The case for property in a fractured market

This year will be remembered as a white knuckle ride for investors. 

In April, Donald Trump's Liberation Day tariffs sparked the biggest stock market selloff since the pandemic. About $US8.6 trillion was erased from the value of global equities before a partial recovery began – one that morphed into a gigantic bet on the promise of Artificial Intelligence. Nvidia alone accounts for nearly 20% of the S&P 500’s year to date gains, with Alphabet, Microsoft and Broadcom together adding another c.30 percentage points.

What can we expect from 2026? Divergent views hint at another volatile year. Central banks and regulators, including the Bank of England, have long fretted over AI-fuelled equity valuations, but the hyperscalers' growing reliance on leverage to fuel generational investments in infrastructure present entirely new threats to global stability.

Approximately half of the US$5 trillion that hyperscalers plan to spend on infrastructure like data centres in the coming five years will be financed externally, mostly through debt, according to BoE estimates.

Some investors reckon 2026 will be the year the music stops, but they are in the minority. The clamour for exposure to AI, alongside easy US fiscal, monetary and regulatory policy will fuel another year of double-digit gains for the S&P 500, according to an FT survey of the world's largest investment banks. That would mark the seventh year of double-digit gains in the past eight.

“For now investors are buying the dream,” Savita Subramanian, head of US equity and quantitative strategy at Bank of America tells the paper.

Disorderly moves

Equities are a volatile asset class, but the action is unlikely to stop there. Fiscal deficits are growing and governments are issuing more bonds, just as central banks are dialing back their own purchases. That points to a growing reliance on private investors, who will demand higher yields for elevated fiscal and inflationary risks. 

This combination increases the risk of disorderly moves in the bond market, which tend to spill quickly into equities. The prevailing volatility caused by a likely rate hike by the Bank of Japan this month provides a taste of what might follow. Japan is the largest holder of US Treasuries, surpassing even China, and the nation's domestic investors have long borrowed cheaply to buy higher yielding overseas assets. An unwinding of this trend alone could prompt contagion elsewhere.

The FT has an excellent explainer here. Manish Kabra, US equities strategist at Société Générale, tells the paper that a hawkish move from the Bank of Japan is a bigger threat to the US equity market than the Federal Reserve, or US domestic policy due to the possible contagion to US Treasury yields. He reckons a 1 percentage point rise in the 10-year Treasury yield would likely trigger a 10-to-12% drop in the S&P 500. It's easy to imagine what happens from there.

Difficult choices

The correlated nature of this volatility presents investors with difficult choices. For the twenty years leading up to the pandemic, stocks and government bonds were negatively correlated, allowing diversified portfolios to use both asset types to hedge appropriately. That began to shift as interest rates climbed, and leading 60/40 stock-bond portfolios declined 16% in 2022, the worst return since 2008.

Uncertainty about the trajectory of monetary policy has pushed stock-bond correlations into positive territory for most of 2025 to date, according to an August paper by J.P Morgan. A continuation of this trend – or even the risk of continuation – should push capital towards real assets, which provide both resilience against inflation and diversification against positive stock-bond correlation. 

International investors' drive to diversify risks and find early cycle opportunities is already gathering steam, and there are good reasons to be optimistic for 2026. International capital flows into commercial real estate increased 18% YoY in Q3, according to provisional data analysed by Knight Frank's Victoria Ormond in October. All regions marked an increase in inbound activity. APAC (+57% inbound increase YoY) and Europe (+4% inbound increase YoY), are notable beneficiaries. There is a clear focus on liquidity and thematic-driven sectors like logistics, residential, innovation-driven assets and well-located offices.

Deferring decisions

Conditions in the UK construction sector are moving from bad to worse. New orders collapsed at the fastest rate since the onset of the pandemic during November, according to a new S&P Global PMI.

Lower volumes of construction output have now been recorded for eleven consecutive months. The 39.4 reading on the index is the lowest since May 2020. Sub-sector data showed that housing activity (index at 35.4), commercial construction (43.8) and civil engineering (30.0) all experienced the fastest downturns in activity for more than five years.

Around 44% of the survey panel reported a fall in new orders, while only 17% signalled an increase. Aside from the pandemic, the resulting seasonally adjusted New Orders Index pointed to the fastest downturn in new work since early-2009.

Tim Moore, Economics Director at S&P Global Market Intelligence, pointed to "headwinds during November as business uncertainty in the run up to the Budget pushed clients to defer investment decisions."

"The degree of optimism dropped to its lowest since December 2022 amid reports of cutbacks to client budgets and pervasive worries about long-term UK economic growth prospects," he added.

In other news...

Billingsgate and Smithfield set to move to east London’s Royal Docks (FT), Lloyds Bank pushes for AI and blockchain to transform UK homebuying (FT), billionaires’ children and spouses inherit record amounts (Times), and finally, Bank of England to Stop Rate Cuts at 3.5%, OECD Predicts (Bloomberg).