CONTRIBUTORS
Dina Ting, CFA
Head of Global Index Portfolio Management,
Franklin Templeton ETFs
Global markets are entering 2026 with widening dispersion, lowering cross-country correlations and a shifting interest-rate landscape that is reshaping relative equity opportunities. After several years dominated by a narrow group of large-capitalization US names, investors now face a more varied, region-driven market. With policy cycles, earnings paths and structural growth drivers pulling in different directions, we believe broad global diversification—with targeted country tilts—may be key to capturing the next wave of leadership.
Regardless of whether artificial intelligence (AI) enthusiasm proves overdone, the broader US economy is clearly slowing. Sentiment weakened heading into the “Black Friday” sales season, and all three components of The Conference Board’s Expectations Index—business conditions, job prospects and future income—fell in November. As the organization’s chief economist noted, “Mid-2026 expectations for labor market conditions remained decidedly negative, and expectations for increased household incomes shrunk dramatically after six months of strongly positive readings.”
What’s more, many investors continue to have limited exposure to international markets within their portfolios. Single-country exchange-traded funds (ETFs) can help broaden global allocations and add diversification by accessing markets with unique long-term growth characteristics. While the Federal Reserve is easing cautiously, parts of Europe appear closer to stabilizing, with pockets of above-trend momentum emerging. Diverging rate paths are reinforcing this global split. In the United Kingdom, we expect steady Bank of England cuts to relieve consumer pressure while boosting the appeal of high-dividend stocks.
Across Asia, several central banks remain in easing mode. If US growth cools while Asian momentum holds, market leadership could broaden further. In South Korea, even incremental Bank of Korea cuts could lift exporters and tech firms by improving funding conditions and helping fuel the global semiconductor rebound. Meanwhile, some economists expect Brazil’s central bank to trim its current elevated rates, lowering financing costs across banks and consumer sectors. Mexico’s Banxico has already begun easing and may continue if inflation stays contained—supporting both corporate activity and household demand.
Together, we believe these shifts point to a more supportive monetary backdrop in 2026 for investors ready to look beyond the United States.
Recent correlation trends also indicate that markets such as Taiwan, Japan and South Korea have seen their correlations with the S&P 500 Index decline over the past year.
Global Markets’ Correlation with S&P 500 (Last One Year)
As of October 31, 2025
Note: Correlation is based on daily returns (USD).
Sources: FactSet, S&P Dow Indices, FTSE Russell Indices. FTSE Russell country indexes are benchmarks that measure and track the performance of equity markets in specific countries and regions. Past performance is not an indicator or a guarantee of future performance.
Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
Global Markets’ Correlation with S&P 500 (Last Three Years)
As of October 31, 2025
Note: Correlation is based on daily returns (USD).
Sources: FactSet, S&P Dow Indices, FTSE Russell Indices. FTSE Russell country indexes are benchmarks that measure and track the performance of equity markets in specific countries and regions. Past performance is not an indicator or a guarantee of future performance.
Indexes are unmanaged and one cannot invest directly in an index. Important data provider notices and terms available at www.franklintempletondatasources.com.
Falling cross-country correlations amplify diversification benefits
Diverging policy paths, currencies and sector exposures are producing more idiosyncratic returns, allowing international allocations to contribute more meaningfully to portfolio resilience.
The United Kingdom offers compelling value, in our analysis. Sticky but moderating inflation and ongoing Bank of England rate cuts support its defensive, income-heavy market. UK-US equity correlation has dropped 57%, falling from roughly 0.30 over three years through October 31, 2025, to 0.13 over one year through the same date—a meaningful shift that enhances the United Kingdom’s diversification role within global portfolios.1
We believe Brazil is positioned as a value and income opportunity supported by commodities, interest‑rate cuts and fiscal discipline. Government forecasts now call for gross domestic product growth of roughly 2.4% in 2026, with inflation easing toward the country’s official 3% target.2 Valuations remain attractive to us relative to emerging‑market peers. If global manufacturing and commodity cycles reaccelerate alongside domestic monetary easing, then Brazil could continue delivering late‑cycle cyclicality and income.
Taiwan remains central to the AI and semiconductor cycle. Global chip sales, following a stronger-than-expected third quarter, are projected to grow more than 25%, with the World Semiconductor Trade Statistics (WSTS) forecasting the market may approach US$1 trillion in 2026.3 Taiwan should continue to benefit disproportionately from this trend, but we believe valuations have become richer. And while the AI capital-expenditure cycle continues and export demand remains resilient, geopolitical risks remain acute.
Notwithstanding these pressures, we believe Taiwan may continue to provide growth upside with moderate cross‑market correlation. Its equity correlation with the S&P 500 now stands at roughly -0.06 on a one-year basis—the lowest level among the major global markets shown.4 This places Taiwan well below other large economies such as the United Kingdom, Germany, India and China, all of which maintain positive correlations with the US market. Even compared with other export-driven Asian markets, Taiwan’s decoupling is notable: South Korea’s correlation, while also lower this year, remains meaningfully higher than Taiwan’s. We believe this sharp divergence underscores the island’s increasingly distinctive return profile and its growing value as a diversifying allocation within global portfolios.
The new year for Japan has fresh stimulus package to look forward to under the leadership of recently appointed Prime Minister Sanae Takaichi whose cabinet has approved US$117 billion in stimulus focused on energy security, defense modernization, infrastructure upgrades and household support.5 Combined with corporate-governance reforms and a potential stabilization in the Japanese yen, these priorities could provide ongoing support for value-oriented sectors, industrials and domestically focused companies.
India, meanwhile, continues to attract global attention as investors weigh whether the long-anticipated acceleration in its equity markets will finally materialize. After a year of elevated expectations—due to resilient domestic demand, strong earnings and enthusiasm around manufacturing reforms—the question heading into 2026 is whether those structural drivers can translate into sustained market leadership. Recent policy moves, including India’s approval of a rare-earth, permanent-magnet manufacturing program, reinforce the government’s commitment to deepening industrial capacity and reducing import dependence. If execution remains strong and inflation stays contained, India may be better positioned to deliver the breakout performance that investors have been waiting for.
As 2026 unfolds, we believe falling correlations and diverging policy regimes argue for broad global exposure—while selective tilts toward markets with clear structural or policy catalysts, such as Japan and India, may help capture more resilient performance.
Endnotes
- Sources: FactSet, S&P Dow Indices, FTSE Russell Indices.
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There is no assurance that any estimate, forecast or projection will be realized.
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Source: “Global Semiconductor Market Approaches $1T in 2026.” WSTS. December 2, 2025.
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Sources: FactSet, S&P Dow Indices, FTSE Russell Indices.
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Source: “Japan to Add Short-Term Debt to Fund Takaichi’s Package.” Bloomberg. November 28, 2025. There is no assurance that any estimate, forecast or projection will be realized.
WHAT ARE THE RISKS?
Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization companies may fall out of favor with investors based on market and economic conditions.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
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