Summary
Growth in the United States and some parts of Asia are expected to be supported by stimulus and AI-related spending in the first half of 2026. Markets still expect the US Federal Reserve to cut rates by 50 bps this year, but confidence in this magnitude and particularly timing has fallen. Meanwhile, Asia is close to the end of its easing cycle with only limited rate cuts from a handful of countries expected in 2026. Eastspring’s Multi-Asset Portfolio Solutions (MAPS) team continues to hold a broadly positive view on risk assets in the near term, as the economic data remains supportive for now. Asia and Emerging Market (EM) equities appear well positioned while EM debt offers attractive carry and should benefit from investor demand for higher-yielding hard currency debt.
Macro: Growth to be supported by stimulus and AI-related spending
The ongoing boom in US Artificial Intelligence (AI) infrastructure spending led to US growth surprising powerfully to the upside in the second half of last year. Consensus expectations for at least a 30% growth in AI spending this year, combined with a large fiscal boost from the One Big Beautiful Bill Act’s tax cuts in the first of 2026 plus the lagged impact of Fed rate cuts point to US GDP growth of 2% or just above this in 2026. The slowing in US job creation is the main risk to this positive US growth outlook, but we see an increasing chance that sustained economic growth will drive a bounce in US employment.
In Asia, exporting chips as a result of the US AI boom is likely to drive GDP growth of 2.0% in Korea and 3.4% in Taiwan. Malaysia also benefits from the AI theme both through exports and through double digit growth in construction, thanks to its build out of data centers. We expect GDP growth of 4.5%.
In contrast to the US, China’s GDP growth slowed from over 5% in the first half of 2025 to 4.5% in the fourth quarter with weakening momentum in consumption and investment. However, we forecast 4.8% GDP growth for 2026, driven by government stimulus. The first wave of this stimulus began with increases in relending quotas and cuts to lending rates for targeted loans by the People's Bank of China (PBOC) on January 15. We expect the PBOC to ease further via a policy rate and reserve ratio cut likely in the second quarter. Most importantly, we expect the government to announce new fiscal stimulus in March, largely targeting infrastructure spending and investment in key “new economy” sectors.
Japan’s economy ended last year with rising indicators of corporate capex growth and an outlook for a bounce in exports this quarter. If Prime Minister Takaichi gains seats in Japan’s parliament in the upcoming snap election, she is likely to be able to push through larger fiscal stimulus. Similar to China, the stimulus measures will probably focus on strategic industries as well as military spending. We expect Japan’s real GDP to grow close to 1.0% this year.
GDP in Asia’s other large economy, India, is likely to grow 6.6% this year. Last year’s interest rate cuts appear to be boosting credit growth and, with this, a recovery in urban car sales. We expect a broader recovery in consumer durables and perhaps property in the coming quarters. We also continue to expect India to reach a trade deal with the US that lowers its tariffs and facilitates a further recovery in exports.
Asset Allocation: Positive on equities but diversifying away from pricey US equities
Markets defied expectations in 2025 as they climbed to record highs amid volatility. We continue to hold a broadly constructive view on risk assets over the near-term, tactical investment horizon (i.e., 3-month), as the economic data remain supportive for now, and anticipated Fed rate cuts should help to counter some of the expected US GDP growth moderation in 2026.
Notably, non-US equities outperformed US equities in 2025. Asia and Emerging Markets (EMs) appear well positioned in 2026, supported by fiscal and monetary stimulus, as well as policy favouring a weaker US dollar. We continue to view equities favourably over the tactical horizon. However, we favour allocating more to undervalued equity markets that provide diversification to higher-priced US equities.
For US credits, spreads look tight, but valuations appear better on a yield basis. We believe investors will continue to add US fixed income exposure given attractive all-in yields, albeit at a slower pace than in recent years. Emerging markets (EM) sovereign debt had one of the strongest performances among global fixed income sectors in 2025. We believe EM debt offers attractive carry and can continue to benefit from global interest-rate dynamics, a weakening US dollar, and strong investor demand for higher-yielding hard-currency assets.
This is an extract from our Q1 2026 Market Outlook. Click here to download the full report which includes a special feature “Look to Asian bonds for income and diversification”
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