A major shift in global capital flows is on the horizon for 2026, promising to open up a wider array of investment opportunities for market participants. According to a significant new report from global asset manager Franklin Templeton, the coming year is poised to see returns "broaden" significantly across different regions and asset classes, moving beyond the recent dominance of US markets.
Three Cyclical Forces Defining the 2026 Landscape
The firm's 'Global Investment Outlook 2026 and Beyond' report identifies three key cyclical forces that will shape the near-term investment environment: broadening, steepening, and weakening. The broadening theme reflects an expansion of attractive opportunities outside the United States, both geographically and across asset types. While American equities, especially in technology, are expected to stay resilient, leadership is set to become more dispersed.
Steepening refers to the anticipated shape of yield curves as central banks globally cut policy rates. The report forecasts that short-term interest rates will fall faster than long-term yields. "Falling short-term interest rates will incentivise investors to move out of cash holdings and into risk assets," the analysis states. This dynamic is likely to benefit cyclically sensitive sectors like financials, industrials, and smaller companies.
The third force, weakening, centres on the US dollar, which Franklin Templeton expects to remain under pressure. The greenback has already depreciated roughly 10% on a trade-weighted basis this year, and the decline may continue. "Weakening of the US dollar tends to reinforce a broadening of returns across capital markets, by region, sector, and asset class," the report notes, highlighting positive implications for emerging market debt and equities.
Policy Shifts Driving the Change
The US Federal Reserve resumed its rate-cutting cycle in September 2025 after a nine-month pause and is projected to continue easing monetary policy into the first half of 2026, even with inflation lingering above target. This global move towards policy easing is a core driver of the broadening thesis, encouraging investors to look beyond traditional safe-haven assets for better returns.
"In 2026, we foresee broadening opportunities across global capital markets, driven by attractive profits growth outside the United States and by global monetary policy easing," Franklin Templeton's report clearly states. This environment is expected to push capital towards equities, credit, and longer-duration fixed income instruments as the appeal of cash diminishes.
Long-Term Themes: AI, Private Markets, and Big Government
Looking beyond the next year, the asset manager outlines three powerful, long-term themes likely to influence portfolio construction for the next half-decade.
The Age of Intelligence remains central, with artificial intelligence deployment still in its early stages. "Its contribution to growth, social welfare, and investment returns is just beginning," the report emphasizes. Continued opportunities are seen in data centres, advanced semiconductors, and AI-enabling infrastructure. A critical related theme is the massive energy demand required to "feed the beast" of AI, pointing to rising electricity needs and spillover benefits for engineering, industrial metals, and power infrastructure.
The mainstreaming of private markets is the second long-term trend. As investors search for income and diversification in a lower interest-rate environment, private markets are set to play a larger role. Franklin Templeton identifies commercial real estate debt, infrastructure, and secondary private equity offerings as preferred areas for investment as cash yields decline.
The report also sounds a note of caution with its third long-term theme: an era of big government. It warns that rising government intervention and spending could pose risks to market returns. "We have entered an era of big and intrusive government, which risks lowering returns and increasing risk across capital markets over the remainder of this decade," it cautions.
In conclusion, Franklin Templeton advises that investors will need to adapt their strategies to a new world where market leadership is more spread out, policy uncertainty stays high, and innovation—particularly in technology, private assets, and digital finance—remains the dominant long-term driver of investment returns.
