Three areas offering value in 2026

By Darius McDermott on 6 January 2026 in Equities

In 2025, the rest of the world finally caught up with the all-powerful US. While the AI trade motored on, a weaker dollar dented returns from US markets for European investors. Many turned their attention to their domestic market, plus Japan, China and other emerging markets. Even the long-unloved FTSE 100 garnered some interest.

However, this has left investors with a problem as they contemplate their portfolios at the start of 2026. There aren’t a lot of bargains around. The US market is significantly ahead of its long-term trading range, but even Japan and Asia are starting to see more ambitious valuations*. Bargain hunting in 2026 requires some bravery – if a sector or region is still unloved after 2025, it is really out of favour.

Small-caps

Smaller companies are an obvious place to start. While they started to catch up in Europe and Asia, in the US and UK, they have continued to trail their larger rivals. This has left them looking cheap. In the US, the three year annualised return of the MSCI USA Small Cap index is almost 10% behind that of the MSCI USA index**. In the UK, the FTSE 100 is 15% ahead of the FTSE 250 over three years and 13% ahead of the FTSE Small Cap***.

With interest rate cuts likely in the US and UK in 2026, these markets may finally start to get more attention from investors. In the US, domestic tax cuts may also add to their appeal. Bob Kaynor, manager of Schroders US Mid Cap, says:

“Fiscal stimulus, particularly the “one big, beautiful bill”, is anticipated to accelerate capital expenditure and provide a tax refund windfall of approximately $130 billion to US consumers in early 2026, further supporting growth. The IPO market remains active, with many new companies experiencing significant first-day price increases and follow-through gains, particularly in the technology and crypto sectors.”

He also highlights an improving earnings picture: “Earnings revisions for small and mid-cap companies have recently turned positive for the first time since 2022, signalling a potential inflection in relative earnings growth. The S&P 600 small-cap index is expected to surpass large-cap earnings growth in the latter half of the current year, providing a favourable backdrop for the asset class considering the wide valuation discount in favour of small and mid-caps.”

In the UK, smaller companies continue to deliver robust operational performance. Aberdeen says that UK small-caps are forecast to grow their earnings at over 10% in the year ahead****. However, they continue to be overlooked by investors. Gains over 2025 have been generated by share buybacks, earnings growth and M&A activity rather than any rerating of the shares.

Georgina Brittain, manager of the JPMorgan UK Small Cap Growth and Income Trust, says:

She says M&A continues to support the market, with companies taken out at a significant premia to current share prices. Regulatory change may also support valuations as the UK stock market finally starts to receive the attention it needs from the government.

In a recent interview, Nish Patel, manager of the Global Smaller Companies Trust, shares more on why the backdrop may now be shifting for smaller companies:

Emerging markets

It’s been a strong year for emerging markets, with the average fund up 22%^. Strong gains from China and Latin America have boosted emerging markets, and helped compensate for weakness in India. This might not suggest bargain basement prices, but emerging markets have been out of favour for a long time, and still look cheap relative to international peers.

There are other reasons to favour emerging markets. Investors are reappraising the relative risk of emerging versus developed markets, with emerging markets adopting orthodox economic policies, while developed market governments are increasingly unpredictable. Equally, emerging market economies are growing at around 2.5x the speed of developed markets and have less debt^^. They are demonstrating a growing technological prowess, with much of the AI supply chain located in emerging markets, particularly in Asia.

Jonathan Pines, manager of the Federated Hermes Asia ex Japan Equity fund says there is more to go for: “China, in particular, is only beginning to rebound from multi-year trough valuations, despite the country’s increasingly domestic-focused economy. It’s worth remembering that the vast majority of listed companies in China are insulated from the risk of higher trade tariffs and have continued to prosper despite the rise in global trade tensions. Moreover, dividend yields in China compare favourably to local interest rates, unlike in most developed economies.

Direct property

The property sector had another lacklustre year in 2025. The MSCI World REITs index rose an anaemic 0.6% in 2025, making it one of the year’s worst performers**. There are reasons to suggest it might do better in 2026. Its high, inflation-adjusted income may prove a selling point as interest rates fall, while low valuations may lure investors at a time when other parts of the market look expensive.

Marcus Phayre-Mudge, manager of the TR Property Trust, says:

“Real estate is at the value end of the equity trade and the world is having its head turned by growth. However, there are so many parts of our world that are seeing structural growth – residential is undersupplied, data centres are a crucial and growing part of our environment; industrial, e-commerce and logistics are still very positive. Healthcare – both primary and elderly healthcare – and social housing are proving to be a growth part of the market.”

He says there are still concerns over areas such as offices, but they are only around 5% of the global property market. “Compared to the headlines it gets, you can avoid these markets if you wish,” he says. An active property fund that can roam across the market should be well-placed to take advantage of the opportunities in commercial property, while avoiding its pitfalls.

There are other areas that have been weak, but have started to revive at the end of 2025. Healthcare is a case in point. It has started to move past some of the regulatory and tariff concerns that have weighed on the sector and may have further to run in the year ahead. The Polar Capital Global Healthcare Trust is one way to take advantage.

While there is a diminishing pool of well-valued opportunities in global stock markets, the rising tide in 2025 did not lift all boats. There are still some options left for dedicated bargain hunters.

*Source: Goldman Sachs, 12 November 2025

**Source: index factsheet, 31 December 2025

***Source: FE Analytics, total returns in pounds sterling, 2 January 2026

****Source: Aberdeen, 14 November 2025

^Source: FE Analytics, total returns in pounds sterling, discrete calendar year 2025

^^Source: IMF, World Economic Outlook, October 2025