Crystal Ball 2026 – Down but not out

 Across global banks, asset managers, and research institutions, the consensus view for 2026 is of a sub-trend but resilient global economy transitioning into a post-inflation, late-cycle phase.

Growth is expected to remain positive but uneven, led by the U.S. and parts of Asia, while Europe lags amid structural and fiscal constraints. Inflation is broadly forecast to moderate toward central-bank targets, giving policymakers room for gradual and cautious rate cuts, though a return to the ultra-low-rate era is not expected.

Financial markets are seen shifting from liquidity-driven gains to earnings- and fundamentals-based performance, with lower average returns, higher dispersion across assets, and sustained volatility.

Structural forces — geopolitical fragmentation, elevated debt, demographic pressures, and the transition to a more multipolar global order — dominate cyclical drivers, while technology and AI-led productivity gains remain the key upside risk.

Overall, institutions describe 2026 as a year of normalization rather than acceleration, where selectivity, diversification, and risk management matter more than broad market beta.

Here is a snapshot of global outlooks for 2026 based on reports published by leading banks and asset managers.

Crystal Ball 2026 — Consensus Takeaway

Growth: Sub-trend but positive

Inflation: Lower, not gone

Rates: Gradual easing

Markets: Lower returns, higher dispersion

Risks: Geopolitics, debt, fragmentation

Goldman Sachs Asset Management- Cautiously constructive

•      Global growth remains positive but below pre-pandemic trend

•      U.S. avoids recession; growth slows but stays resilient

•      Inflation normalizes further, allowing gradual rate cuts

•      AI-led productivity gains support medium-term optimism

•      Markets likely to favor quality assets over cyclical risk

Fidelity International - Bottom-up cautious

•      Earnings growth becomes more important than multiple expansion

•      Markets increasingly stock-specific

•      Inflation volatility declines but does not disappear

•      Policy mistakes remain a risk

•      Active selection emphasized

Crédit Agricole - Cautious normalization

•      Global growth stabilizes below trend

•      Rate cuts begin but are gradual

•      Credit conditions ease slightly

•      Europe remains vulnerable

•      Financial stability risks monitored

Bank of America - Neutral-to-defensive

•      2026 characterized by slow growth, lower inflation

•      Labor markets cool but avoid collapse

•      Equity upside capped by valuations

•      Bond returns improve versus past decade

•      Policy errors remain key tail risk

Morgan Stanley - Constructive with volatility

•      Growth moderation continues into 2026

•      AI investment supports productivity upside

•      Inflation falls but wage pressures linger

•      Markets transition from liquidity-driven to earnings-driven

•      Increased scenario dispersion

Deutsche Bank - Cautiously pessimistic

•      Global economy avoids recession but lacks momentum

•      Fiscal constraints grow more binding

•      Europe underperforms peers

•      Trade fragmentation intensifies

•      Policy coordination weakens

Citi - Late-cycle cautious

•      Global economy slows into late-cycle phase

•      Inflation normalization supports risk assets

•      Earnings growth uneven

•      Dollar volatility increases

•      Policy uncertainty remains elevated

Moody’s – Credit risk persists

•      Sovereign credit pressures persist

•      High debt constrains fiscal policy

•      Growth insufficient to offset demographics

•      Default risks remain elevated in weaker economies

•      Structural reform critical

State Street Global Advisors - Balanced, risk-aware

•      2026 characterized by late-cycle dynamics

•      Policy rates peak and transition into easing phase

•      Equity returns more moderate than 2023–24

•      Greater dispersion across regions and sectors

•      Volatility structurally higher than pre-2020

BNP Paribas Asset Management - Defensive with selective opportunity

•      Global economy stabilizes but growth remains fragile

•      Europe lags the U.S. and parts of Asia

•      Disinflation trend continues, but uneven

•      Sustainability and energy transition remain long-term drivers

•      Policy uncertainty remains a core risk

J.P. Morgan Asset Management - Constructive but selective

•      Global growth slows but avoids a hard landing

•      Inflation converges toward targets in major economies

•      Central banks gain flexibility in policy

•      Equity returns positive but less broad-based

•      Income and alternatives regain importance

Allianz Global Investors – Active management

•      “New regime” investing continues into 2026

•      Inflation lower, but not returning to ultra-low era

•      Bonds regain relevance as diversifiers

•      Valuations matter more than liquidity

•      Active management favored

Barclays Private Bank - Capital-preservation focused

•      Growth decelerates but remains positive

•      Inflation pressures ease unevenly

