The year diversification works gain

Global markets are entering 2026 with widening dispersion, falling cross-country correlations and a shifting rate landscape that is reshaping relative equity opportunities.

After several years dominated by a narrow group of large-cap U.S. names, investors now face a more varied, region-driven market. With policy cycles, earnings paths and structural growth drivers pulling in different directions, broad global diversification—with targeted country tilts—may be key to capturing the next wave of leadership.

Regardless of whether AI enthusiasm proves overdone, the broader U.S. economy is clearly slowing. Sentiment weakened heading into the “Black Friday” sales season, and all three components of The Conference Board’s Expectations Index—business conditions, job prospects and future income—fell in November.

As the organization’s chief economist noted, “Mid-2026 expectations for labor market conditions remained decidedly negative, and expectations for increased household incomes shrunk dramatically after six months of strongly positive readings.”

While the Federal Reserve is easing cautiously, parts of Europe appear closer to stabilizing, with pockets of above-trend momentum emerging. Diverging rate paths are reinforcing this global split.

In the United Kingdom, we expect steady Bank of England cuts to relieve consumer pressure while boosting the appeal of high-dividend stocks.

Across Asia, several central banks remain in easing mode. If U.S. growth cools while Asian momentum holds, market leadership could broaden further. Brazil’s central bank is expected to keep cutting from today’s elevated levels, lowering financing costs across banks and consumer sectors.

Mexico’s Banxico has already begun easing and may continue if inflation stays contained—supporting both corporate activity and household demand.

In South Korea, even incremental Bank of Korea cuts could lift exporters and tech firms by improving funding conditions and helping fuel the global semiconductor rebound.

Together, these shifts point to a more supportive monetary backdrop in 2026 for investors ready to look beyond the United States.

Recent correlation trends also indicate that markets such as Taiwan, Japan and South Korea have seen their correlations with the S&P 500 Index decline over the past year.

Falling cross-country correlations amplify diversification benefits

Diverging policy paths, currencies and sector exposures are producing more idiosyncratic returns, allowing international allocations to contribute more meaningfully to portfolio resilience.

The United Kingdom offers compelling value. Sticky but moderating inflation and ongoing Bank of England rate cuts support its defensive, income-heavy market. UK–U.S. equity correlation has dropped 57%, falling from roughly 0.30 over three years to 0.13 on a one-year basis—a meaningful shift that enhances the UK’s diversification role within global portfolios.

Brazil is positioned as a value and income opportunity supported by commodities, interest‑rate cuts and fiscal discipline. Government forecasts now call for GDP growth of roughly 2.4% in 2026, with inflation easing toward the country’s official 3% target.

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Valuations remain attractive relative to emerging‑market peers. If global manufacturing and commodity cycles reaccelerate alongside domestic monetary easing, then Brazil could continue delivering late‑cycle cyclicality and income.

Taiwan remains central to the AI and semiconductor cycle. Global chip sales are projected to grow with the World Semiconductor Trade Statistics projecting the semiconductor market to reach about US$761 billion in 2026, up ~8.5% year-on-year.

Taiwan benefits disproportionately from this trend but valuations have become richer. If the AI capital expenditure cycle continues and export demand remains resilient, then Taiwan may continue to provide growth upside with moderate cross‑market correlation.

Taiwan’s equity correlation with the S&P 500 now stands at roughly -0.26 on a one-year basis—the lowest level among the major global markets shown.

This places Taiwan well below other large economies such as the UK, Germany, India and China, all of which maintain positive correlations with the U.S. market. Even compared with other export-driven Asian markets, Taiwan’s decoupling is notable: South Korea’s correlation, while also lower this year, remains meaningfully higher than Taiwan’s.

This sharp divergence underscores Taiwan’s increasingly distinctive return profile and its growing value as a diversifying allocation within global portfolios.

The new year for Japan has fresh stimulus package to look forward to under the leadership of recently appointed Prime Minister Sanae Takaichi whose cabinet has approved US$136bn in stimulus focused on energy security, defense modernization, infrastructure upgrades and household support.

Combined with corporate-governance reforms and a potential stabilization in the yen, these priorities could provide ongoing support for value-oriented sectors, industrials and domestically focused companies.

India, meanwhile, continues to attract global attention as investors weigh whether the long-anticipated acceleration in its equity markets will finally materialize.

After a year of elevated expectations—driven by resilient domestic demand, strong earnings, and enthusiasm around manufacturing reforms—the question heading into 2026 is whether those structural drivers can translate into sustained market leadership.

Recent policy moves, including India’s approval of a rare-earth permanent-magnet manufacturing program, reinforce the government’s commitment to deepening industrial capacity and reducing import dependence.

If execution remains strong and inflation stays contained, India may be better positioned to deliver the breakout performance that investors have been waiting for.

As 2026 unfolds, falling correlations and diverging policy regimes argue for broad global exposure—while selective tilts toward markets with clear structural or policy catalysts, such as Japan and India, may help capture more resilient performance.

By Dina Ting, Head of Global Index Portfolio Management, Franklin Templeton