Stock investing in 2026 demands diversification, active approach amid AI boom, geopolitical risks

[SINGAPORE] Diversification and active management are likely to become more important for investors as artificial intelligence (AI) and geopolitics continue to shape the trajectory of global markets in 2026, analysts said.

Whether the AI boom is still in a nascent stage or on the brink of an ugly bust – or both – it could be time for investors to carefully assess their exposure to the handful of big American technology stocks that have come to dominate key stock indices.

Keiko Kondo, head of Asia multi-asset investments at Schroders, said: “There are more opportunities to be harvested by being active in stock selection and controlling the market exposures in portfolios.”

With valuations turning expensive in the US technology sector, investors should prepare themselves for higher volatility in the year ahead and hunt for more attractively priced alternatives, she suggested.

Outside the US, some markets in Asia are also “really well-positioned” to gain from the AI story, said Vis Nayar, chief investment officer at Eastspring Investments.

He noted that Taiwan and South Korea have benefited from strong demand for semiconductors over the past year, while China is seeing disruption driven by the emergence of new AI models such as DeepSeek.

Beyond AI are India’s vibrant consumer and real estate sectors, driven by the country’s rising middle class. Its domestic demand-oriented economy and market are “very different to the AI story (of) many other markets”, Nayar added.

Meanwhile, South-east Asia is a diversified region with a range of growth drivers, including consumption and infrastructure development, he noted. For example, Malaysia has a strong consumer segment and is gaining from a data centre boom, while Vietnam has infrastructure investments.

Markets across Asia are also likely to benefit from recent Federal Reserve rate cuts as well as a weaker US dollar, as regional central banks will have more room to loosen monetary policy.

These factors may draw more international capital flows in the months ahead, as more investors diversify their exposure to major stock indices dominated by large technology stocks.

“There’s been no need to diversify for about four or five years now; you wanted to concentrate on (the growth),” Nayar said.

But as global investors become increasingly exposed to the same few names, the growth potential in these other markets will become more compelling, he added.

AI: bubble or productivity driver?

While the AI theme has helped propel US stocks to all-time highs in 2025, it has also sparked concerns about stretched stock valuations and even raised questions about whether a bubble is forming, said the BlackRock Investment Institute in a report.

Yet, said Schroders’ Kondo, much of the AI investment spending is coming from large companies that can afford it.

She added: “They’re definitely expensive, but at the same time, there are fundamental reasons for these companies getting highlighted.”

Will all their AI investments pay off? Macquarie Asset Management said in a report that there are “reasonable grounds” to be concerned that AI’s impact would be disappointing, which could lead to a slowdown in spending on it.

Indeed, history has proven that expectations first surge on the potential of a new technology, but sink when take-up is slower than hoped or when productivity gains are not immediate.

Nevertheless, Macquarie expects that any period of weakness in investment spending will not last long, given the speed with which technologies are diffused today and AI’s impressive rate of task progression.

“The odds of a mild AI hype deflation are about the same as the odds that productivity gains start to come through and add to AI’s investment spending contribution to gross domestic product growth,” said Macquarie.

BlackRock analysts noted that AI is not only an innovation itself, but that it also has the potential to innovate the process of innovation.

“AI could begin to generate, test and improve new concepts on its own,” the report said. “This self-reinforcing loop of accelerating innovation is key to achieving the breakout.”

Geopolitical tensions

Geopolitical tensions will continue to sway markets, even though uncertainty over tariffs has eased, observers said.

Tan Kuan-Ern, co-head of Asia country coverage at UBS Global Banking, expects geopolitical considerations to continue to influence trade policy, especially in Asia where risks are largely driven by external factors.

These include interest rate surprises, tariff negotiation breakdowns and the evolving US-China relationship.

“Markets will likely continue to experience mini shocks every time a policy is announced that is unforeseen by the market,” Tan said. “These could be good buying opportunities, as was seen in the second quarter of 2025.”

Eastspring’s Nayar added that the impact of tariffs has also not fully gone away, even though markets have become “a little bit more insulated” to the tariff noise.

He noted that the US took some time to implement and collect tariffs throughout the year, which means that the impact on American consumers is still filtering through.

He also expects US growth to slow in 2026 amid sticky inflation and lower interest rates, which should result in further US dollar weakness.

But this should benefit Asian markets, as central banks have more room to cut rates, said Nayar.