•      Higher dispersion across asset classes

•      Defensive positioning favored over aggressive risk-taking

•      Liquidity conditions stabilize

HSBC Asset Management - Global and thematic

•      Global economy transitions toward lower-inflation equilibrium

•      Asia remains the main growth engine

•      U.S. slowdown manageable

•      Climate transition reshapes capital flows

•      Diversification essential

Capital Economics - Macro-pessimistic

•      Global growth remains structurally weak

•      China’s slowdown is secular, not cyclical

•      Advanced economies face aging-related constraints

•      Inflation risks fade faster than growth risks

•      Downside skew remains

MUFG Research – Asia to outperform

•      Asia outperforms developed markets

•      Japan benefits from structural reform

•      China stabilizes at lower growth

•      Currency volatility persists

•      Global financial conditions ease slowly

BlackRock - Regime-change thesis

•      “Fragmented world” theme dominates 2026

•      Higher macro volatility is structural

•      No return to pre-2020 stability

•      Tactical allocation favored over strategic beta

•      Geopolitics shapes returns

Invesco - Selective opportunity

• Market leadership narrows

• Valuation discipline returns

• Alternatives gain prominence

• Income strategies regain relevance

• Long-term themes outweigh cycles

ING - Macro-conservative

•      Growth stabilizes at low levels

•      Europe structurally underperforms

•      Inflation risks fade faster than growth risks

•      Trade fragmentation remains drag

•      Downside risks dominate upside

Diagnosing the investors’ pain - 2

As I mentioned yesterday (see here) the pain being felt presently by the non-institutional investors is disproportionately high. For the investors and traders who have spent a short period of time in the market, mostly those who started investing in post Covid period, the pain may be actual, while for those who have been investing for a long time, the pain might only be notional due to perception of relative underperformance or loss of opportunity cost.

Over exposure to small cap stocks

While large caps account for ~60–63% of total and free-float market capitalization, retail participation in this segment has been relatively muted. Institutional investors—both domestic and foreign—continue to dominate ownership and trading activity in large caps. As a result, price discovery here has been more orderly, liquidity deeper, and drawdowns relatively contained.

In contrast, non-institutional investors (retail investors, HNIs, family offices, and smaller proprietary books) have had disproportionately higher exposure to small cap stocks. This skew became more pronounced during the 2020–2023 period, when abundant liquidity, low interest rates, and a sharp post-COVID earnings rebound created an ideal environment for risk-seeking behavior.

Small caps offered three things that large caps could not during that phase:

·         the promise of rapid earnings growth,

·         the possibility of valuation re-rating, and

·         the psychological appeal of “finding the next multibagger”.

This led to a powerful feedback loop—rising prices attracted incremental capital, which further pushed up prices, often well ahead of fundamentals. Valuation discipline gradually took a back seat.

Consequently, though the tradeable (free float) market cap of 5000 small cap stocks is approximately 17% of the total tradeable market cap, over 35% of the total asset under management (AUM) of mutual funds, AIF and PMS etc. is invested in small cap stocks. Smallcap funds witnessed 37% yoy AUM growth in FY25.

Margin Trade Finance (MTF): the hidden amplifier

Another critical, and often underappreciated, contributor to the current pain has been the sharp rise in Margin Trade Finance (MTF) positions, especially in mid and small cap stocks. Over the last few years, MTF became more accessible, cheaper, and widely marketed. Many investors used leverage not for short-term tactical trades, but for holding structurally illiquid small cap names.

This worked exceptionally well on the way up. However, leverage has a habit of revealing itself brutally on the way down.

As small cap stocks started correcting, even modest price declines triggered margin calls. Forced selling followed—not because of deteriorating business fundamentals in every case, but because leverage reduced the ability to absorb volatility. This has exacerbated downside moves and compressed recovery attempts, thereby deepening investor discomfort.

Importantly, this phenomenon does not show up clearly in index-level data. Indices are weighted by market capitalization, while investor pain is weighted by position concentration and leverage. The two are very different.

Normalization, not necessarily a breakdown

The current correction in small cap stocks should also be viewed in a broader historical context. Between 2020 and 2023, small cap indices and several individual stocks delivered returns far in excess of long-term averages—both in absolute terms and relative to earnings growth. A phase of return normalization was therefore inevitable.

