2026 Asia Outlook

Meanwhile, Asian central banks have been steadily implementing monetary policy easing in 2025, and they look poised to enter the final legs of the easing cycle in the coming months. This means fiscal policy would play a bigger role in supporting growth in 2026. Asia’s outperformance this year also played out against a backdrop of a broadly weaker U.S. dollar, which has generally boded well for emerging market (EM) economies and their equity markets. 

Looking ahead to 2026, we are optimistic about global AI tailwinds continuing to support tech exporters like Taiwan and South Korea. India presents a compelling entry point with a robust mix of cyclical tailwinds and stands out as one of our top implementation ideas outside of the U.S. despite export-related headwinds. China will likely continue to grapple with structural economic challenges through its impressive pace of tech innovation can yield select winners in some sectors. Japan’s macro-outlook is complicated by stubborn inflation and a behind-the-curve central bank but its equities continue to present plenty of medium-term opportunities, though markets appeared to have priced in plenty of optimism already. Southeast Asia presents interesting select opportunities related to AI and global supply chains though the key drivers of each individual economy and market are varied.

2026 looks set to be another interesting year for Asian economies, with likely divergences in their respective policy and growth paths which can lead to a variety of market outcomes. We explore them in our 2026 Asia Outlook below.

China

Can China’s growth model persist in 2026?

2025 was a tale of two halves, the first half of the year was marked by a growth recovery including an apparent (and hoped for) end to the property collapse and an equity market boom. However, the second half of the year marked a notable shift downwards. Reflecting on 2025 at the annual Central Economic Work Conference (CEWC) this week, Beijing concluded that “this year was very much not an ordinary year.” 2026 looks to be a continuation, albeit slightly more “normal”. However, it’s clear that the sources of China’s economic growth remains fundamentally unbalanced. Amid a still cratering real estate sector, the trends of weak consumption and disappearing investment amid a historic export boom are likely to persist. We dig into each trend to understand how they affect China’s outlook and, importantly, how they affect the world.

We expect real GDP growth of 4.3% (range: 4.1–4.6%) in 2026, moderating from 2025 due to the high base for export growth. Policies are expected to be moderately supportive: the fiscal stance will likely remain expansionary, keeping the budgetary deficit around 4% of GDP, with additional support through policy banks and local government bond quotas. The People’s Bank of China (PBoC) will likely retain a fine-tuning approach to balance growth and inflation objectives with banking sector profitability. We do not expect meaningful policy rate cuts and think the central bank will likely rely more on liquidity operations and reserve requirement ratio (RRR) adjustments. 

Will consumption recover?

China’s household consumption weakened in 2025. The deceleration was broad-based across several sectors, and is primarily driven by a weak labor market and slowing household income growth. The ongoing housing downturn also contributed to increased household balance-sheet caution.

The policy messaging has been mixed: boosting domestic demand was proclaimed a policy priority, receiving attention in both the newly released 15th Five Year Plan and December Politburo meeting. But the messages were decidedly mixed: The CEWC dropped the phrase “work hard to boost domestic demand, particularly household consumption demand.” Boosting domestic demand is still listed as the top overall priority for 2026, but stimulating consumption is not the major channel. The major consumer-stimulus policy in 2025 (trade-in subsidies for some durable goods) is set to continue in 2026. but the instruction now is to “optimize” them, which likely means a reduction in scale. That outcome is unsurprising given the underwhelming results of the subsidies. This means more consumer subsidies and household transfer programs are likely, but the primary constraint on household consumption is the weak labor market which is pushing down income growth. So far, policymakers have shown less interest in policies to tighten the job market, and industrial policy aimed at cutting capacity is unlikely to help – or could it?

China’s disappearing fixed asset investments: is the so-called “anti-involution” campaign working too well?

Despite weak domestic demand, industrial expansion has persisted, with overcapacity now extending beyond traditional heavy industries (such as steel, cement, chemicals) to encompass emerging higher-end sectors and is even spilling over into services. A notable example is the clean tech sector – including electric vehicles, lithium-ion batteries, and solar panels – which has experienced rapid capacity growth in recent years, driven by generous policy subsidies. This has led to intensified price competition.

“Involution” or 内卷 is an economic term used in China describing excessive, zero-sum competition that yields diminishing returns. The core of the problem is persistent excess capacity. In such an environment, producers often resort to chronic price undercutting, duplicative projects, and aggressive marketing expenditures, typically resulting in compressed margins and limited productivity gains. While these dynamics may temporarily benefit consumers, they can also lead to a deterioration in corporate financial health, misallocation of resources toward low-return, duplicative products, and a reduction in R&D investment – ultimately negatively impacting economic growth.

