While we apply a bottom-up stock picking process it is important to have a macro view overlay to guide us on portfolio construction. The rate of change, whether it is societal, geopolitical, or technological continues to increase exponentially and this argues for active management over passive. There are three key macro topics that we are watching particularly closely as we move towards 2026. The first is everyone's favorite topic of artificial intelligence (AI). The second is the overall health of the economy and what we expect to see from the Trump administration. And last but not least is private credit.

Why AI is not a bubble

First on AI, no, it is not a bubble. Yes, there will be some misallocation of capital and an ensuing market downturn sometime in the next five years just as we have seen with every new technology going back hundreds of years. We acknowledge the non-zero probability that large language models (LLMs) prove to be a dead end to true artificial general intelligence (AGI); however, we are also comforted by our meetings with companies that are citing use cases that are already driving significant costs savings.

We do not think AI is currently in a bubble, because ultimately it comes down to supply and demand. Unlike the commercial internet where you just dug a hole and laid some fiber, AI compute is infinitely more physically challenging to incrementally produce. To provide perspective, to produce a one-gigawatt (GW) data center that will run LLMs, it requires six football fields of land along with over 200,000 tons of equipment such as cables, heating, ventilation and air conditioning (HVAC), transformers, etc.¹ There are legitimate questions around if we even have enough electricity and skilled tradespeople to address a fraction of the tens of GWs of data centers that have been announced.

On the demand side, anecdotes suggest a waiting list of 20 different customers for each newly installed Nvidia graphics processing unit (GPU) at a data center. We will continue to pay close attention to companies addressing key bottlenecks (such as Nvidia, Prysmian, Schneider, ) that are acting as a governor on the adoption of AI. Further, we will continue to remain vigilant to AI exposed companies where valuations may be implying too optimistic of a scenario while also taking advantage of any irrational selloffs in AI exposed names. We feel that we are still early in the AI capital expenditure (capex) cycle and there is still significant outperformance to be had by investing in this space.

Running the economy hot: fiscal and monetary support ahead

On the topic of the U.S. and global economy, while there are certainly some wobbles in the consumer spending and confidence (particularly the bottom 80%) we expect significant fiscal and monetary support taking hold over the next five months. Indications are that Trump is going to run the economy hot through the mid-term election a year from now. We should expect significant tax refunds both for individuals and corporations in the first few months of next year due to the One Big Beautiful Bill (OBBB). We should also expect other initiatives from the Trump administration focused on bringing down costs in housing and healthcare along with the possibility of some form of helicopter money (US$2,000 has been floated as a giveaway to those making US$100,000 or less). Finally, we expect the U.S. Federal Reserve and U.S. Treasury to work in coordination and independently in bringing down interest rates and Treasury bill price volatility. All of this should be supportive of the economy and asset prices.

For the stock market, in the short term, liquidity is one of the biggest drivers of performance and we should expect other countries to get involved as well. We are starting to see signs that China will implement further initiatives to support the local property market while Japan is proposing the most Federal spending since the pandemic. All of this is probably inflationary and one of the best defenses is to own finite assets like equities. We have a bias toward investing in companies that help to drive efficiencies in society and are thus deflationary. In our view, these companies should do well in an inflationary environment.

With all of that said, next year is a mid-term election year which has historically brought about greater equity market volatility. The average peak-to-trough decline within the S&P 500 during an election year has been almost 20% going back to 1962. The good news is that these declines represent great buying opportunities as the 1-year return following these market troughs has averaged 31%. We again look forward to taking advantage of this volatility.

Exhibit 1: S&P 500 price return 12-month period following a mid-term election

^{Source: Strategas, as at 25 November 2025.}

Why we're steering clear of leverage in an uncertain credit landscape

Regarding the last topic of private credit, this may not be a story specific to 2026, but it is worth noting given the events around the First Brands and TriColor scandals this year.

Having gone through a couple of credit cycles in our careers, we have started to get a sense of déjà vu. What is different this time is that it appears that more of the risk has moved to cashflow-driven direct lending private credit and away from the banks (although banks may not be immune as roughly 10% of their U.S. loans are now to non-bank financial institutions). Unfortunately, given not all private credit is transparent, this means that the market will have much less early warning if something is wrong.

Private credit is of course not all created equal. Some private credit and private equity houses have historically boasted about their high sharpe ratios and low volatility in underlying asset prices. But in certain instances, this was a function of and not having to worry about marked-to-market valuations.

Some private credit houses have also enlisted other questionable strategies such as payment in kind (PIK) and maturity extensions. Banks have never had that privilege and thus we started to see warning signs on credit in 2006 and 2007.

What we find concerning in pockets of private credit, along with the above tactics, is the potential conflict of interest as it is estimated that between 70% and 80% private credit loans have the same private equity sponsor. We are starting to see credit risk increase with a recent example of Renovo, a private equity backed home improvement contractor that went bankrupt and reported only US$50,000 in assets versus US$150 million in private credit loans.

In 2026 there will be a need to look beneath the bonnet at the robustness of private credit processes, particularly in the diverse direct lending arena. In a scenario where there is a downturn in credit, investors will be well served by avoiding excessive balance sheet leverage and owning companies with mission critical products and services that tend to be more immune to economic downturns.

Conclusion: Be prepared to benefit from disruption

In an environment defined by accelerating change and heightened uncertainty, we believe there will be a clear need for disciplined bottom-up stock selection, combined with a thoughtful macro-overlay. This should be focused on identifying companies that are both resilient and aligned with long-term structural trends.

By actively navigating opportunities in AI, remaining vigilant on economic policy shifts, and avoiding any hidden risks in private credit, our aim will be to capitalize on volatility rather than be constrained by it. History shows that periods of disruption create some of the most compelling investment opportunities - and investors should be prepared to seize them.