What we are witnessing now appears less like a systemic breakdown and more like a recalibration—of valuations, expectations, and risk appetite. Such phases are uncomfortable, but they are also an integral part of healthy market cycles.

For investors, the key takeaway is not to extrapolate past excess returns indefinitely, nor to assume that all pain signals permanent damage. The real task lies in reassessing portfolio construction—especially exposure to illiquid names, leverage usage, and valuation sensitivity—so that future volatility becomes survivable rather than debilitating.

 

What to do now?

Investors need to have a hard relook at their investment strategies and portfolios, and carry out the following five corrections, if needed, in my view:

·         Calibrate all deviations from the predetermined asset allocations.

·         Resize the disproportionate allocations to small and midcap stocks.

·         Exit narrative and momentum stocks where the fundamentals are weak or do not support the stock price.

·         Deleverage.

·         Review your advisors’ quality, and look for alternatives if needed.

Diagnosing the investors’ pain

The benchmark Nifty50 has faced acute selling pressure around the 26000 level in the past two months. It has made several unsuccessful attempts to sustainably topple over this barrier. Nifty Midcap100 (benchmark for midcap stocks) has also shown a similar trend in the 60000-60500 range. Nifty Smallcap 100 (benchmark for smallcap stocks) has declined for the past two months.

It is pertinent to note that in Indian context, a large cap company is defined as a company that falls within the top 100 companies in the country in terms of total market capitalization. At present, the companies with a total market capitalization in excess of appx Rs1060bn (~USD1.2bn) would qualify to be large cap companies. The companies with a market capitalization rank from 101 to 250 are termed as midcap companies. Presently, the companies with a total market capitalization between 343bn and Rs1060bn (US$375mn to US$1.2bn) are classified as midcap companies. All other companies are classified as small cap companies.

Out of INR474trn total market capitalization of Indian listed companies, appx 60% is of large cap companies (top 100); 20% is of midcap companies (101 to 250); and 20% is of small cap companies (251 to 5250).

If we consider free float market cap, i.e., market cap excluding the promoters’ holding, appx 63% is of large cap companies (top 100); 20% is of midcap companies (101 to 250); and 17% is of small cap companies (251 to 5250).

(These are approximate numbers based on data collected from various sources. Actual numbers might be slightly different.)

On 2025YTD basis, Nifty50 is up ~9.5%, Midcap100 is up ~4.5% and Smallcap 100 is down ~8%. As per the Value Research data, on an average YTD2025, large cap funds have yielded a return of 8%, Midcap 2% and Smallcap funds (-)6%. Multicap and Flexicap funds have yielded a return of 1.5%-3%, on an average YTD2025.

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​However, anecdotal evidence indicates that the pain being felt by investors is much more severe than what the performances of benchmark indices or average of a fund category might indicate. In my view, it might be an opportune time to diagnose the reasons for this acute pain, in order to take corrective steps, including amending the investment strategies, if required.

More on this tomorrow.

 

Navigating Volatility Without Losing the Plot

Over the past few weeks, Indian financial markets have begun to show unmistakable signs of stress. While the benchmark indices such as the Nifty and Sensex have largely managed to hold their ground, the underlying market tone tells a very different story. A significant number of small- and mid-cap stocks have undergone sharp price corrections, exposing the fragility beneath what still appears, on the surface, to be a resilient market.

This divergence between benchmark indices and broader market performance is often an early signal of rising investor discomfort. And this time, the discomfort has morphed into something closer to panic.

The anatomy of the current panic

The most pronounced damage has been in momentum-driven stocks, many of which were heavily owned by non-institutional investors. As liquidity dried up, these stocks witnessed not just steep price declines but also an absence of buyers, exacerbating the fall. This is a familiar pattern: assets that rise rapidly on optimism and excess liquidity tend to fall hardest when sentiment turns.

Importantly, this correction has not been driven by a single adverse event. Rather, it is the cumulative effect of stretched valuations, crowded positioning, and a gradual shift in the global macro environment. When markets are priced for perfection, even marginal disappointments can trigger outsized reactions.

What has added to investor unease is that equities are not the only asset class struggling.

