Asia ex-Japan equities remain as our favoured region, given the undemanding valuations, positive secular growth drivers, USD weakness, and supportive monetary and fiscal policies which contributed to a more favourable risk-reward versus its peers.

Eli Lee
Chief Investment Strategist,
Bank of Singapore

For global equities, we expect an increase in near-term volatility and continue to advocate that investors with concentrated or leveraged positions consider hedging for risk management purposes.

Despite near-term volatility risk, we continue to hold an overall risk-on stance in our tactical asset allocation given our view that the long-term outlook remains relatively constructive.

First, the Fed under Kevin Warsh (nominated by Trump to replace Jerome Powell as the Fed Chair when his term ends in May this year) is relatively more likely to protect its institutional independence and project a picture of coherent policymaking, which are long-term positives for global markets and businesses.

Second, we believe that the outlook for equities will be driven by broadly positive earnings fundamentals due to resilient growth and the positive effects of rising productivity catalysed by artificial intelligence (AI).

Third, the recession risk in the US and globally is relatively low, and inflation risk appears to be well contained thus far.

In equities, we maintain an Overweight position in Asia ex-Japan, expressed via our constructive stance on HK/China, Malaysia and Singapore equities. We have a Neutral position in Japan – a stronger mandate for Prime Minister (PM) Takaichi can lead to a more expansionary fiscal policy, but any disorderliness in Japanese government bonds (JGB) and the JPY could hurt an equity rally.

US – Expect modest upside

US equities have been off to a rocky start. While a rally in cyclicals demonstrated a broadening beyond tech, geopolitical concerns in Greenland led to increased volatility while developments in Iran and potential tariffs on Canada remain cause for concern.

In 2026, we expect the S&P 500 Index to register a modest upside, given the resilient AI theme, deregulation efforts, lower oil prices, and recent initiatives by the administration such as its announcement of a US$200bn mortgage buying programme. However, we believe that valuations are not compelling at this juncture. Also, in an environment of a weaker US Dollar, continued fiscal concerns and policy unpredictability, ex-US opportunities (particularly in Asia ex-Japan) could prove to be more attractive to global equity investors.

Europe – Buoyed by expectations of greater fiscal spending

European equities have been buoyed by the benign global growth environment, as well as expectations of greater fiscal spending in Europe. However, sentiment was dented when trade war threats by US President Trump resurfaced due to developments relating to Greenland. Although tensions were lowered with the announcement of a “framework deal” (details not yet published and subject to further discussions) involving Greenland and tariff threats were removed, the volatility experienced during the turbulent week in January is unlikely to fade quickly in people’s minds. Meanwhile, France’s Prime Minister Lecornu managed to push some of the 2026 budget through the National Assembly without a vote, easing near-term political risk in France.

Over the longer term, fiscal expansion and infrastructure spending in Europe favours sectors exposed to domestic demand, construction and capital goods. We also see opportunities relating to renewables and healthcare equipment. Exporters in the meantime could face headwinds from trade frictions and increasing competition.

Japan – Selective opportunities

Japanese equities have performed well so far this year, following speculation that PM Takaichi would call for snap elections – which she eventually did. Investors believe that a stronger mandate will allow her to push through “Sanaenomics”, which potentially entails a more expansionary fiscal policy, thereby translating into a growth/inflation uplift which will be helpful for corporate earnings.

However, we see several risks that investors will need to consider.

First, tensions between China and Japan remain high. While it is unclear how long this current episode will last, sectors such as AI/semiconductors, autos and transportation could come under pressure in the near term.

Second, a disorderly sell off in Japanese Yen (JPY) and Japanese Government Bonds (JGBs) could also pose risks to the equity rally. This is also compounded by the possibility of rate hikes by the Bank of Japan (BOJ).

Thus, despite the positives from the potential fiscal boost, we would prefer to be selective in Japanese equities given valuations are now at an all-time high since 2021. While we are Neutral on Japanese equities, we prefer specific areas such as: (i) AI; (ii) Technology hardware (especially semiconductors); (iii) Defence; (iv) Energy; and (v) beneficiaries of domestic demand, which are less susceptible to tariff threats and could benefit from inbound travel due to the weak JPY.

Asia ex-Japan – Riding growth currents and creating new horizons

Despite the stellar performance of Asia ex-Japan equities last year and good year-to-date performance, we continue to hold an Overweight stance on the region’s equities.

As transformative mega trends reshape economies and financial markets, Asia is poised to play a key role in this evolution, presenting clear investment opportunities in sectors such as (i) AI and robotics, (ii) advanced manufacturing, and (iii) metals and mining – an area gaining momentum amid the shift toward green energy, electrification, and infrastructure expansion.

