LGT Bank Warns Investors to Brace for Bumpy 2026 Amid Heightened Volatility
In its key investment communication to clients for 2026, LGT Bank has highlighted that market volatility is likely to be substantially higher than the levels experienced throughout 2025. Recent global developments strongly underscore and reinforce this critical assessment, setting the stage for a turbulent financial year ahead.
Equities to Rise but Face Profit-Taking Pressure
The fundamental view from LGT strategists is that risk assets, particularly equities, will likely end the year higher than where they began. This anticipated growth is primarily driven by expectations of another year of robust corporate earnings expansion. However, elevated Price-to-Earnings multiples, especially within technology and innovation-led sectors, are expected to spur periodic and potentially sharp bouts of profit-taking by investors.
US Dollar Slide and Rupee Exception
LGT also maintains the view that the US dollar will continue its significant slide throughout 2026. This follows a substantial move in 2025, where the broad DXY index fell by a notable 9.4%. Interestingly, the Indian rupee dipped approximately 5% last year, standing as an exception to the broader trend. Meanwhile, major currencies including the euro and the Swiss franc gained considerable ground against the weakening greenback.
Gold Forecast at $5,500 per Ounce
The investment firm projects that gold will continue its upward climb, with a specific 12-month forecast of USD 5,500 per ounce. This bullish outlook is largely attributed to central banks around the world remaining committed to reducing their reserve asset share of US government bonds and actively diversifying into gold holdings. Central banks, arguably less "price sensitive" than retail investors, are expected to continue buying precious metals persistently until their target allocation levels are met. LGT expresses a preference for gold over silver, noting that the latter lacks a substantial institutional investor base to drive similar demand.
2026 Begins on a Volatile Note with Key Developments
While the year is still in its early stages, there has been no shortage of market-moving news to drive volatility. The first major event was the announcement of Kevin Warsh as the nominee to succeed Jerome Powell as Chair of the US Federal Reserve in May 2026. This news sparked an immediate knee-jerk sell-off in financial markets.
The concern stems from Warsh's previous tenure on the Fed's board from 2006 to 2011, during which he was a vocal critic of Quantitative Easing (QE) – the policy where the central bank uses its balance sheet to lower borrowing costs. It is important to note that Warsh is not alone in this skeptical view, as QE can still be characterized as an experimental monetary policy tool.
Warsh Viewed as a Pragmatist
LGT assesses that Warsh can be more accurately labelled as a "pragmatist." The firm believes that so long as the US labour market continues to soften and inflation shows signs of moderating, he is likely to support lower interest rates. This perspective is reinforced by President Trump's open criticism of the Powell-led Fed for being overly restrictive. Therefore, it would make little strategic sense for the president to appoint a new Fed Chair who is dogmatically opposed to looser monetary policy. In summary, LGT strategists argue that the market has overreacted and should not extrapolate too heavily from comments Warsh made more than a decade ago.
AI Disruption Creates Earthquake in SaaS Sector
The next key development creating waves is a veritable earthquake in the Software as a Service (SaaS) sector, triggered by the rapid rollout of new Artificial Intelligence (AI) productivity tools. Legacy players in the enterprise software world now face a sudden and significant threat of customers switching en masse to these advanced AI solutions – a transition that could happen relatively quickly.
That said, LGT cautions that it would be premature and wrong to write off the entire sector indiscriminately. Some established software firms may demonstrate the agility to evolve, adapt, and even thrive in this new landscape. Nonetheless, this situation serves as another prominent example of how AI is actively disrupting existing business models, where adaptation and innovation become absolutely key to survival.
Investors Advised to Brace for a Bumpy Ride
In closing, LGT strongly advises investors to brace for a notably bumpy and volatile ride throughout 2026, a forecast confirmed by the turbulent opening weeks of the year. The saving grace, according to the firm, is that the underlying corporate earnings backdrop remains fundamentally positive. This means the intrinsic value of what investors are purchasing is generally on an upward trajectory.
In such unpredictable market environments, strategic diversification becomes even more crucial than usual. A well-balanced portfolio across different asset classes and geographies may help navigate the expected periods of heightened volatility and uncertainty.
Stefan Hofer is the Chief Investment Strategist at LGT Bank in Hong Kong.
Disclaimer: This analysis is for educational purposes only. The views and recommendations expressed are those of the individual analysts or broking firms and not of the publisher. Investors are strongly advised to consult with certified financial experts before making any investment decisions.