Bonds offer little shelter

Traditionally, balanced portfolios rely on fixed income to cushion equity volatility. However, over the past three months, government bonds have delivered negligible—or in some cases negative—returns. Rising global yields, persistent inflation concerns, and uncertainty around future rate trajectories have reduced the defensive appeal of bonds.

As a result, investors holding diversified portfolios have found little comfort on either side of the asset allocation spectrum. When both equities and bonds underperform simultaneously, investor confidence tends to weaken disproportionately, often leading to emotionally driven decisions.

Currency weakness adds another layer of anxiety

Adding to the market nervousness has been a sharp depreciation of the Indian rupee against most global currencies. A weaker balance of payments position in Q3FY26, a strengthening US dollar, and the likelihood of limited intervention by the Reserve Bank of India (RBI) have all contributed to the rupee’s decline.

What stands out, however, is the magnitude of depreciation against the Euro and the British Pound, which has been far steeper than against the US Dollar. From a structural perspective, this has a silver lining: it improves export competitiveness and encourages diversification of trade toward the UK and European markets.

Yet, currency weakness is a double-edged sword. If global commodity prices firm up, imported inflation could rise, complicating the domestic inflation outlook and constraining policy flexibility. Markets, which are forward-looking by nature, tend to price in these risks well before they materialize in economic data.

Flight to gold: safety or misallocation?

In periods of uncertainty, investors instinctively gravitate toward perceived safe havens. This time has been no different. Precious metals—particularly gold—have seen a surge in demand. Gold ETFs in India have recorded record inflows over the past couple of months, even as flows into equity and debt mutual funds have slowed materially.

While gold certainly has a role in portfolio diversification, the scale and speed of these inflows raise concerns. When fear and greed operate simultaneously, investors often over-allocate to assets that have recently performed well, rather than those that best serve long-term objectives.

This behaviour risks creating serious asset misallocation at the household level. Chasing gold after a sharp run-up, while cutting exposure to equities following a correction, can materially impair medium- to long-term returns. History suggests that such shifts, driven by emotion rather than strategy, rarely end well.

A resetting global order and the case for discipline

There is little doubt that the global economic and geopolitical order is undergoing a reset. Supply chains are being reconfigured, monetary policy frameworks are evolving, and geopolitical risks are now a permanent feature rather than a temporary disruption. In such an environment, market volatility is not an exception—it is the norm.

However, heightened volatility does not automatically imply poor long-term outcomes for investors. In fact, periods of uncertainty often lay the groundwork for future return opportunities. The key determinant of success is not market timing, but behavioural discipline.

At times like these, investors must resist the temptation to respond reflexively to short-term market moves. Selling risk assets after sharp corrections, abandoning asset allocation frameworks, or making concentrated bets on “safe” assets can do more damage than the market volatility itself.

Asset allocation: The only free lunch still available

The importance of adhering to a well-thought-out asset allocation strategy cannot be overstated. Asset allocation is not designed to maximise returns in any single year; it is meant to ensure that portfolios remain aligned with risk tolerance, liquidity needs, and long-term financial goals across market cycles.

Rebalancing—gradually and systematically—becomes especially important during volatile phases. Corrections in equities, particularly in quality segments, should be viewed through the lens of long-term capital allocation rather than short-term performance anxiety. Similarly, fixed income and gold allocations should be maintained at strategic levels, not tactically inflated based on fear.

Last words

Market panic is rarely caused by one event. It is usually the result of accumulated excesses meeting an inflection point. The recent correction in Indian markets, weakness in bonds, currency depreciation, and rush toward gold are all manifestations of this process.

For investors, the challenge is not to predict the next market move, but to avoid self-inflicted wounds. The global environment may remain turbulent, and volatility may persist longer than expected. But history consistently rewards those who remain disciplined, diversified, and aligned with their long-term strategy.

In uncertain times, restraint is not inaction—it is a conscious, rational choice. And more often than not, it is this choice that separates successful investors from the rest.

Why anti-immigration is risky business

In a December 2025 commentary, economist Kenneth Rogoff argues that the rising tide of anti-immigration sentiment in many wealthy countries isn’t just a political squabble: it’s an economic self-inflicted wound.

Rogoff notes that many advanced economies are confronting aging populations, shrinking workforces, and chronic labour-shortages. Yet political pressure is pushing in exactly the opposite direction: tougher restrictions on migration.

He warns that by “shutting the door on immigrants,” nations undermine their ability to adapt to rapid technological change, maintain innovation, and sustain long-term growth.

