1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 133
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
reinforces the importance of disciplined security selection underpinned by sustainable advantages
and broader secular growth drivers as the primary source of long-term returns in U.K. equity
markets.
We see more runway for EU Defense/Industrials index outperformance relative to the S&P 500
beyond 2025
200
180
160
140
120
100
80
60
40
Jan 2020
Nov 2020
Sep 2021
Jul 2022
May 2023
Mar 2024
Jan 2025
Nov 2025
Sources: Scotia Wealth Management, Bloomberg, indexed to 100 as of Jan 1, 2020 base.
Looking beyond Europe to Japan, certain areas within Japanese equities appear well-positioned
for 2026. This outlook reflects a combination of pro-growth policies under Prime Minister Sanae
Takaichi, domestic demand that may find support from ongoing wage increases, elevated
household savings, a weak currency (supporting tourism and trade), and ongoing
corporate/governance reform. This view, however, depends on the BoJ’s ability to sustainably
achieve its 2% inflation target, despite its slower response to rising prices (relative to the E.U.).
Notably, despite higher rates and narrowing spread between U.S. and Japanese 10-year yields, the
yen has depreciated against the dollar (an unusual setup). This dynamic should benefit certain
sectors like semiconductors, where Japanese firms may gain share through improved pricing. The
key risk to this dynamic is a potential unwinding of the carry trade, which could trigger yen
appreciation (as could reduced fiscal concerns). The spillover could be significant, driving market
volatility and potentially devaluing AI-related equities. Additionally, geopolitical tensions with
China remain an important factor to monitor.
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