2027 may be less about how much risk investors take and more about where they choose to take it.
The global economy enters the year in surprisingly resilient shape. Growth has absorbed a series of potential shocks over recent years, with economic data generally surprising to the upside. But that resilience sits alongside uncertainty. Inflation remains a risk, government borrowing is high, and geopolitical fragmentation continues to put pressure on supply chains, energy, and commodities.
Key to this economic resilience has been companies investing in AI infrastructure, and forecasts for the level of future investment have been revised substantially higher through 2026. This should reduce recessionary risks over the next few years.
Building resilience may require investors to look beyond the relationships they have traditionally relied upon. For many years, government bonds provided a natural counterweight to equity risk. When growth weakened and equities fell, interest rates often came down and bond prices rose. Over time, bonds and equities have become far more correlated, meaning they typically move in similar directions over time, reducing their diversification benefits.
Higher bond yields do provide a greater income cushion, which can make returns more resilient. But investors may also need to consider broader sources of diversification, including currencies and commodities, alongside conventional equity and bond exposures.
The search for yield has also changed considerably. During the era of ultra-low interest rates, generating more income often meant accepting substantially more duration or liquidity risk. Higher yields have changed that trade-off.
Shorter maturity bonds now offer similar yields to broader indices but have experienced much lower volatility. This means liquid fixed income markets can once again provide meaningful contractual income without the need to take significant duration risk to access it.
But attractive headline yields don't make this an easy investment environment. Government and corporate borrowers are increasingly competing for capital, making relative value and security selection important.
Two asset classes we would highlight are emerging market bonds and high yield. Emerging markets enter 2027 with what we believe are attractive yields, resilient fundamentals, and increasingly distinct domestic policy cycles. Emerging market corporate bonds are seeing persistent net credit rating upgrades for the first time in years.
In high yield markets, absolute yields have climbed to the highest levels since 2024. Having the flexibility to hunt down value across global fixed income markets could be a key consideration in the year ahead.
In 2027, resilience may come from having more sources of income, more ways to diversify, and more places to look. Explore our thinking on these themes in Thoughts for 2027.