To address these challenges, a series of “anti-involution” measures were announced in July 2025, aimed at curbing price wars and facilitating an orderly exit of supply in traditional sectors with low utilization rates. The equity market responded positively, with a significant rally driven by expectations of improved profitability and hopes for an end to deflationary pressures.

We view these initiatives as a step in the right direction. However, resolving the structural supply-demand imbalance will likely be a multi-year process, and more time is required for these measures to have a meaningful impact on the real economy. An effective approach may require a combination of capacity discipline and exit strategies, competition policies that emphasize standards over pricing, more decisive consumer support, and enhanced international trade diplomacy.

What does China’s industrial buildout mean from a global perspective?

China’s export machine continues to defy geopolitical headwinds, showing robust growth even as protectionist policies proliferate globally. Real exports are on track for 8% growth in 2025, with China’s market share now at 15% of total global exports, with some economists predicting continued increases through 2030. Notably, Chinese goods have captured significant market share in non-U.S. markets, with exports to the U.S. now representing less than 10% of total exports.

This dominance is anchored by formidable cost advantages, a large and expanding STEM (Science, Technology, Engineering, and Math) talent pool, and a state-driven push into high-growth sectors such as electric vehicles, batteries, robotics, and solar. While the U.S., EU, and select EM have responded with tariffs and industrial policies, China’s integrated supply chain and ability to anticipate and invest in future demand have allowed it to capture outsized gains in the world’s fastest-growing export segments. Even as some manufacturing shifts to ASEAN and India, these new hubs remain heavily reliant on Chinese inputs and capital goods, reinforcing China’s central role in global trade.

For the rest of the world, China’s sustained export strength signals intensifying competitive pressures and a challenging path to diversification. Developed market rivals like Japan and Korea are losing ground in key sectors, with Korea’s trade surplus with China turning to deficit and Japan’s export share sliding to historic lows. Meanwhile, Southeast Asian economies and India are benefiting from supply chain diversification, but their rising exports are matched by sizable trade deficits with China. Efforts to replicate China’s manufacturing ecosystem face hurdles, as most economies lack the scale, speed, and state-backed resource mobilization that underpin China’s success. As China continues to move up the value chain and consolidate its lead in advanced manufacturing, its grip on global trade looks set to endure – leaving competitors scrambling to adapt in a world where decoupling remains more rhetoric than reality.

One consequence of China’s increasingly competitive export sector has been a rise in global trade frictions. While the trade dispute with the U.S. is driven by a complex set of factors, anti-dumping and countervailing measures by the EU and several emerging economies – such as Turkey, Brazil, and Mexico – are also noteworthy. Within the region, numerous trade barriers have been introduced since 2024. For example, Vietnam and Korea have imposed anti-dumping duties on steel, while India has raised special tariffs on Chinese chemicals and industrial products, including electronics. These developments are a key reason why we anticipate Chinese export growth to moderate heading into 2026, constraining China’s biggest economic driver since the pandemic.

Why is CNH less likely to significantly appreciate?

Despite China’s export outperformance adding over $1tn to the trade surplus year-to-date, the yuan has weakened by 4% on a trade-weighted basis. This has sparked debates over the likelihood of a meaningful appreciation, with some arguing that the currency is structurally undervalued.

We think the bar for significant appreciation is high. The recent strength could be largely driven by seasonality. While momentum could drive USDCNH below 7 in the near term, over the medium term we expect a stable, range-bound trajectory for the pair. The yuan is a heavily managed currency by the central bank under a low-vol FX management framework. If the existing policy stance remains unchanged, the direction of USDCNH could be largely dominated by movements in the dollar—our 2026 outlook expects a bumpy bottoming process for the dollar over 1H, followed by a reversal stronger in 2H. This argues against a much stronger yuan against the dollar.

As for whether policy stance could shift toward favoring a stronger yuan, we caution about potential repercussions on export competitiveness and the entrenched deflationary pressure. The benefit of a stronger yuan to consumer purchasing power is likely to be limited, given China’s low reliance on imported consumer goods. A risk to this view would be if FX policy becomes a central issue in trade negotiations with both U.S. and non-U.S. trading partners, especially in the event of widespread and significant pressure to increase trade barriers on Chinese exports.

AI spotlight

China: Can AI help economic growth?

With traditional growth drivers likely taking a back seat, can China capitalize on the global AI wave to derive another driver for the economy? While we see exciting prospects for China’s AI buildout, the relative scale of this sector is still dwarfed by the U.S., where tech-related spending is contributing to a majority of economic growth. Value is more likely to accrue to a select group of sectors and companies rather than broadly across the economy, at least for 2026.

