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This content was published in the Hong Kong Economic Journal on January 6, 2026
Is the prospect of a rewarding 2026 filled with successful investment opportunities too good to be true? Many investors seem to think so. Sentiment has cooled amid concerns about sluggish U.S. growth, persistent inflation near 3%, a softening labor market, and renewed geopolitical and trade tensions. Yet, there are still plenty of reasons to remain optimistic as we head into the new year.
The U.S. economy continues to show resilience in key areas, particularly corporate earnings and the higher-end consumer segment. Taken together, the decision between “risk-on” and “risk-off” for asset allocation is far from clear-cut. We suggest a stance of “cautiously risk-on” for 2026, where tactical asset allocation will be critical to success.
For those leaning toward “risk-off,” the concern largely stems from historically low risk premia. Markets have enjoyed an extraordinary run: the S&P 500 delivered +26.3% in 2023, +25.0% in 2024, and +17.5% through October 2025. In less than three years, U.S. stocks have surged more than 85%. Investors wonder if the good times can last. Valuations are stretched globally, despite strong earnings growth. Outside of select pockets in Latin America, Southeast Asia, and U.S. REITs, value is hard to find. A weakening dollar and abrupt policy shifts have also dented foreign confidence in U.S. assets. Meanwhile, developed ex-U.S. markets equities outperformed US equities, and alternative assets like gold and silver have hit new highs.
The bond market offers little comfort. Credit spreads remain historically tight—even after murmurs of deteriorating credit quality. This fragility means any combination of slowing consumer spending, weaker credit, AI profitability delays, or rising taxes could weigh heavily on risk assets.
Despite these headwinds, we enter 2026 with optimism and an overweight to equities, credit, and other anti-fragile assets. Several compelling macro forces are at play while corporate fundamentals are solid, with consensus forecasts calling for global sales growth of 6% and earnings growth of 13% in 2026, both higher than last year. Policy support is also unique. The U.S. government is spending aggressively to stimulate growth, while the Federal Reserve is easing monetary policy. This rare combination of expansive fiscal and monetary policies without a recession has historically favored risk assets. Fed delivered another 25 bps of interest rate cut in December, announced expansion of balance sheet for reserve management, and flagged further easing for 2026 which can improve financial conditions. The “Fed put” remains in place should a negative shock hit the economy.
In equity, emerging markets, particularly in Asia, are also intriguing. Countries such as China, Taiwan, and South Korea have outperformed and remain attractive. The rise of technology and digital transformation in these regions presents opportunities for growth, albeit with geopolitical risks. On the other hand, Indian equities underperformed substantially in 2025 on headwinds from U.S. immigration and trade policies, however India retains a strong domestic growth story and benefits from structural reforms while India can be a good diversifier for portfolios for next year as it has low correlations with other markets.
From a fixed income perspective, we remain moderately long in duration, emphasizing flexibility to respond to curve shifts and evolving inflation expectations. This is an environment that favors active management, selective sector rotation, and a dynamic approach to duration. High yield remains compelling as a carry trade, supported by improved credit quality and reduced exposure to lower-rated issuers, though heavy issuance may eventually tilt positioning toward neutral. Investment-grade credit continues to benefit from strong fundamentals and technicals, but tighter spreads and potential supply upticks require careful credit selection.
Looking ahead, 2026 will likely be a year where asset allocation risk and reward loom large. Buying opportunities may arise as markets overreact to high-frequency data, speculate on Fed moves, or debate when AI shifts from cost to profit center. To increase liquidity and stay prepared with flexibility will be key to capitalizing on opportunities and managing risks in what promises to be a complex but potentially rewarding year.
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