Local hero: Asia’s risk markets
Conditions are finally ripe for Asian equity markets to outperform those in developed peers in 2026
WHISPER it quietly, but might Asia’s equity markets be set to outperform those in developed markets on a sustained, multi-year basis for the first time since 2001?
At Lombard Odier, we think so. Our tactical asset allocation for 2026 delivers a high conviction overweight to emerging markets (EMs), with an emphasis on Asia as the primary engine for risk exposure in global portfolios.
For investors in Singapore and across the region, this positioning aligns and reflects Asia’s superior growth dynamics, attractive valuations and resilient policy frameworks – making EMs, and Asian EMs in particular – the standout opportunity for 2026 amid an increasingly fragmented global landscape.
We anticipate continued but decelerating economic expansion globally, with US growth moderating below potential but avoiding a recession (to which we assign a 60 per cent probability).
Fed rate cuts, fiscal offsets, and the persistent AI productivity cycle should support risk assets and underpin investor appetite.
However, US-centric uncertainties – tariff pressures, softening labour markets and potential fiscal concerns from midterm spending – tilt the balance towards resilience in EMs. In this environment, we explicitly overweight global equities solely through EMs – we are neutral on developed markets – and overweight EM hard-currency bonds, while adopting a selective approach to currencies.
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The tilt towards emerging markets
For Asian investors, the tilt towards EM equities should feel particularly compelling. With China, Taiwan, South Korea and India representing 28 per cent, 21 per cent, 13 per cent and 15 per cent, respectively, Asia dominates the weighting in global EM benchmark indices and – naturally – stands to capture disproportionate benefits from reflationary trends, domestic stimulus and the global AI infrastructure buildout.
I wrote about my “positive” tilt to China last month. China’s 2026 economic challenges – slowing growth, disinflation, weak consumption and property woes – are paradoxically bullish for equities. Low inflation pushes bond yields lower, making stocks’ higher dividend yields more attractive, and driving domestic savers to rotate liquidity into equities amid limited alternatives.
But more broadly, growth expectations in China underpinned by more targeted policy stimulus to bolster consumption, property stabilisation and export competitiveness should directly benefit regional supply chains and trade partners (like Singapore).
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Korea represents a shining opportunity through corporate governance reforms and leadership in semiconductors or AI hardware; India offers diversification via structural growth in services, manufacturing relocation and domestic demand.
These markets trade at compelling valuations relative to overextended developed peers, providing a buffer against US political or debt risks. At 22 per cent, earnings growth forecasts for the MSCI Asia ex-Japan Index are robust, supported by technical tailwinds including stabilising outflows, improving sentiment without euphoria, and non-overbought conditions.
Overall, exposure to Asian equities positions portfolios to capture upside from growth differentials and commodity exposure, while allowing local investors to benefit from their proximity to these dynamic economies.
Asian fixed income: an attractive carry story
In fixed income, EM hard currency debt earns a strong overweight as the better-yielding segment globally, with Asian corporate issuers playing a pivotal role. Tight spreads notwithstanding, carry remains attractive compared to US Treasuries (underweight) or developed markets investment grade credit (market weight).
Asian US dollar-denominated credit – particularly investment-grade corporates in Korea, India and select Asean names – offer superior quality, diversification and (still-attractive) yield premia.
Our strongly held conviction towards easy global monetary policy (with the exception of Japan), coupled with policy flexibility among EM central banks, lend support to the fixed-income complex, while improved fundamentals post-pandemic enhance resilience (by reducing default risk).
For regional credit-based portfolios, this exposure delivers stable income in US dollars, hedging local currency volatility while capitalising on Asia’s growth outperformance.
US dollar to weaken; Asian currencies to strengthen
Our base case for 2026 foresees a moderately weaker US dollar as growth moderates and the Fed cuts rates (expected pause until mid-year, then three reductions to 3 per cent).
It is entirely possible that softening labour market indicators (evident in creeping unemployment and low hire or quit rates) and easing wage pressures combined will erode the dollar’s interest rate differential advantage with its major trading partners.
With no evident crisis signals despite mild consumption deceleration and policy uncertainties, we believe that the US dollar will face gradual headwinds throughout the year, extending its softening trend in a global environment of continued expansion.
Of course, if the dollar weakens, other currencies will likely strengthen. And such a backdrop fosters resilience and selective appreciation potential in EM currencies, as growth differentials favour EM economies with greater policy flexibility and commodity exposure.
In the absence of tail risks materialising – such as geopolitical escalation in Asia or Taiwan disrupting energy prices and supply chains – the milder US dollar supports capital inflows into higher-yielding EM assets.
While caution persists (reflected in preferences for hard currency exposures elsewhere), resilient EM foreign exchange (FX), particularly in reform-oriented or commodity-linked markets, stand to benefit from risk-on rotations and reduced dollar dominance in our preferred “soft-landing” outcome.
Risks to the view
Of course, our overweight in EM risk is not without caveats. While we assign a 60 per cent probability to our base case, equally, we assign balanced 20 per cent probabilities to a best-case acceleration and/or outright recession.
We are also mindful of other tail risks like an AI bubble burst, halting capital expenditure or US midterm-driven fiscal concerns eroding the Fed’s independence.
Yet, these risks are regarded (and priced) as non-central scenarios. Geopolitical risks, particularly Taiwan as a potential new conflict zone, pose the most direct threat to Asian EM exposures, but we view them as manageable through diversification (for example, India or Korea tilts) and quality focus.
From an implementation perspective, our EM tilt offers portfolios a balanced path: growth and return potential from equities, income and diversification from hard currency bonds, and controlled FX risk.
In a fragmented world where US exceptionalism faces headwinds, it is our view that EM provides relative strength and risk-adjusted opportunity.
The writer is chief investment officer for Asia at Lombard Odier
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