For now, China’s AI industry is starting to enter a transformative phase, driven by accelerated infrastructure investment and ecosystem development. Hyperscaler cloud providers and enterprise platforms are committing significant capital to AI-ready data centers, advanced computing clusters, and model training capabilities. Industry-wide AI and cloud capex is projected to exceed $70 billion in 2026. While this is only 15–20% of U.S. hyperscaler spending, it underscoring China’s strategic push to build foundational layers for generative AI and large-scale machine learning. There are also advancements in domestic AI semiconductor solutions as localization remains a key policy directive and subsidies incentivize the use of key home-grown AI infrastructure. These investments are expanding capacity and enabling domestic innovation in multi-modal models and AI-native applications.

On the monetization front, the Chinese market is rapidly scaling AI applications across consumer and enterprise domains. Generative AI tools are being embedded into search, social platforms, and productivity suites, creating new and higher engagement models and revenue streams. Enterprises are increasingly adopting AI-driven solutions for process automation, coding, predictive analytics, and customer interaction, fueling demand for inference workloads. China’s cloud AI revenue is expected to accelerate and remain elevated at a 45% 6-year CAGR and reach nearly $90 billion by 2030. Meanwhile, optimization and cost efficiency remain top priorities, with industry players deploying advanced resource pooling and algorithmic improvements to manage rising compute costs. While near-term profitability may be pressured by the elevated investment cycles, these structural shifts reinforce China’s ambition to lead in AI infrastructure and applications, setting the stage for sustained growth through 2026 and beyond.

South Korea and Taiwan: What does the global AI buildout mean for Asia’s semiconductor powerhouses?

The global AI buildout – while centered on the U.S. – has benefitted the Taiwanese and South Korean markets. We estimate that close to 30% of total AI capex makes its way to these two economies, which has been a tailwind for growth amidst trade uncertainty across Asia. This is consequential enough to drive an earnings upgrade cycle in Asia ex-Japan that could keep earnings growth elevated at 12-13% in 2026, and 10-11% in 2027. It is worth noting that companies across the Asia ex-Japan market with meaningful AI exposure now represent approximately 30% of the index and they are a key driver of near-term earnings growth. In addition, any upturn in global growth on the back of Fed rate cuts could provide upside optionality to earnings.

In particular, South Korea is well-positioned to benefit from a number of secular developments such as:

• Leading the world in the increasingly important role of memory in AI applications and workloads
• Possessing expertise in specialized engineering fields such as building of nuclear facilities and high voltage electrical grid equipment
• Growing its role as an exporter of defense equipment across the world, and possessing shipbuilding talent with a large potential market opportunity to help modernize the U.S. naval fleet

Authorities have also become increasingly vocal on pushing companies to improve their valuation multiples that would typically mean more shareholder-friendly initiatives. These opportunities are likely to drive higher earnings growth relative to Asia EM. Pullbacks are likely to present investors with opportunities to gain exposure to these attractive themes.

Japan

Can Japan overcome inflation?

While Japan’s growth outlook remains challenged by weaker domestic consumption and lingering trade headwinds, the main concern in markets is how the Bank of Japan (BoJ) appears increasingly behind the curve in tacking stubborn inflation amid a sharply depreciating yen.

In our base case, we expect Japan’s inflation to gradually moderate and stabilize near 2% – the BOJ’s long-term average target – over the course of 2026. Achieving this outcome, however, will likely require several critical policy conditions to be met.

The primary factor underpinning our expectation for declining inflation is the recent surge in food prices. Non-fresh food (including rice) inflation has been the main driver of 2025’s inflation resurgence. Rice prices in Japan have doubled in 2025, driven by supply shortages resulting from extreme weather and the August 2024 earthquake, which led to hoarding. In response, the government released emergency stockpiles, and rice prices have begun to show signs of peaking in Q4. Additional government measures, such as the gasoline tax reduction and the resumption of electricity and gas subsidies in Q1 next year, could further alleviate energy inflation.

