January always brings with it a glut of outlook conferences as analysts tout their views, and attendees get a flying start on their required hours of CPD for the year. I was at one such conference on Monday, and as is customary at events like this, there were several audience surveys. These polls can be an interesting way to gauge investor sentiment and a few of the answers, and indeed the questions themselves, got me thinking.
Market optimism remains strong - but so does the risk of complacency
One of the polls asked everyone’s expectations for global equity returns for 2026. Around 90% of respondents were either in the 0-10% or the 10-20% camp. This immediately concerned me. I too share the view that the most likely path for equities is up, but at a time when there are plenty of risks on the horizon, this poll result suggested a degree of complacency. This is a risk for markets, as if consensus flips, there could be a lot of selling and an unduly negative price fall.
However, a significant majority of optimists isn’t automatically a reason to sell in quite the same way that overwhelming negative sentiment after a sell off can be a helpful buying signal - it’s a reason to be wary though.
Balancing my positive outlook for equity returns with stretched market sentiment argues for staying long equities while opportunistically hedging downside risk. Despite exciting news headlines over the first fortnight of 2026, markets themselves have been much less exciting, so volatility is not expensive. This means hedging with put options may be a good move, and this is something we are doing in our own funds.
The dangers of extrapolating
A later question asked what region the audience expected to have the best returns over the year. For this question there wasn’t such a meaningful consensus, but the most popular answer was Asia Pacific, with around 40%.
While the Asia Pacific region may well have a great 2026, I couldn’t help but think that most people were just extrapolating Korea’s +100% return (in USD terms) last year without thinking too much more.
The biggest risk is the unknown unknowns
The final poll that interested me was the question “what is the biggest risk to markets?”. Given recent news flow from Venezuela and Iran, it wasn’t an enormous surprise to see geopolitics win this one. However, this is perhaps the hardest risk to price, both probabilistically and directionally. After an event, there is always a tendency to claim you ‘knew’ it would happen, when really all that happened is you ‘guessed’ right. Let’s be honest, few (if any) people really have an edge in predicting geopolitical events, and even if you did, it can be just as difficult to predict what the market reaction will be.
It also struck me that this was a paradoxical question in the first place. If a risk is big enough that people are talking about it, then it will be priced in to markets to some degree, and almost by definition is not the “biggest” risk. Really the biggest risk is the one no one is talking about - Donald Rumsfeld’s unknown unknowns - because that’s the one that is not accounted for at all in market prices.
It is a constant battle as an active investor to balance having strength in your convictions while also accepting what you don’t know. If you don’t have an edge, then don’t play the game, so while geopolitics may be a big risk to markets in the short-term, the best thing to do is usually not to react.
Key takeaways
- When investor sentiment is very positive, that is an opportune time to hedge downside
- Geopolitics is an obvious risk in 2026, although it’s not obvious what you should do about it
- The biggest risk is the one no one is talking about yet
CJ Cowan
Portfolio ManagerCJ is a portfolio manager of the Quilter Investors Cirilium and Monthly Income Portfolios. CJ joined Quilter Investors in August 2018 from Aberdeen Standard Investments where he worked in the global macro team, managing global government bond and global aggregate portfolios.
CJ is a CFA charterholder and has also completed the Chartered Alternative Investment Analyst qualification. CJ has a degree in economics from the University of Bristol and an MPHil in Economic and Social History from Brasenose College, University of Oxford.
