Asia’s 2026 outlook: resilient growth amid policy shifts, global risks

ASIA’S gross domestic product is forecast to expand by about 4 per cent, matching 2025 performance and outperforming the global average of around 3 per cent. The MSCI Asia ex-Japan equity index is expected to deliver mid-to-high single-digit returns, while regional credit spreads should grind modestly tighter on the back of continued capital inflows.

Influencing risk and opportunity, two major forces will continue to shape Asia’s outlook: one, the trajectory of US monetary policy and the greenback, and two, the success – or otherwise – of China’s long-anticipated pivot in industrial policy from export-led growth towards domestic consumption.

Weaker greenback and lower US rates

Lombard Odier expects the Federal Reserve to deliver another 75 basis points of cuts through 2026 before pausing at a terminal Fed funds rate of 3 per cent. This will keep real policy rates positive but no longer restrictive, and – crucially – engineers a structurally weaker US dollar. Lower US rates and a softer greenback act as classic liquidity tailwinds for emerging Asia.

Portfolio flows into Asian local currency bonds and equities are projected to remain robust, with foreign portfolio inflows highly likely to recover further in 2026 amid a benign economic environment. Trade agreements such as the Regional Comprehensive Economic Partnership (RCEP) continue to deepen intra-Asian supply chains, likely providing a further buffer against any renewed US protectionism.

China: Will it or won’t it pivot?

Given its economic heft, China’s performance will, as always, cast the longest shadow.

We forecast China will expand a (below consensus) 4.1 per cent real GDP growth for 2026 (down from 4.8 per cent in 2025 and 5 per cent in 2024), with the consumer price index barely positive at 1 per cent.

Deflationary pressures will likely persist, because of chronic overcapacity in manufacturing and the ongoing multi-year deleveraging of the property sector. Private consumption remains stubbornly low at only 40 per cent of GDP – well below peers such as India (more than 60 per cent) and the US (about 70 per cent).

The October 2025 Fourth Plenum and associated 15th Five-Year Plan offered genuine hope that Beijing finally recognised the unsustainability of the old model.

The leadership explicitly committed to three structural shifts that will dominate policy in 2026 and beyond – first, boosting household consumption through targeted fiscal transfers, accelerated social-welfare reform and higher disposable incomes; second, reviving productivity via artificial intelligence (AI), green technology, and the removal of remaining hukou system restrictions that still distort labour mobility; and third, gradual supply chain upgrading and diversification of trade partners to reduce vulnerability to US tariffs.

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China’s Fourth Plenum – planning or prepping?

If these measures are executed with conviction, China can achieve a soft rebalancing: growth stabilises around 4 per cent, deflationary forces gradually recede, and the export of surplus capacity (the “China dumping” fear that haunts South Korea, Taiwan, Vietnam and Indonesia) is meaningfully curtailed.

A consumption-led China would be unambiguously positive for the rest of Asia, because it reduces competitive pressure on regional manufacturers, and increases Chinese demand for Asean consumer goods, tourism and commodities.

Conversely, a mismanaged industrial policy – continued subsidisation of excess steel, electric vehicle, solar and battery capacity – would likely reignite trade frictions and force neighbours into costly defensive tariffs or currency depreciation.

The rare earth export restrictions imposed (and then temporarily lifted) in 2025 remain a live and meaningful bargaining chip; Beijing knows the West will need years to build alternative supply chains.

Regional winners and laggards

• India continues its outperformance (6.5 per cent growth expected) on the back of domestic reforms, infrastructure spending and favourable demographics.
• Indonesia, Malaysia, the Philippines, Thailand and Vietnam benefit from China+1 diversification, the RCEP, and strong US/European demand for electronics and manufactures. Growth of 4.5 to 5 per cent is expected.
• Export-heavy South Korea and Taiwan remain the most exposed to any Chinese overcapacity spillover, though semiconductor and AI-related demand provide a powerful offset.
• Japan enjoys mild reflation and corporate governance tailwinds, with the Nikkei likely to post another year of low-teens gains.

Equity and credit market outlook

Equity markets are supported by reasonable valuations (MSCI Asia ex-Japan forward price-to-earnings ratio of about 15 times versus 23 times for the S&P 500) and improving earnings growth as global liquidity is expected to remain accommodative. Sectors with clear secular winners – Indian consumption, Asean manufacturing, Asian semiconductors/AI and renewables – are expected to outperform.

Investment-grade Asian credit should remain well-supported in 2026, led by quasi-sovereigns and high-grade financials. High-yield remains bifurcated: the Chinese property’s high-yield bond sector might still show sporadic fragilities despite receding default waves, while the non-property high-yield bond sector in India and South-east Asia offers attractive carry with improving fundamentals.

Key risks include an unexpected US inflation reacceleration, forcing the Fed to pause or hike again – while this probability is low, it is one of high impact. Chinese policy execution failure poses another risk if stimulus remains too tilted towards supply-side subsidies rather than genuine household support. Finally, the escalation of trade/geopolitical tensions would also prove problematic, particularly if rare earth or semiconductor restrictions resurface.

Our Lombard Odier base case assigns a 70 per cent probability to the constructive scenario of steady 4 per cent regional growth, continued capital inflows and modest asset price appreciation. The remaining 30 per cent is split between a mild disappointment (growth closer to 3.5 per cent; higher volatility) and the low-probability tail of renewed US tightening or Chinese policy error.

In summary, 2026 is likely to be another constructive year for Asia; perhaps not the double-digit growth of the pre-pandemic era, but a resilient 4 per cent expansion underpinned by liquidity, intra-regional trade and – if Beijing delivers – the early stages of the long-awaited consumption pivot.

The writer is chief investment officer, Asia, at Lombard Odier