Nonetheless, a smooth return to the inflation target depends on several conditions. Firstly, authorities need to address the buildup of short yen positions and prevent excessive currency depreciation. As a large energy importer, Japan’s currency has a meaningful impact on prices. If the market pushes USDJPY higher (as we saw in several episodes since 2022), the BoJ may need to deliver additional rate hikes to stabilize exchange rates (we expect the JPY to remain weak in the near-term and potentially grind towards the 146-150 range by end-2026). Secondly, PM Takaichi’s expansionary fiscal policies have an impact on prices. Efforts to stimulate household consumption could introduce additional demand-driven inflationary pressures, compounding already elevated corporate inflation expectations – the latest Tankan survey indicates long-term expectations have risen to 2.5%. For context, even in the absence of significant fiscal stimulus, we expect organic consumption growth in 2026, underpinned by continued wage growth. We expect the 2026 Shunto negotiations to yield wage gains broadly in line with 2025’s outcome (~5.5%). The administration needs to carefully balance stimulus measures to mitigate the impact of inflation on households while minimizing the risk of fueling further price pressures.

In summary, while a return to target inflation is feasible, it hinges on prudent policy management and the containment of upside inflation risks.

India

External headwinds can be overcome by domestic tailwinds

India’s equity market was one of the worst-performing in 2025, and for good reasons. Both fiscal and monetary policy have been tight since last year, while the Liberation Day tariffs unexpectedly singled out India with one of the highest tariffs applied to any major economy at a 36% effective rate, which persists to this day in the absence of a trade deal. With substantial value-added export exposure to the U.S., this presents a growth risk to India.

However, a strong mix of domestic tailwinds could overcome these external headwinds. Inflation has been low at around 2%, a 47-year low and the bottom end of the Reserve Bank of India’s (RBI) mandate, which gave room for the central bank to cut rates by 125bps from 6.50% to 5.25%. Direct and indirect tax cuts are being implemented from the recent budget, while a large amount of infrastructure projects are nearing completion in the coming quarters, which could act as a growth multiplier. Our investment bank expects that the central bank could remain on hold for now as growth and inflation rebound, with a positive outlook for 2026 GDP growth at 7.5%. All these factors are setting up for stronger domestic credit growth and consumer demand which is supportive of the market.

Southeast Asia spotlight

Artificial Intelligence: Southeast Asia’s strategic role in the global AI value chain

Traditionally anchored in commodities and export-oriented manufacturing, Southeast Asian countries are starting to align more closely with the global AI investment cycle, primarily by deepening their involvement across higher value-add areas like infrastructure, hardware, and complementary supply chains. Malaysia stands out as a beneficiary of this AI-linked structural shift. Its total electrical and electronics (E&E) sector accounts for roughly 40% of total exports, supported by sustained global demand for semiconductors, which comprise approximately 65% of E&E exports, underscoring the country’s deep integration within global technology supply chains.

Indonesia plays a more upstream but increasingly important role within the AI value chain. As the world’s largest producer of nickel – commanding a 59% share of global production –

Indonesia is one of the key suppliers of this critical input used in batteries, semiconductors, and data center infrastructure. With commodities comprising over 79% of total goods exports, Indonesia’s export mix is becoming more closely aligned with the needs of an AI-driven digital economy, positioning the country not only as a source of raw materials, but also as a strategic contributor to the global AI ecosystem.

Fragmentation: Vietnam as a “connector economy” in a fractured world

Ongoing geopolitical fragmentation and supply-chain reconfigurations continue to reshape global trade flows. Within Southeast Asia, Vietnam has been one of the clearer beneficiaries. The country has increasingly functioned as a “connector economy”, facilitating trade flows between the U.S. and China. As corporates diversify production away from China, Vietnam has absorbed some of the manufacturing activity tied to U.S. end-demand while continuing to source intermediate inputs from China.

Vietnam’s strong electronics exports reflect underlying structural strengths, including competitive manufacturing costs, improving industrial capacity, and steady global demand for hardware. Foreign direct investment flows have also picked up. Together, these trends point to a broader strengthening of Vietnam’s manufacturing base and reinforce its position as a key hub.

Inflation: Easing inflation pressures and a pro-growth policy stance

Inflation pressures across the region have remained relatively subdued compared with developed markets, reflecting stable food and energy prices and moderate demand dynamics. Against this backdrop, several central banks have shifted towards a more accommodative stance, and policymakers are focusing more on supporting growth rather than restraining price pressures. Indonesia exemplifies this pro-growth stance. The new administration has outlined a suite of fiscal policies aimed at boosting liquidity, accelerating state spending, and supporting key sectors such as agriculture, energy, and infrastructure.

Combined with a benign inflation environment, these coordinated policy efforts provide a supportive backdrop for domestic demand and help anchor near-term growth prospects for the region.

