25 Nov 2025

Eastspring Investments 2026 Market Outlook Balancing Optimism and Risk

• Asia and Emerging Markets expected to continue outperforming the US in 2026, supported by policy and macro tailwinds
• Bifurcation within Asia marked by Artificial Intelligence (AI)-driven growth in North Asia and policy-driven momentum in Southeast Asia
• Active stock selection remains critical to capturing alpha, while defensive strategies can hedge downside risks

SINGAPORE (25 November 2025)– Eastspring Investments (“Eastspring”), the USD286 billion¹ asset management business of Prudential plc, anticipates the combination of Federal Reserve rate cuts and higher inflation to weaken the US dollar in 2026. A softer US dollar typically favours Asia and Emerging Markets. Coupled with the global expansion of AI infrastructure and policy stimulus, economic growth and market returns in these regions are poised to continue outperforming.

Nevertheless, Asia and Emerging Markets are far from homogeneous. Geopolitical risks, increasing market concentration, shifting trade policies, and currency volatility underscore the need to balance optimism with disciplined, active stock selection.

Vis Nayar, Chief Investment Officer, Eastspring Investments, said, “2025 has demonstrated that markets can defy expectations, climbing to record highs even as volatility persisted. Looking ahead to 2026, we expect Asian giants – China, India and Japan – to benefit from policy-led opportunities, while growth in ASEAN will be driven by domestic policies and North Asia by the global expansion in AI infrastructure. The bifurcation of growth within Asia, along with increasing market concentration, reinforces the importance of careful active management of portfolio exposures to generate alpha.”/p>

Softer US and Eurozone growth expected in 2026, offset by policy stimulus across Asia

Eastspring expects softer growth in the US and Europe in 2026. The recent slowdown in US employment growth and the rising cost of tariffs are likely to weigh on US GDP, while fiscal stimulus from Germany, the lagged impact from the European Central Bank’s policy rate cuts in 2025 and improving business sentiment are projected to offset most of the drag on the Eurozone economy from US tariffs.

On the other hand, Asia’s key economies are expected to remain resilient, supported by policy easing and improving investment sentiment.

Press reports following China’s 4th Plenum imply that the Chinese government is committed to keeping GDP growth close to 5% through 2030. We expect new fiscal stimulus focused on strategic industries such as technology, transportation, and biotechnology.

Japan’s new administration also appears set to introduce fiscal measures through reductions in fuel tax, household transfers, and support for strategic industries such as defence.

In India, GDP is forecast to grow 6.6% in 2026, supported by its Goods and Services Tax rate rationalisation, tax relief for Micro, Small and Medium Enterprises, and further policy rate cuts.

Ray Farris, Chief Economist, Eastspring Investments, added, “The US Federal Reserve is likely to cut the Fed Funds rate by 25 basis points at its December 2025 or January 2026 meeting, and we expect another 50 basis points of cuts in 2026. In Asia, inflation is below both central bank targets and historic averages in all countries except Korea and Taiwan, where it is in line with the target. This mix leads us to expect policy rate cuts in China, India, Indonesia, the Philippines, and Thailand.”

Eastspring cautioned that key risks to its monetary policy and growth forecasts stem from US inflation and the trajectory of the US dollar. Higher than expected US inflation could force the Fed to halt rate cuts, shocking risky asset prices lower and the USD stronger, potentially leading central banks to halt rate cuts too. Trade policy negotiations may also create periodic volatility, though Eastspring expects such shocks to be less severe than those experienced in the first half of 2025. Crucially, ongoing domestic policy stimulus could potentially cushion such shocks.

Equity: Government reforms, policy tailwinds and AI build-out to shape opportunities across Asia and Emerging Markets

With policy favouring a weaker US dollar, the outlook for Asia and Emerging Market equities remains constructive. Emerging Markets continues to trade at a valuation discount to Developed Markets. Alpha opportunities lie in the consumer staples and discretionary sectors as well as among the small-to-mid-cap segments in Brazil, Indonesia and Mexico. The global AI infrastructure build-out is creating a clear bifurcation across Asian markets. Export-oriented economies in North Asia, as well as Singapore, are benefitting from rising external demand driven by the AI ecosystem. In contrast, other ASEAN economies remain more reliant on policy-driven efforts aimed at stimulating domestic demand and supporting property markets.

