By Darius McDermott, managing director of FundCalibre
Flying out of the traps, 2026 has already delivered plenty of excitement. It is a reminder, should it be needed, that the US administration thrives on disruption. Investors can look forward to another noisy year, with unpredictable policymaking and geopolitical unease. The impact on stockmarkets is tough to read; building resilience will be crucial.
The diversification trend started in earnest in 2025, with many global markets outpacing the previously dominant US. This was particularly true for UK and European investors who had to contend with the weaker dollar as well. The same concentration problems and worries over US exceptionalism that drove that diversification trend are evident at the start of 2026: there are worries over the sustainability of the AI trend, US debt, and the outcome of US economic policy.
Rupert Silver, manager of the Credo Dynamic fund, said: “We are mindful that the more expensive and widely held assets become, the greater their potential for downside when sentiment shifts. Dynamic therefore maintains its long-term exposure at the core of the portfolio, but as valuations rise, we seek greater diversity and protection.”
He is using ‘buffered ETFs’ – which use options to provide a pre-determined level of downside protection – alongside short duration bond holdings and other less or even non-correlated assets, such as gold and hedge funds. “We aren’t predicting doom and gloom, but this diversity allows us to remain invested for the long haul whilst sleeping well at night.”
Bonds may not be the answer
This need for diversification comes at a time when fixed income options have some limitations. Corporate bond spreads over government bonds remain at historic lows*. There are reasons that they could go lower still – some multi-national companies are arguably a safer bet than highly indebted developed market governments. However, there is relatively little margin of safety should the economic conditions deteriorate, even if all-in yields are still high.
Many multi-asset investors are now swerving longer-dated credit. Silver added: “Longer-dated bonds remain exposed to widespread market concerns about governments’ ability to balance the books and manage ever growing debt…There are also concerns that any increase in inflation would have further negative consequences, particularly for longer-dated bonds.”
For him, the focus remains on short-term bonds to maximise yields, with over 8% of the portfolio expected to mature within the next year.
Income revival
In an unpredictable environment, dividends offer a welcome security. Income strategies tend to focus on more stable businesses with the cashflow to make payouts to investors.
Nick Clay, manager of the TM Redwheel Global Equity Income fund, said equity income could provide an important defence against volatile markets in the year ahead: “Over time, the power of compounding premium dividends, combined with a lower beta profile, can provide a pathway to more consistent, defensible returns. This effect is often amplified during periods of volatility when not losing money becomes mathematically more important than making money, even if the end results are positive. These strategies can therefore deliver their strongest outperformance when the broader index experiences increased volatility or a pullback.”
He outlined three possible scenarios for the year ahead: that markets continue to rise in a straight line led by the same technology giants; that markets rise, but with far greater swings and reversals – a pattern already visible in 2025, or that markets correct, pulling back sharply from recent highs.
“Disciplined equity income strategies will naturally lag the index in the first scenario…But in the second and third scenarios – both of which now seem increasingly likely as volatility returns and concentration risks build – an approach grounded in yield, quality, and risk discipline is far more likely to deliver resilient, attractive returns.”
Will hedges work?
Gold and other precious metals have been portfolio superstars in 2025, helping protect against geopolitical tensions. Equally, there is no doubt that resource nationalism may support prices for strategic commodities in the months ahead. Copper, for example, saw its price tip over the symbolically important $12,000 per metric tonne in December**.
However, while commodities can still provide an important hedge, with prices now far higher, investors need to be selective. Georges Lequime, manager on the WS Amati Strategic Metals fund, is keeping relatively high exposure to precious metals, pointing out that gold and silver prices are some 18% and 51% higher than the average prices that the mining companies received in Q3 2025***, but, he added: “We continue to prefer the mid-caps that are still trading at 50-70% discounts to the large liquid names.” He is maintaining exposure to key ‘in demand’ metals such as lithium, graphite and rare earths, but believes copper may be vulnerable.
Consider traditional defensives
There is also value in some traditional defensive companies. Debbie King, co-manager of the Aegon Diversified Monthly fund, is taking selected exposure to ‘bond proxies’ in inexpensive sectors such as financials and utilities as a way to balance the technology exposure in the fund.
Meanwhile, Dr Ian Mortimer, manager of the Guinness Global Equity Income fund, sees value in some of the consumer staples names, which have been out of favour.
The problem with the capricious policymaking emerging from the US is whole sectors, or even whole countries, can suddenly find themselves a target. There is also the ongoing risk investors lose faith with the US altogether. A spread of sectors, challenging traditional assumptions and staying alert will be vital in defending portfolios in the current environment.
*Source: ICE BofA US Corporate Index Option-Adjusted Spread, 9 January 2026
**Source: Investing News Network, 7 January 2026
***Source: fund factsheet, November 2025
