As global economies chart a course through a new era of government-driven growth, investors must prepare for a landscape defined by both significant opportunity and rising volatility in 2026.

A panel of Schroders Australia’s investment leaders, including Martin Conlon, Sebastian Mullins and Kellie Wood, say the coming year will be one of divergence, where careful stock selection and a tactical approach will be vital, with the Australian market presenting a compelling picture.

Sebastian Mullins, head of multi-asset and fixed income, says that while the world economy continues to expand, the balance of risks has shifted considerably.

“A surge in government spending, shifting politics, and inflationary pressures will provide global markets with both opportunity and instability,” Mr Mullins says.

“We are now seeing a recovery taking hold in Australia, with growth expected to rise to around 2 per cent as household consumption finally takes the baton from government infrastructure spending. This is supported by an improvement in consumer confidence and a remarkably strong job market.”

However, Mullins notes that this positive momentum faces a key constraint.

“The counterbalance is that inflation remains strong, limiting the ability for the Reserve Bank of Australia to cut rates. Investors need to adapt to this new fiscal-driven landscape.”

A primary concern on the global stage is the concentration of market value in US technology stocks. Mr Mullins says soaring valuations and a surge in corporate debt issued to fund AI infrastructure are increasing the risk of a sharp market correction.

“One lingering concern is whether the strong performance in US tech stocks is a sign of an AI bubble,” Mr Mullins says.

“If we were to see a large equity market sell-off, this would impact the wealth effect of wealthy Americans, likely leading to reduced consumption. In this scenario, the stock market may lead the economy as opposed to the other way around.”

Mr Mullins says that while the largest AI players remain highly profitable, the funding environment is changing in a way that introduces new risk.

“Historically, AI investment was made from free cashflow, but companies like Oracle and Meta have started to use debt to fund their expenditure,” Mr Mullins says.

“US investment-grade issuance from AI big tech firms has risen from less than US$40bn per year to more than US$120bn year-to-date. If more debt enters the system, this will likely lead to a bubble that could pop. Any near-term weakness would be driven by a valuation unwind rather than a full-scale bubble collapse.”

Kellie Wood, head of fixed income, says global markets have entered a new regime where fiscal policy, not monetary policy, is steering the economic cycle.

“Globally, easing cycles are underway. US growth has reaccelerated, with momentum clearly stronger than in early 2025,” Ms Wood says.

“We expect the global economy to accelerate in 2026 after a short-term soft patch caused by lingering tariff effects. The potential for upside surprise remains high and US recession risk low.”

Ms Wood identified credit markets as a standout performer in 2025, and she sees ongoing potential, particularly closer to home.

“We see compelling opportunities in the Australian credit market. Ongoing market development has created pockets of value, supported by increasing breadth and depth across sectors. Both domestic and offshore issuers are drawn to the Australian market by its limited execution risk, even for larger transactions.”

The next phase of the cycle will reward active, tactical positioning.

“As we approach 2026, global markets are contending with a complex and evolving macro landscape. The post-COVID recovery has revealed a shift - economic growth cycles are no longer synchronised and divergence is becoming the norm,” Ms Wood says.

“In this new regime, active risk management becomes essential. Structural shifts are creating winners and losers across asset classes and regions.”

Martin Conlon, head of Australian equities, said today’s markets reflect deep structural imbalances created by network economics and rising government deficits.

“This era has created an environment where disequilibrium has become the norm. Traditional economic forces that historically corrected imbalances are proving less effective, creating both risk and opportunity for investors,” Mr Conlon said.

“The markets we’re seeing today are unlike those of the past. Large companies now dominate global networks, generating extraordinary profits with minimal tangible assets or workforce. The rise of AI is shifting competitive dynamics globally, and this is driving new market behaviours and valuations.”

While Australia is influenced by these global trends, Mr Conlon highlights that the local equity landscape is uniquely shaped by three key sectors: mining, financial services, and construction.

“The extraction of raw materials is a small but crucial sector globally, but it is much larger in Australia. Our financial services sector is oversized due to Australia’s appetite for housing debt and its large superannuation system. And as a high-immigration country, construction represents a much larger share of our economy than in almost any other developed market,” Mr Conlon says.

“The fate of these sectors will always have a disproportionate impact on returns for Australian investors.”

In this environment, Mr Conlon says the market remains one of aggressive yet uneven valuations.

“Often, the companies commanding the highest prices are not the ones with the strongest fundamentals. Short-term earnings growth and hype around sectors like defence, critical minerals, and AI are drawing far more attention than long-term business sustainability,” Mr Conlon says.

“In markets where speed and overreaction are often mistaken for efficiency, careful, considered investing is increasingly proving its worth.”