Matthew Pollock, Head of Portfolio Construction and Strategy at Janus Henderson Investors for Europe, the Middle East and Asia Pacific, explained that financial markets in 2026 will be mainly influenced by three factors: geopolitics, demographic shifts, and the cost of capital: Geopolitics, demographic shifts, and the cost of capital.
"Excessive risk-taking is unnecessary in the current environment," Bullock said in an interview with the FSA, noting that collateralized debt instruments, investment-grade credit and flexible multi-sector strategies could be suitable for dealing with market volatility in the year ahead.
Geopolitics
Geopolitical factors include political developments in the US and Europe, as well as armed conflicts around the world and trade disputes and tariffs and their impact on trade. "Geopolitics will continue to be the primary driver of markets, shaping their direction through 2026 and beyond," Bullock said. He explained that Janus Henderson's focus in this area includes Europe, small caps, and absolute returns.
Opportunities in European small businesses
Smaller companies in Europe that have been off the radar of investors offer attractive opportunities, as they typically have lower debt levels than larger companies, making them easier to manage, Bullock said. "Current valuations for smaller companies are attractive," he added, emphasizing that Janus Henderson supports active small-cap teams in seeking opportunities globally.
Demographic challenges
Demographic shifts, especially an aging population, will increase demand for nursing homes, hospitals and associated real estate. He emphasized that artificial intelligence will play a major role in addressing these challenges, stressing that he prefers to invest in companies with real technology and value-added capabilities, rather than broad exposure to general indices.
He added that the integration of technology, especially artificial intelligence and robotics, with the health sector will contribute to improving diagnostics and operations, with demand expected to increase as the population ages. He also highlighted the importance of sustainability, noting that current methods of energy production and resource utilization are still inadequate.
Challenges in Energy and Electric Vehicles
Bullock noted the UK's progress in renewable energy, with an occasional surplus of wind power in Scotland, but emphasized challenges in energy distribution and EV infrastructure, with new charging stations taking years, sometimes more than a decade, to be connected.
Potential bond yields
As for financial markets, although interest rates have recently fallen, they have not returned to previous low levels, making income levels attractive. Pollock explained that high-quality floating-rate CDOs could offer potential returns if investors continue to favor these instruments over similar investment-grade credit.
Realizing Absolute Returns
Janus Henderson adopts an absolute return methodology, focusing on analyzing companies from the bottom up to discover undervalued securities, without seeking excessive returns or unnecessary risk. "The current markets, influenced by the volatility of individual investors, are well suited to this approach, and it is best to wait for the right opportunities to capitalize on them," Bullock said.
The key message is to focus on the quality of companies and not just market indices, an approach that applies across asset classes and allows for returns without significant risk.
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