Cross-asset implementation ideas

Chinese equities: picking the winners is paramount

The outlook for Chinese equities has become more constructive over the medium-term, and we view pullbacks as opportunities to add exposure for investors who are underweight (Chinese equities make up around 3% of a globally-diversified equity allocation) or enter tactical trades on specific stocks. Moderately pro-growth policies that establish a floor on economic growth, increasing recognition of technological advancements, improving U.S.–China relations, and domestic investors seeking alternative assets to property ownership are all potentially supportive for the Chinese equity market. Negative earnings revisions in 2025 imply recent gains have been largely multiple-driven. Due to this unevenness, we prefer a highly selective approach regarding Chinese equities with an emphasis on our China Tech Innovator Basket. This group focuses on three key areas: AI & “super apps” driving digital efficiency and monetization, new electric vehicles (NEV) & autonomous driving reshaping mobility and expanding beyond China, and semiconductor localization strengthening domestic supply chains amid technological export controls. In addition, high-quality dividend names with resilient earnings continue to offer attractive yields. While we acknowledge domestic consumption remains soft, an increasing number of consumer companies being valued at depressed valuations could offer attractive risk/reward.

Japanese equities: a constructive outlook that markets have already priced in

The new administration’s moderately expansionary fiscal program that balances increased social welfare with investing in new technologies/defense supports the market outlook. Furthermore, monetary policy remains relatively dovish, which could result in USDJPY staying in a higher range for longer, which is supportive for earnings. With increased support for consumption, and rising expectations of a re-acceleration in global growth, the domestic and global backdrop is constructive for Japanese equities. However, markets appear to have priced a lot of that optimism in, and modest upside to our December 2026 TOPIX outlook of 3,350-3,400 keeps us tactically neutral on Japanese equities. We prefer select opportunities in the financial, industrial, consumer discretionary, and technology sectors. Meaningful pullbacks present buying opportunities for investors to build a long-term neutral allocation of around 5% within a globally-diversified equity portfolio.

Indian equities: attractive entry point for long-term performance

We re-iterate our positive outlook on Indian equities with a December 2026 MSCI India outlook of 3,350-3,450, implying an expected low-mid teens total return from current levels. We expect the tailwinds for the economy to translate into tailwinds for earnings recovery (India’s earnings growth is strongly correlated to GDP growth historically). The current earnings downgrade cycle has been extended at 14 months vs 9-10 month historical average (since 2000). In addition to earnings estimates that seem to have stopped drifting lower, the September earnings season also witnessed earnings growth accelerating to 13% YoY, 4% better than expectations at the start of the reporting period. This bodes well for upside to earnings estimates in the coming quarters, and we expect earnings growth to re-accelerate at 13-14% p.a. (vs ~11% in 2025) in both 2026 and 2027. Valuations are also reasonable with the relative price-to-earnings ratio (P/E) for MSCI India vs the S&P 500 at one standard deviation below the 10-year average, and in-line with the 10-year average premium relative vs MSCI Asia ex. Japan. With positioning by active emerging markets funds near the 0-1st percentile in terms of Indian equity exposure, we find the risk/reward attractive. Investors can take this opportunity to build a long-term allocation to this market, which makes up close to 3% of a globally-diversified equity portfolio.

Asia fixed income: opportunities if you know where to look

The outlook for Asia’s high grade fixed income market remains constructive in 2026, with stability underpinned by its short duration profile and restrained net supply. The Asia investment grade (IG) index has been trading at a lower spread than its U.S. counterpart, due to its over 40% allocation to sovereign and quasi-sovereign issuers, which reinforces its overall credit quality and resilience. With all-in yields hovering in the high 4% range and a duration near 4.5 years, Asia IG remains an appealing proposition for local investors seeking both income and capital preservation. From a relative value perspective, we maintain a preference for subordinated capital issued by Japanese insurers and global banks in the region, supported by solid fundamentals. While U.S. technology credits may face supply pressures in 2026 due to heavy AI-related capex, China’s tech sector is less exposed, as its investment is more measured and fundamentals could improve if “anti-involution” measures become more effective. However, since current valuations remain elevated compared to U.S. peers, we prefer to stay patient and wait for better entry points as market conditions evolve.

Turning to high yield, the sector has delivered another year of strong performance, yet disciplined credit selection remains paramount. While default rates have trended lower, recent credit events in Hong Kong and China’s property markets continue to test investor confidence and may have broader implications for the high yield space. The scarcity of new supply has driven valuations to relatively tight levels versus historical norms, and thus we find better value in BB companies with healthy leverage over low-quality single B names. We see opportunities in Indian high yield, underpinned by its long-term growth trajectory; and Macau gaming credits, which benefit from improving credit profile and successful refinancing activities in 2025.