The key change is not simply slower growth concerns; it is a repricing of the entire macro environment and risks. Markets have shifted from expecting monetary easing to pricing in tighter policy across many major central banks. This shift reflects persistent inflation risks, now amplified by higher energy and, potentially, food prices. This underscores a “higher-for-longer” interest rate regime.
For investors, recent developments underscore two points. First, volatility is no longer episodic; it is structural. Second, returns should be driven by earnings growth rather than multiple expansion.
Uneven resilience
Not all economies are equally positioned to absorb shocks. The US and Japan entered this period with a crucial advantage: strong corporate profit margins. In the US, profits remain elevated as a share of GDP, while Japan has seen a structural improvement over the past decade. These margins act as a buffer against rising input costs.
See also: Asia’s open for business: Hopu Investments
In contrast, Europe looks more vulnerable. The region is highly exposed to energy imports and is now facing a combination of rising costs, tightening financial conditions, and weakening growth momentum. This divergence is not cyclical; it reflects deeper structural differences. For investors in Asia, this matters because it reinforces the case for selective global exposure rather than broad diversification.
Emerging markets face a more nuanced outlook. While some countries—especially those tied to the AI supply chain such as South Korea and Taiwan—retain strong long-term prospects, higher energy prices and tighter financial conditions pose near-term risks, particularly for debt markets.
Investing in a more fragmented world
See also: Private markets accelerate into 2026
Investors should recognise that a deeper structural shift appears to be underway. The events of early 2026 have accelerated the transition toward a more fragmented, multipolar global economy. This is unlikely to be a temporary detour. Supply chains are being rewired, security alliances are evolving, and energy independence has become critical.
This has profound investment implications. What were once considered cyclical sectors — energy, infrastructure, industrials — will increasingly be shaped by longer-term, policy-driven demands. Governments and corporations are likely to accelerate spending on energy systems, defence or security, and supply-chain resilience for the next few years, not quarters.
The AI investment cycle is also evolving and broadening. The focus is shifting from digital applications to physical deployment — robotics, automation and industrial systems. This “physical AI”, visual-language-action (VLA) layer, represents the next phase of productivity enhancement.
Portfolio construction in a chaotic world
In this environment, optimism is not a strategy. Resilience is.
First, we believe equity exposure should tilt toward high-quality markets and companies. US large-cap equities stand out for stronger balance sheets, higher margins and more consistent earnings growth. In contrast, small caps and lower-quality segments are more exposed to rising financing costs.
Second, fixed income requires a more nuanced approach. While yields are more attractive than in recent years, duration risk remains elevated. Short-duration, high-quality bonds may offer a better balance of income and risk in a rising-rate environment.
For more stories about where money flows, click here for Capital Section
Third, spreads in credit markets remain tight relative to the risks, suggesting investors are not being adequately compensated for taking on additional credit exposure. In our view, if investors want to take risks, equities offer a more compelling risk-reward trade-off.
Finally, gold deserves renewed attention — not as a tactical hedge, but as a structural allocation. In a world of geopolitical fragmentation and shifting reserve preferences, gold’s role as a store of value is being reinforced.
The economic and market outlook remains positive, but the distribution of outcomes has widened. Policy is constrained by inflation persistence, while unpredictable geopolitics are a key driver of markets. Success in this environment will depend less on optimism and bullish conviction, and more on disciplined judgment. Portfolios should be anchored by fundamentals and risks should be managed proactively.
Conrad Dequadros, head of economics, chief investment office of Citi Wealth
