Investors chase broadening markets

AS the new year progresses, equity investors seem to be looking beyond the winners of the past decade, seeking opportunities in a broadening market where policy support and innovation collide.

After years of concentrated gains, the investment landscape is shifting, with a mix of fiscal and monetary tailwinds prompting strategists to rethink portfolio allocations.

Morgan Stanley Investment Management is guiding clients through this evolving terrain.

“From a behavioural cycle, we’re following a very consistent pattern,” says Andrew Slimmon, head of applied equity advisers team at Morgan Stanley.

In a recent podcast, Slimmon frames 2026 as “late cycle but not end of cycle”, pointing to the post-2022 bear market rebound as a pivotal moment.

“We had a bad bear market in 2022 that bottomed down 25%.

“And that provided a wonderful opportunity to invest,” he observes, adding that early pessimism in 2023 and 2024 gave way to optimism, signalling the typical progression of a bull market.

Serena Tang, Morgan Stanley’s chief global cross-asset strategist, notes the unusual confluence of supportive monetary and fiscal policy, something rarely seen outside recession periods.

Slimmon concurs, highlighting the impact on equity markets: “The last time I checked, page one of the investment handbook says, ‘Don’t fight the US Federal Reserve’.

“And so, you have monetary policy easing.”

With tax relief also on the horizon, he says, investors have reason to remain cautiously optimistic.

Leading sectors

For investment opportunities, procyclical sectors are expected to lead, according to Slimmon.

“You stick with those more procyclical areas: finance, industrials, technology, and then you move down the cap curve a little bit.

“I think those are the winning trades,” he says.

He points out that momentum in these sectors started to accelerate in the second half of financial year 2025 (2H25) and should carry into 2026.

Jitania Kandhari, Morgan Stanley’s deputy chief investment officer of the solutions and multi-asset group, adds depth to the policy discussion, introducing what she calls the “age of capped real rates”.

“Real rates here are defined by the 10-year on the Treasury yield adjusted for consumer price index,” she explains.

Historical precedents, including periods of high public debt, suggest that real rates remain capped even amid short-term fluctuations.

“Markets, not necessarily central banks, will even enforce that cap,” she says.

The focus on broadening leadership is particularly important as artificial intelligence (AI) investment continues to reshape markets.

Kandhari sees the next wave of value creation coming from adoption rather than just innovation.

“If last decade was about concentration, now it’s going to be about breadth.

“Clearly the next phase of value creation could happen from just the model building to the application layer, from enablers to adopters,” she argues.

She also highlights the rise of two global AI ecosystems: a high-cost, cutting-edge US model and a lower-cost, efficiency-driven Chinese counterpart, each spawning unique supply chain opportunities.

AI revolution

Slimmon draws parallels between the current AI revolution and the Internet boom of the 1990s.

“I think it’s much safer to know that just like the Internet, AI is a technology productivity enhancing tool, and companies are going to embrace AI just like they embraced the Internet,” he says.

For investors, he argues, broadening exposure is more prudent than trying to pick the next tech superstar.

Investors often face the tension between top-down macro signals and bottom-up stock selection.

Slimmon emphasises the need to combine both approaches.

“Statistically, two-thirds of a manager’s relative performance comes from macro.

“Much of a return of an individual stock has to do with things beyond just what’s happening fundamentally,” he says.

At the same time, one-third of performance hinges on company-level fundamentals, reinforcing the importance of blending strategies.

The recent shift towards non-US opportunities illustrates this balance.

Slimmon notes: “We have picked up signals from other parts of the world, Europe and Japan.

“Pro-cyclical stocks started to work.

“Value stocks started to work in the 1H25.”

He points to a safer orientation as global equity leadership diversifies beyond US-centric growth and value plays.

Essentially, investors should prepare for a year defined by broadening market leadership, supported by policy tailwinds, structural rate caps, and the gradual adoption of transformative technologies.

For those navigating 2026, the key lies in balancing macro awareness with selective stock picking, embracing both established sectors and emerging global opportunities.

“The story of last year was the United States did just fine.

“But there were parts of the world that did better and I think that will continue in 2026,” says Slimmon, summarising the fund management company’s global outlook.