After a third year of strong returns in markets, Tom Stevenson, investment director at Fidelity International, looks at the reasons for both caution and optimism as we move into 2026 and suggests three funds to help investors build their portfolios for the year ahead.
After three years of rising markets, I’m optimistic but cautiously so. There’s certainly a good case to be made for another year of decent returns, but it would be prudent not to expect another 20% year, and to put some protections in place. The good news is that corporate earnings, the main driver of stock market returns over time, are looking robust. After dipping around the time of the tariff announcement in April, earnings growth expectations are back into double digits for both this year and next.
Policy, both fiscal and monetary, looks likely to be supportive this year. Interest rates should fall further, helped by a change at the top of the Federal Reserve in the spring. That will support shares and short-dated bonds, even if fears about debts and inflation prevent long bond yields from falling much further.
Bonds may not offer much growth but could still be a useful diversifier this year. That’s especially the case because gold has arguably had the best of its run. Bitcoin looks to be pausing for breath, in line with its proven four-year cycle of gains and subsequent retreats. Creating balance as the equity bull market matures will be one of the biggest challenges in 2026.
Three fund picks for investors to consider
Dodge & Cox Worldwide Global Stock
First, I’m sticking with my preference for global equity funds. Dodge & Cox Worldwide Global Stock is a repeat recommendation. The fund has a value bias that will be helped by the rotation away from the US. This fund, which has delivered well for us in recent years, benefits from experienced analysts and a disciplined bottom-up stock picking process which is applied consistently through a range of market conditions.
The fund has a good valuation discipline but is pragmatic in its value approach. It prefers a fair company at a good price to a good company at a fair price. This means it can own companies with growth characteristics that appear cheap as well as more deep value, contrarian ideas.
Its top four holdings illustrate the range of its portfolio both in terms of geography and sector: Taiwan Semiconductor, GSK, Alphabet and Charles Schwab.
My second pick for 2026 is a fund that will be familiar to many investors. Special Situations has been a staple investment in many portfolios over the years, dating back to Anthony Bolton’s long tenure managing the fund.
Alex Wright has carried the torch forward with great skill in recent years and he has enjoyed a particularly strong run since the pandemic. He is a seasoned investor, supported by a high-quality pool of analysts.
The approach of the fund is contrarian and invests broadly across the market cap spectrum. There is a clear value bias, which is an advantage in a period when investors seem to be rotating away from highly priced growth shares. Although largely a UK fund, Wright can allocate up to 20% away from the home market.
What is impressive about this fund is its ability to deliver performance even when its style is out of favour. It suggests real stock picking skill. Historically, Special Situations has performed well in post-bubble markets such as the 2000-2003 period, and that provides some reassurance in the current market situation.
Valuation is a key driver of returns in the long run and the UK is one of the cheapest stock markets in the world today. There may be good reasons to worry about the UK economy, but this is more than reflected in its price.
My final pick is a fund that has become a significant part of my personal portfolio over the past year. Emerging markets were one of the top performing equity investments in 2025, and I believe they will continue to enjoy tailwinds in the year ahead. There is a long-term case to be made for investing in regions of the world where growing wealth and positive demographics are driving higher economic growth than in the developed world. But there is also a shorter-term case focused on the likely weakness of the dollar, which tends to be associated with stronger performance from emerging market shares.
Lazard Emerging Markets Fund is managed by a long-standing, experienced manager who has remained true to his style despite an extended period of style headwinds. James Donald is backed by an experienced and stable team. This is important for a global emerging markets manager because regional markets can be idiosyncratic, and companies are not always directly comparable to their developed market peers.
The investment approach of the fund is strong, with a methodical portfolio construction process and good risk management. When you consider the potential for volatility in this asset class, the performance of the fund has been reassuringly smooth over the years.
As ever, I will be investing in all three picks in my own portfolio.
By Tom Stevenson, investment director at Fidelity International
