruption risks in IT services. One of the things I am really worried about for many emerging markets, and India being one of them, is that China is gaining market share in these economies very quickly.
And, why is that?
So, if you are a global investor, many people think of the rupee as a consequence of the tariffs that the Trump administration has put in place. I believe that that’s not true. I believe that the Trump administration’s tariffs are actually secondary. We believe the rupee is actually a very uncompetitive currency, made even more uncompetitive by China’s hyper competitiveness.
How are you reading the most recent 500% tariff threat by the US, which has hit the market?
Tariffs didn’t impact markets and global trade in 2025 as the US saw a big increase in imports to front-run the tariffs and companies took the hit on their margins. If the tariffs stick, companies are likely to slowly pass them on to the consumer, leading to modestly higher inflation.
But even this slight increase in prices will hurt the US consumer at a time when real disposable incomes are flat-lining, savings rates are low, and labour market prospects are looking weaker. Markets are expecting the opposite-a renewal of growth, driven by fiscal largesse. We can see this in the way cyclical stocks, small-cap stocks and low-quality companies are outperforming the overall index. These are all signs of an early cycle renaissance.
How are long-term global fund managers looking at India?
Everything has a price, and at these valuations, people are less keen to invest aggressively in India. But it is amarket they would like to invest in at the right price. People have not given up hope on a shift in manufacturing from China to India but they want to see evidence of that happening before they come into India in a very big way. At this minute, the Indian manufacturing renaissance seems on hold. More global managers are also paying attention to the rupee, which is an uncompetitive currency and could depreciate more than what the forwards are implying. We are long China relative to India, although that call can change.
What is your assessment of the AI story? Is there is a bubble?
A true bubble is something where, when it bursts, you don’t see the markets coming down; you see the markets collapsing. In recent financial history, when bubbles burst, markets corrected between 40% and 80%. I don’t think there’s any prospect of that. The market is expensive, and expectations of earnings are very high, perhaps unrealistic. These are headwinds to very strong returns, which is why we will see lower, more mediocre returns in 2026 than in 2025. The free cash flow, Ebitda, and earnings of tech companies are very strong. It’s a slowing of returns rather than acomplete collapse.
Are you seeing any weakness in the US economy?
Yes. The US economy is very imbalanced and very narrow. Outside of hyperscaler AI capex and consumption by the richest 20% of the income distribution, there is not much going on. The labour market is very weak. Over the next three months, the US market is going to consolidate. Tariffs will impact through higher inflation, which will compromise real disposable in comes and cause the market to stall. Over the next two quarters, we think US growth will be sub-trend, the S&P will stall, and then things go back to trend with reasonable, but lower returns than what we have already seen.
How do you see the Fed’s rate cycle evolving over the next year?
We are expecting two more cuts in 2026 and one more cut in 2027. We believe three more cuts are likely, with about two-and-a-half cuts being priced in. What is more important is that although we believe the Fed rate over the next 15 months will be 75 basis points lower than what it is today, the long-end rate, the 10-year rate, is not going to come off by that much. Equity investors are not paying enough attention to this. Having lived through a decade and a half of quantitative easing, everybody has become hyper-focused on the Fed, but we would disagree that Fed cuts alone are sufficient to create better returns.
What is your outlook on the US dollar?
From a 12-month perspective, we think the dollar holds its ground. Against certain emerging market currencies which are uncompetitive, the rupee being a prime example, we think the dollar can actually strengthen more than what the forwards suggest.
Are you seeing more upside in gold and silver from here on?
With the US fiscal deficit worsening and the term premium increasing, the risk-reward for gold remains positive. We are probably in the latter stages of this rally, but under abase case scenario, gold is going up another 10 to 15%. Silver can continue to do quite well, but you have to start getting careful when the gold-to-silver ratio drops close to 65, which historically signals euphoria in precious metals. Gold is the numerator and silver is the denominator