Accommodative policies by the US Federal Reserve (Fed) could ease financial and liquidity conditions and weaken the US Dollar, factors that have historically benefited Asia ex-Japan equities. This comes at a time when several Asian and major Developed Markets (DM) central banks (excluding the Bank of Japan) still have room to further ease monetary policy. Additionally, a more proactive fiscal policy approach across Asia is expected to bolster growth prospects.

However, investors should remain cautious of specific risks that may cause short-term volatility, including geopolitical tensions. Within Asia ex-Japan, our preferences are for China, Hong Kong, Singapore and Malaysia, while we view the risk-reward balance for Thai equities as less attractive.

China/HK – Constructive outlook

Hong Kong (HK) and China equities market posted strong year-to-date performances with Materials being the outperforming sector while Financials has been a laggard. We stay constructive on HK and China equities and prefer the offshore China equities market.

Amidst buoyant market sentiment in the onshore A-share market, regulators and exchanges announced “a counter-cyclical measure” by raising margin financing ratio from 80% to 100% for new margin contracts which has effectively reversed the easing measures introduced in August 2023.

China’s recently released GDP data indicated that 2025 growth was resilient at 5.0% despite last year’s uncertainties around trade. However, we believe further stimulus is needed as momentum continues to slow, deflation risks persist, and growth remains somewhat uneven.

Several stimulus measures have been rolled out in recent weeks. These include the first batch of consumption subsidies for the year, 25bps interest rate reduction by the People’s Bank of China (PBoC) and reports suggesting new guidance from policymakers allowing “white-listed” real estate projects to apply for longer loan rollovers than previously allowed. Beijing has also pledged, on 20 January, to increase the fiscal spending amount in 2026 and announced a modest increase in interest subsidies on consumer, and small and medium enterprise loans.

With 2026 being the first year in the 15th Five Year Plan, we believe policy delivery and implementation are key to monitor. Several policy implementation details have been announced, including details of the consumer goods trade-in and equipment upgrade program, the 2026 list of major and key construction projects, and new supportive monetary policies, including targeted rate cuts and subsidies aimed at supporting consumption, technology and small- and medium-enterprises.

We believe a timely policy delivery would support the rotation from Value to Growth in 1Q26. We reiterate a barbell strategy with quality yield plays to cushion market volatility and upside optionality in other investment themes: (i) AI proxies; (ii) policy beneficiaries in technology innovation, domestic consumption and anti-involution; and (iii) a better outlook.

All considered, we remain constructive on HK and China equities. Apart from expectations of further gradual stimulus measures, we believe that the revival of the IPO market could help unlock animal spirits, while the expected step-up in earnings growth this year should help sentiment as well. Household excess savings also remain ample, and further deployment into equity markets could be possible given the moribund housing market.

Global Sectors - Global Materials outperform while Financials lag

2026 started with a focus on geopolitical tensions and the overt grab of resources. As such, it may not be surprising that the Global Materials sector has been the top performing sector YTD, followed by the Industrials sector which houses the sub-sector of Aerospace & Defence. A search for safe havens, has supported the stock prices of precious metals miners, while the spotlight on critical minerals has also supported the share prices of their producers in the Materials sector.

On the other hand, the Financials sector has lagged. A mixed earnings season for US banks as well as a proposal by US President Trump to impose a 10% cap on credit card interest rates as well as other potential changes took the industry by surprise. This has implications for not just US banks but consumer finance firms as well.

AI infrastructure remains the frontrunner in tech

Meanwhile, growth from the AI infrastructure buildout remains intact as a read-across from the leading foundry player’s earnings beat and guidance for high double digit revenue growth in 2026. The view was also reiterated by various tech company leaders during the annual Consumer Electronics Show (CES). Amid breakneck growth in AI infrastructure demand, supply constraints are broadening beyond AI chips into memory and wafer capacity. We thus favour AI infrastructure plays i.e. the internet and semiconductor companies. In particular, the wafer fabrication equipment (WFE) segment would benefit as foundries increase CAPEX to keep up with demand. We are, however, cautious of the software segment that is at risk of disintermediation by AI natives.

Signs of equity market broadening

After the dominance of growth stocks in the US in 2025 as AI-powered mega-caps marched to fresh highs, there are some signs of a broadening beyond in the first month of 2026. The S&P 500 Index has risen by about 1% YTD as of 25 January 2026, but international equity markets and small and mid-caps have outperformed. Within large-caps, the equal-weight S&P 500 Index has returned 4%, mirroring an improvement in other measures of S&P 500’s market breadth. There are three potential paths to an equity market broadening: (i) a “catch down” collapse in the valuations of the largest stocks, (ii) a broad-based “catch-up” in valuations across markets, or (iii) a market broadening driven by earnings broadening.

We believe the ultimate degree of equity market broadening will depend on the degree of earnings broadening. Looking back at history, for 13 of the last 15 years, comparing the S&P 500 vs the equal-weight SPW shows that the index with the stronger growth in forward earnings per share (EPS) estimates posted the superior share price performance.