Please see the below article from Tatton Investment Management detailing their discussions on what has happened in global markets over the past week. Received this morning 16/02/2026.
Anxiety under the surface
At a global index level, equities look calm but the AI winners and losers theme is raging below the surface. Last week, realized index-level volatility dropped, but single stock-level volatility stayed high.
Leveraged traders are targeting companies vulnerable to AI displacement. Those with high ‘price-to-book’ ratios were punished. UK wealth manager St James’s Place lost 13% after Altruist released an AI tax tool for investors. The big firms with large technical departments are under threat, but smaller firms have greater opportunity to compete. That’s good news for small business, but probably won’t affect small-cap stocks until the dust settles.
In the meantime, companies might react to share price falls with cost-cutting layoffs. That puts highly valued employees at risk, dampening a crucial source of consumer demand. The US labour market was surprisingly strong in January (130,000 jobs added) but that’s already out of date. Initial jobless claims spiked last week, and fear is that the old labour market stasis (little hiring but no firing) will tip into layoffs. That disrupts the strong US growth narrative.
Alphabet’s 100-year sterling bond issuance is encouraging, proving there’s demand for long-term debt in the UK market. UK growth data was mild for December but full-year growth (1.3%) was better than expected a year ago. Some fear that a change in Labour leadership might mean a loosening of the budget deficit, but bond markets still expect a tight fiscal policy with an emphasis on lower interest rates – as the BoE looks set to deliver.
The US Congressional Budget Office upped its long-term debt and deficit forecasts, partly due to Trump’s likely fiscal expansion this year. The need for tariff revenue will see the president veto congress’s anti-tariff bill on Canada, but there’s still a Supreme Court ruling dangling over the White House, putting further pressure on US bonds. We discuss the big non-US winners below.
The Takaichi Trade
Japanese stocks surged after Prime Minister Takaichi’s landslide election win. Both voters and investors appreciated her message of growth over caution and the continuation of Abenomics (fiscal and monetary stimulus alongside structural reform). The late Shinzo Abe’s eponymous reforms boosted long-term corporate profitability, which has now fed into wage rises, stronger domestic demand and higher growth. Even with US tariff headwinds, Japanese exports (particularly to the rest of Asia) are benefitting from a cheap yen, while the tech sector is booming. This will keep benefitting Japanese consumers, who have plenty of room to lower their savings rates.
Stocks have rallied under Takaichi, but Japanese Government Bonds (JGBs) and the yen have suffered. Amid last month’s JGB yield spike, we wrote that the JGB market has similar structural weaknesses to the UK gilt market before the Liz Truss episode (gilts are mainly held by pension funds; JGBs are mainly held by insurers), but this isn’t Japan’s Truss moment. Fiscal fears triggered the gilt selloff in 2022, whereas it’s actually strong Japanese growth pushing up JGB yields. Indeed, JGBs and the yen strengthened post-election because international investors want to buy into Japan’s long-term growth (and holding unhedged JGBs is a good way to do that).
Takaichi says her spending plans won’t raise Japan’s debt-to-GDP because GDP will rise – but the bigger risk is that the spending isn’t needed. Private sector growth is strong; extra government investment might just stoke inflation and force the BoJ to raise rates. This is a risk, but we think Takaichi’s spending will be milder than she says for this reason.
Asian trade is so important to Japan, so Takaichi’s antagonism toward China is another risk. But both Japan and China have often favoured economic pragmatism in recent decades, so we still think Japan’s long-term prospects are bright.
Emerging markets benefit from regionalisation
EM stocks have outperformed all others in the last year, despite Donald Trump’s trade disruptions.
EMs altogether account for more than half of global GDP in Purchasing Power Parity (PPP) terms. That doesn’t guarantee economic power, though, as currencies rarely converge to PPP rates even in the long-term. There’s two broad reasons for this: the lack of arbitrage and the dominance of financial markets. Arbitrage is limited by trade barriers and general non-equivalence (how do you compare a Himalayan tea house with a central Manchester hotel?), while financial market dominance means that countries with higher valued assets (e.g. developed countries) have higher valued currencies.
Trump’s policies arguably make PPP matter more. A weaker dollar always helps EM companies with dollar debts, but the general sense of riskier US assets makes EM assets less risky by comparison. Plugging the US trade deficit also stops the outflow of dollars, which stops the retuning inflow into dollar assets. Meanwhile, Trump’s desire to rebuild manufacturing capacity means a greater equivalence of goods: If American and Chinese manufacturers are selling the same cars, the main difference will be the price.
Regionalisation in the last decade has created regional trading blocs – and by far the biggest, in PPP terms, is Asia. Its growing importance is driving new politics: China is now trying to present itself as a reliable alternative to the US, and is showing a little more restraint against Taiwan and the South China Sea.
Beijing has a strong incentive to make its financial markets more attractive to foreigners (more transparency and fewer interventions), but you don’t have to buy Chinese assets to invest in Asia’s growth story – as Japan and Korea have shown. We think regionalisation will make EM assets more attractive in the long-term.
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Alex Clare
16/02/2026