In effect, restricting immigration at this moment equates to taxing the future — a decision that may feel popular, but that carries serious costs in competitiveness, productivity, and payoffs from technological adoption. Recently Elon Musk also echoed similar sentiments.

At its core, his message: demographics aren’t optional — if labour supply and talent mobility dry up, so does growth.

What recent research & experts show — mostly the same

Rogoff’s warnings align closely with a growing body of research from institutions, economists and labour-market studies. Key takeaways:

Immigration as a solution to demographic and labour-market stress

·         The recently released OECD International Migration Outlook 2025 shows that labour-market inclusion of migrants remains strong in many advanced economies. Migrant inflows continue to play an important role in filling shortage gaps.

·         In tandem, the IMF’s 2025 “Silver Economy” analysis warns of a demographic crunch: shrinking working-age populations, rising dependency ratios, and fiscal pressure from aging. The report argues that policies facilitating labour-force participation — including through migration — will be critical to cushion the impact.

·         A related 2025 working paper finds that, on average, immigration has a “positive and statistically significant” impact on macroeconomic performance in host countries — though the magnitude depends on the migrants’ qualifications and host-country characteristics.

Immigration supports innovation, productivity, and growth

·         A 2025 cross-country study covering OECD nations shows migration has a positive effect on innovation output (e.g. R&D, patents) — though the authors also caution that in some settings it may coincide with downward pressure on minimum wages or lower-end wages.

·         More broadly, literature going back decades has documented that immigrants — especially high-skill ones — contribute disproportionately to new businesses, entrepreneurship, patents and new ideas.

·         Other scholars (e.g. Gianmarco Ottaviano and Giovanni Peri) emphasize that immigrants and natives often complement each other: immigrants take some tasks, natives others, improving overall task-allocation and productivity without necessarily displacing native employment.

 The “migration bargain”: costs + benefits

·         A recent 2025 article dubbed the “migration bargain” argues that while immigration brings short-term and long-term economic benefits (growth, innovation, labour supply), the costs — especially at local/facility level (services, public infrastructure, integration costs) — are borne by those communities most sensitive to them.

·         In other words: the macroeconomic upside is real, but the benefits and burdens are often unevenly distributed. That tension helps explain the political backlash, even when the overall data leans positive.

Where some debate still rages — and why it matters

While many economists support the “open migration = growth + innovation” view, the picture isn’t unanimously rosy. Some caveats:

·         Not all immigrants — or all host economies — benefit equally. Gains depend heavily on migrant skill profile, host-country policies, integration, and local labour-market conditions. The positive macro effects can obscure micro-level distributional tensions (wage pressure for low-skilled natives, competition in certain occupations, integration costs).

·         A 2025 empirical paper argues that many past studies over-simplify. Its authors propose a new, more rigorous framework for measuring immigration’s impact — claiming that only by carefully tracking workers over time (rather than snapshots) can we reliably estimate immigration’s effect on wages, occupational mobility, and employment for natives.

·         Politically and socially, even if economic metrics look good, populations may feel cultural, infrastructural, or social strain — often the hardest costs to quantify and the easiest to politicize.

Why it matters for investors & global macro observers

·         Immigration policy is becoming a core macroeconomic variable, not a side issue. Countries that continue to welcome and integrate talent may sustain better long-term growth, innovation, and fiscal health. Countries that close borders may struggle with labour shortages, productivity stagnation, or inflationary pressure in key sectors.

·         For global businesses — especially those in technology, manufacturing, services — talent mobility is no less important than capital flows. Restrictive migration may raise wage costs, reduce flexibility, and constrain growth plans.

·         For countries like India — a known exporter of talent — shrinking immigration demand in developed markets may affect remittances, diaspora networks, and global outsourcing dynamics.

Bottom Line

Rogoff and Musk are ringing the alarm for good reason. The convergence of aging populations, shrinking labour forces, and rising technology-driven demand makes talent mobility more — not less — critical. Across research institutions and academic literature, a clear pattern emerges: well-managed immigration tends to boost economic performance, innovation, and labour supply, especially in nations that are running out of home-grown workers.

But — and this is important — the gains are real only when integration is handled properly, skill-mismatches are minimized, and distributional effects are addressed. Restrictive, populist policies may score short-term political points — but over the medium term, they risk undercutting the very engine of growth they claim to protect.