Falling cash yields are set to upend institutional portfolio positioning in 2026, according to the Franklin Templeton Institute (FTI), as rollover risk rises and yield curves steepen, prompting a shift toward duration, credit and overseas equities.
FTI’s Global Investment Outlook: 2026 and beyond says that with central banks worldwide resuming easing cycles and profit growth accelerating outside the US, CIOs and asset owners are preparing for a rare broadening of return opportunities spanning public markets, private credit and alternative assets including private real estate.
“For investors sitting on large cash balances, falling short-term interest rates pose rollover (or reinvestment) risk, namely the likelihood that income derived from short-term deposits and cash will also fall as short rates decline,” the report said.
This environment is reshaping asset allocation conversations, with greater emphasis on extending duration, increasing credit exposure and revisiting cyclical equity segments long overshadowed by US mega-cap growth.
FTI says that within the US equity market, the earnings outlook has brightened for small-cap stocks, industrials and financials.
“Small-caps stocks and industrials, which are typically more highly leveraged than the rest of the market, will see profitability rise as the Federal Reserve trims interest rates and debt servicing costs fall. Financials should benefit from a steeper yield curve, improving net interest margin and from innovations in capital markets.”
“The steepening of yield curves reinforces our previous broadening thesis, as investors will be incentivised to seek new opportunities in duration, credit, equities and elsewhere.”
Over the coming year, FTI anticipates a widening of investment opportunities driven by global profits growth and monetary easing with the Federal Reserve is expected to continue cutting rates into the first half of 2026 and potentially longer.
“As US short-term interest rates fall, investors will be confronted with rollover risk in their money market holdings. Accordingly, we anticipate that many will shift from cash into fixed income (public as well as private) with exposure to duration or credit returns,” the outlook said.
“A key beneficiary will be emerging market debt, sovereign and corporate, local as well as hard currency denominated.”
The trade-weighted US dollar has fallen about 10 per cent year-to-date, and Franklin Templeton says several factors suggest the decline is not over. For US investors, dollar weakness increases the appeal of emerging local currency securities.
“But as the Fed cuts US rates, investors from other regions (e.g. Europe, the UK or Japan) will see the cost of currency hedging decline, which would increase their net (of hedging) returns in emerging fixed income assets.” Meanwhile, US market performance, FTI says, can broaden sustainably away from the still-compelling leadership of large-cap growth, technology and artificial intelligence (AI) companies.
“Prospects appear to be brightening outside the United States. Over the next 12 months, earnings growth is expected to be as high in emerging markets as in the United States.”
Despite the global rotation, FTI remains confident the US will continue to attract investment flows. “Its corporate and market fundamentals remain superb … The US boasts superior profitability, liquidity and a breadth of investment options – which we believe are unmatched anywhere.”
Last week, Investor Daily covered how AMP deputy chief economist Diana Mousina believes US exceptionalism is over for the country in the long term in light of the growing dominance of China.
At the same time, private equity, private credit and other alternatives are “on the cusp of going mainstream”.
“In the coming years, fund innovation, regulatory changes and the application of information technology will hasten the mainstreaming of private investments,” the report said.
FTI notes that governments and industry leaders are already discussing eligibility of such assets for individual portfolios, potentially including self-directed retirement accounts.
“The explosive growth of alternative asset fund structures puts pooled funds within reach of more investors, vast increases in data analytics allows advisors, ratings agencies, regulators and investors to better assess the opportunities and risks in what traditionally have been opaque investment instruments. Within private markets, commercial real estate debt, infrastructure and secondary offerings of private equity are our preferred areas.”
Moving onto thematic sectors, FTI says the deployment of AI is still in its early phase, with its contribution to growth and investment returns only beginning.
“Promising investment opportunities remain in the build-out of its infrastructure, including data centres. New and more powerful chips will revolutionise the speed and scope of AI applications.”
One of the most compelling themes, it says, is the need to “feed the beast” as AI drives unprecedented energy demand.
“New investment will be required in electricity production, transmission and storage. To meet that need, both public and private markets will attract capital, with powerful spillovers to sectors such as engineering, basic materials, rare earths and industrial metals.”
Longer term, innovation remains the most important return driver, in FTI’s view, best served via information technology, private markets and digital finance.
“The global investment landscape is evolving. Changes are primarily about new opportunities, based on improving profitability and more attractive valuations in sectors and regions that so far have underperformed. Support also comes from expected monetary policy easing globally,” the report said.
“That outcome owes much to the macroeconomic growth impulse delivered by monetary easing across the emerging complex. Even Europe may participate, nudged ahead by both monetary and fiscal easing, paving the way for an upturn in the European growth and earnings cycles in 2026.”
However, the firm warns that the macro backdrop is far from benign.
“We must recognise that much of the world has abandoned faith in free markets, free trade and the free movement of factors of production … We have entered an era of big and intrusive government, which risks lowering returns and increasing risk across capital markets over the remainder of this decade. Rarely has that outcome served investors well. Vigilance remains warranted.”
FTI goes as far as to declare globalisation as being “over”. “Brexit and US tariffs are visible manifestations of the backlash against trade and migration. But even earlier, globalisation was already stalling,” the report said.
“The reversal of globalisation is not costless. The desire to boost efficiency and profitability drove decisions made over the past 75 years to outsource manufacturing and services, to hire immigrants and to allocate capital globally.”
Moving in the opposite direction, Franklin Templeton Institute says, implies a less-efficient allocation of resources, higher costs and lower returns on capital. “Of course, de-globalisation is not universal.
“Countries still interested in trade will find like-minded partners. And since most trade takes place with neighbours, regionalisation is the likely successor to globalisation, most probably centred on three major trading blocs – North America, Europe and Asia.”
