2026: A Tale of Two Cities

When Charles Dickens opened A Tale of Two Cities with his now-famous line, he was describing a world defined not by a single prevailing condition, but by sharp contrasts existing at the same moment in time. 

Prosperity and hardship, confidence and fear, progress and stagnation were not sequential chapters, they were simultaneous realities, depending on where one stood.

In our view, today’s global economy bears a striking resemblance. Headline data suggest resilience: growth has proven more durable than expected, labor markets remain firm in many regions, and asset prices continue to reflect optimism around technological innovation and future productivity. 

Yet beneath the surface lies a far more uneven picture. Large parts of the economy remain under pressure from inflation, higher borrowing costs, and constrained affordability. Wealth and income outcomes have diverged meaningfully, as have regional growth paths across the globe.

This bifurcation matters deeply for investors, particularly in fixed income. A world defined by dispersion rather than uniformity rewards selectivity and flexibility, and it places a premium on sourcing risk away from traditional benchmarks. It challenges the usefulness of averages and elevates the importance of understanding who is benefiting, who is struggling, and where capital is truly being compensated.

In this outlook, we frame the investment environment as a modern Tale of Two Cities. We explore three areas where the “best of times” and the “worst of times” coexist: the concentration of growth driven by AI and capital investment, the widening divide between asset owners and non-asset owners, and the divergence between China and the rest of the emerging market universe. Together, these contrasts help explain not only where opportunities exist today, but why a global, unconstrained approach remains essential as we navigate the year ahead.

The First Divide: Concentrated Growth in an AI-Driven Economy

The first, and perhaps most discussed, “two cities” dynamic in today’s economy is the growing divide between areas experiencing strong, durable growth and those that are languishing. At the centre of the “best of times” sits a powerful, but highly concentrated, investment cycle driven by artificial intelligence and the capital expenditures required to support it. Spending on semiconductors, data centres, power infrastructure, and automation has surged, supporting earnings expectations and asset valuations for a relatively narrow set of beneficiaries.

Magnificent 7 Market Cap Compared To The S&P 493. Market Capitalisation

For these sectors, higher interest rates have proven more challenging, while the spillover effects from technological investment have so far been modest. The result is an economy where growth exists but is unevenly distributed, and where headline GDP masks a wide dispersion of underlying outcomes.

For investors, this distinction is critical. A concentrated growth environment can remain resilient for longer than expected, even in the face of restrictive monetary policy. That dynamic supports an ongoing willingness to own credit, as default risk remains contained among growth beneficiaries and higher-quality borrowers. 

At the same time, it argues strongly against indiscriminate exposure. When growth leadership is narrow and well understood, simply buying the market often offers limited compensation for risk. 

Instead, we believe this environment rewards idiosyncratic credit selection. Within portfolios, this has meant sourcing credit exposure through areas where structure, collateral, and dispersion create opportunities, such as select segments of CMBS, rather than relying on broader corporate beta in areas like CLO. In CMBS, careful underwriting and security selection allow us to participate in economic resilience while avoiding some of the most crowded expressions of risk. 

This theme of dispersion, of some thriving while others struggle, extends beyond corporate investment and into the household sector, where the contrast between economic “cities” becomes even more pronounced. If the first divide highlights how growth is increasingly concentrated across sectors, the second reveals how unevenly that growth, and the burden of inflation, has been distributed across households. Here, the distinction between the best and worst of times is not abstract. It is lived.

Rising Share: Share Of Quarterly PDFP Growth Attributable To Tech Spending* And Power Infrastructure

The second “two cities” dynamic is defined by a widening gap between those who own assets and those who don’t. For households with equity holdings, real estate ownership, or fixed-rate debt locked in prior to the rate hiking cycle, the past several years have been relatively forgiving. Rising asset prices and stable higher living costs, leaving many higher-income households financially resilient. 

For lower-income cohorts and non-asset owners, the experience has been markedly different. Inflation has been most acute in essentials such as housing, food, and insurance; categories that represent a disproportionate share of spending for these households. 

This uneven transmission of inflation and monetary policy has important implications for credit markets. Aggregate indicators may suggest stability, but credit performance is diverging meaningfully by income, asset ownership, and borrower quality. In our view, this calls for a more selective approach to consumer exposure.

Conversely, we have remained cautious toward below- prime segments of the consumer, including portions of auto ABS and unsecured consumer credit, where affordability pressures are intensifying and credit stress is more likely to emerge. 

This same bifurcation informs sector exposure. We continue to favor defensive areas of the economy, such as grocery retail, where demand remains resilient across income levels, while avoiding segments more reliant on discretionary spending from financially stretched consumers.

The Third Divide: China and the Myth of a Monolithic EM

In our view, these challenges are not merely cyclical, but structural in nature.

In contrast, many other emerging market economies are experiencing a more favourable environment. Growth remains relatively robust, inflation has moderated, and policy credibility has improved across several regions. A weaker US dollar has also provided relief for local currencies and balance sheets, supporting domestic demand and external financing conditions. 

This divergence underscores a critical point: China does not equal emerging markets. EM dispersion today is structural, not cyclical, and broad generalisations obscure meaningful differences in fundamentals and return potential. For investors, this elevates the importance of fundamental analysis, country selection, and currency exposure. 

Within portfolios, emerging markets have been our preferred expression of beta in recent quarters, across both hard-currency sovereign debt and local market exposures. 

Positioning further strengthens the case. Emerging markets remain a structurally under-owned asset class, particularly relative to developed markets such as the United States, where global investors are overweight equities and both public and private credit. 

In a world defined by dispersion and crowding, this imbalance creates opportunity as foreign investors look to diversify a portion of their overallocation to the US going forward.

Conclusion

The defining feature of the current cycle is not whether growth persists or falters, inflation rises or falls, or policy tightens or eases. It is that very different outcomes are unfolding at the same time, across sectors, households, and regions.

Concentrated growth driven by capital investment coexists with broader economic fatigue. Asset owners experience resilience while affordability challenges intensify for others. China’s struggles stand in contrast to healthier dynamics across much of the emerging market world.

In Dickens’ world, the future was shaped by those who understood the forces at work on both sides of the divide. In today’s markets, we believe the same holds true. By recognising where it is the best of times, where it is the worst of times, and, most importantly, how those realities intersect, we aim to navigate a complex and bifurcated global economy with discipline, flexibility, and consistency.