Potential headwinds could arise if global trade softens, weighing on export momentum and corporate earnings. As we anticipate varied performance across regions and markets, a disciplined approach to valuation and active stock selection is essential.

• China: Outcomes from the 4th Plenum and the forthcoming 15th Five-Year Plan are likely to prioritise technology, industrial modernisation, and domestic consumption. Attractive entry points are emerging in the consumer discretionary and staples sectors, supported by domestic stimulus. Selective opportunities also exist in automation, green technology, and domestic capacity upgrades, while high-growth tech and semiconductor stocks carry rich valuations. Key risks include geopolitical tensions, a prolonged property downturn, and persistent disinflation.
• India: The biggest near-term market drivers are likely to be further policy rate cuts by the Reserve Bank of India and the announcement of a US-India trade deal. We expect earnings improvements in financials, consumer, and telecommunications sectors. Large-cap stocks remain attractive for liquidity, while four-wheelers, energy, and property sectors benefit from tax reforms and supportive policy. Key risks include delays in trade agreements and weaker-than-expected consumption.
• Japan: Policy support from the new administration, rising corporate earnings growth, and renewed investor interest continue to underpin confidence in the market, though elevated valuations suggest the need for selectivity. Opportunities exist in underappreciated small to mid-caps and select industrials and materials which are expected to benefit from cyclical recovery. Risks include global slowdown affecting exports, inflationary pressures, and policy execution challenges.
• Taiwan: Taiwan’s semiconductor and AI sectors are poised for strong growth, driven by sector leadership in edge AI, server components, and the semiconductor supply chain. While export dependence and geopolitical tensions present risks, Taiwan remains attractive for long-term investors focused on innovation and sector leadership.
• ASEAN: ASEAN markets offer a mix of structural growth, policy support, and relatively attractive valuations. Countries such as Singapore, Malaysia, Indonesia, Thailand, and Vietnam are benefitting from accommodative monetary policies and fiscal stimulus. Eastspring likes economies with strong domestic policy responses that could drive structural improvements. Small-to-mid-cap stocks in Singapore, construction, property, port infrastructure and healthcare companies in Malaysia, consumer, mining, resources and financials businesses in Indonesia, retail, healthcare and wellness sectors in Thailand, banking, infrastructure and consumer stocks in Vietnam present compelling investment cases.

Fixed income: Monetary easing to anchor bond yields

Monetary policies across major economies, including Asia and Emerging Markets, are expected to remain accommodative in 2026. Moderating inflation, high real yields, and limited material bond supply – particularly in China – provide strong technical support for fixed income markets.

Supportive central bank stances across Asia, combined with expected US rate cuts, should offer additional policy flexibility. Eastspring remains positive on both US dollar and local currency duration, and favours adding duration when rates spike higher.

Credit selection becomes increasingly important as tariffs and trade friction weigh on corporate margins, though cost-saving and efficiency initiatives can help mitigate downside risks. All-in yields remain fair by historical standards, sustaining investor demand.

Diversifying alpha and building resilience

Against this backdrop of uneven growth, rising concentration risks in equity markets, and evolving correlations between asset classes, portfolio resilience will be more important than ever in 2026.

Traditional links between equities and bonds are becoming less reliable, making systematic hedging critical to managing potential drawdowns. At the same time, diversified tactical alpha strategies across different time horizons can enhance returns while managing risk.

Defensive strategies can also build portfolio resilience. Globally, a handful of stocks are increasingly driving performance, and Asian markets are showing similar concentration trends. This reinforces the value of active management in navigating both regional and sector-specific disparities.

Sustainable investing too complements this approach by identifying companies that are well-positioned to adapt to shifting consumer behaviour and regulatory changes. Eastspring expects continued divergence in demand for sustainable solutions across regions, creating opportunities in private markets, especially for adaptive and nature-based solutions, as well as in managed coal phase-out initiatives.

For more information and details on the above highlights, please visit https://www.eastspring.com/2026-market-outlook to download the full report.

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