To optimise portfolio performance in 2026, the time has come to diversify investments, according to Michel Saugné, CIO of LFDE : “The attractiveness of Japan, Europe and the emerging countries makes them a good choice for diversification.”
At the end of January, when presenting his strategy for the start of the year, Michel Saugné was already stressing the effectiveness of broader portfolio diversification, outside the US market. The likely key to performance in 2026!
The events of the beginning of the year point in this direction. For several weeks now, pressure has been mounting on the US stock market, with the software publishing sector the first to pay the price (down by more than 20% since 1 January), hit by fears about artificial intelligence.
All in all, since1 January, Wall Street has trailed the international markets in terms of performance, while all the other major world indices have been in the green since January (Stoxx Europe 600 +4.5%, Japan +12%…). The S&P 500, the New York Stock Exchange’s flagship index, is stable, while even the Nasdaq Composite was in the red in mid-February (-2.99%).
In his outlook for 2026, Michel Saugné expresses concern about the valuations of certain Wall Street stocks, with price/earnings ratios approaching high levels. In short, US markets have become much more expensive than their historical average. “The margin for error is becoming very limited, with high expectations for earnings growth combined with a high level of optimism among operators. In our view, equity markets remain expensive and the likelihood of US indices continuing to perform is slim at such valuations. On the bond market, spreads are currently tight, reflecting investors’ strong optimism about global economic stability.”
Start of the end of the rate cut..
“If global monetary policies remain accommodative, the downward trend in interest rates should come to an end, while the level of debt will limit additional fiscal stimulus.”
In terms of diversification, it is important to note that European equities are trading at much lower valuations than their US counterparts, in an environment that remains relatively buoyant. Germany’s massive stimulus plan will support European growth, as will the fall in energy prices over the last few quarters, due to the combination of the fall in the price of a barrel of oil and that of the US dollar. While European inflation remains well under control, some optimistic analysts are even forecasting European growth of close to +1.8% in the fourth quarter.
With an acceleration in consumption on the cards, the end of the Ukrainian conflict could be one of the pleasant surprises. However, the German market appears to be a good opportunity, while France needs stability.
Over the last few years, the US markets have been a magnet for investors. But here too, the tide is turning at the start of the year.
Stock picking in banking stocks
European-focused ETFs stood out in January, recording higher inflows than US ETFs. This is the first time this has happened in a long time, and shows that investors are continuing to diversify their portfolios. Despite this reversal of leadership, it is worth noting that flows into US ETFs continue to be positive.
Equity markets: the need for selectivity?
“If we look at the equity markets, one segment in particular attracts attention: European Quality. After 18 difficult months and a few disappointments, the valuation level seems to have normalised”, according to LFDE’s CIO.
In terms of sectors, the European banking sector, which already shone in 2025, still has potential, but with a difference. You have to be more selective in your choices, paying more attention to alpha rather than beta, i.e. focusing more on stocks that tend to outperform rather than buying the whole sector via an ETF, for example. So stock picking will be king!
“After the strong momentum, selectivity is the order of the day in our view, with the European banking sector outperforming the Magnificent Seven in 2025 (Amazon, Alphabet, Meta, Tesla, Microsoft, Apple, Nvidia),” he explains. The Magnificent Seven, which have delighted many investors, have just hit a five-month low on the markets (16 February).
Japan still has a long way to go..
Another vector for diversification, already relevant in 2025, is the Japanese market, which remains attractive. Japan has entered a new era, whereas a few quarters ago the country was thought to be on the brink of collapse. Japan has evolved significantly over the last three years, benefiting from accommodating financial conditions and a pro-growth policy underpinned by a government strengthened by the recent elections. At the same time, rising incomes and the forthcoming fiscal stimulus measures should further stimulate consumption. The yen hit historic lows against the dollar and a number of other currencies. Over the last four years, the Japanese currency has fallen by almost 40% against the dollar (and slightly more against the euro). A rate of depreciation described by the Japanese government as one-way and rapid. With the Japanese currency glaringly undervalued, it is becoming difficult to continue falling. The investor therefore also benefits from buying a cheap currency.
Since1 January, the Japanese Topix has gained more than 15% in mid-February, boosted by banks which have long been penalised by low interest rates and are now on the rebound thanks to a return to profitability with interest rates back on the rise.
“For the past 18 months, we have been favourably disposed towards emerging countries, and we remain so,” adds Michel Saugné. The fall in the US dollar has historically been a positive factor for the emerging zone.
Despite the recent fall, gold remains the ultimate safe-haven asset and the only alternative to the dollar. As long as geopolitical uncertainties persist, investors will remain wary of this type of asset.
After a phase marked by abundant liquidity and central bank rate cuts against a backdrop of disinflation, we are entering a period where profits will be the guiding principle. Less linearity, more dispersion and volatility ahead!
