Asia-Pacific equities

China’s economy continues to show bifurcated growth, with high-tech and AI-related manufacturing driving strong export growth while domestic demand remains soft. Despite potential near-term economic headwinds from the Middle East conflict, we don’t see urgency for the government to launch new domestic support policies, as the economy is handling the crisis relatively well.

The property market shows tentative signs of improvement, with prices rising in some larger Tier 1 cities. However, we think it is too early to declare this a stabilization of the overall property market, as housing inventory levels in many lower-tier cities remain elevated. Excess supply relative to demand will likely keep overall housing prices under pressure, deterring potential buyers from entering the market.

The AI narrative will likely be a key theme driving China’s equity market performance in the second half of the year. China’s tech champions possess competitive advantages in cost, scale, and supply chain integration, and their valuation appears undemanding relative to global peers.

We prefer companies in AI, humanoid robotics, and lithium batteries supply chains. We think these companies are capitalizing on surging global demand for AI-enabling goods.

Japan’s equity markets have rallied strongly in 2026, with the Nikkei 225 surging 11.9% in May to break above 66,000, driven by AI enthusiasm. Importantly, valuations still look attractive despite all-time high index levels, as robust earnings growth from semiconductors and electronics manufacturers supports the rally. The TOPIX’s more modest gains recently reflect the broader market’s diversification—above-average year-to-date returns thus far, but not as strong as the more AI-concentrated Nikkei 225.

Japan has emerged as Asia’s preferred equity destination, attracting $73.6 billion in year-to-date inflows through May, as investors seek a diversified alternative to crowded AI trades from the likes of South Korea and Taiwan. This capital rotation is supported by genuine structural reforms in Japan—enhanced corporate governance, rising shareholder returns, and the government’s fiscal credibility. The nascent “Sanaenomics” framework, encompassing AI advancement and defense sector liberalization and expansion, signals a policy shift toward long-term growth.

While near-term volatility risks—yen fluctuations, conservative earnings guidance, and external geopolitical concerns—exist, we think these represent tactical headwinds rather than structural challenges. Our local research correspondent upgraded their 2026 price targets (Nikkei 70,000) to reflect confidence in the uptrend. The confluence of sustainable inflation, corporate reform momentum, and domestic demand support provides a solid foundation for continued Japanese equity appreciation, with pullbacks presenting buying opportunities for long-term investors, in our opinion.

Asia-Pacific fixed income

Asia fixed income enters H2 2026 with credit spreads materially tighter from March levels. First-half returns were supported by interest income, resilient issuer fundamentals, and limited net supply, while government fiscal support across the region also helped cushion broader macro volatility linked to the U.S.-Iran conflict. The outlook remains exposed to geopolitical risks, supply-chain disruption, energy-price volatility, and the impact from higher U.S. yields. Asian credit spreads—the premium investors demand over U.S. yields—are tighter than they have been in many years, leaving little room for negative surprises. We expect returns to become more issuer-specific from here, with dispersion likely to rise and performance increasingly driven by credits with durable balance sheets, and clear policy support.

In China, policy direction should remain supportive but targeted. The recent messaging from the National Development and Reform Commission (NDRC), China’s powerful central planning agency, has been more tactical, emphasizing the need for a faster policy rollout to sustain growth momentum. Fiscal support, local government special bond issuance, urban renewal, and measures to improve residency-linked public services should help underpin domestic demand, in our opinion. Anti-involution initiatives, government measures to reduce excess industrial capacity, may also support margins in selected industrial and technology sectors. In the property sector, sales of existing homes have improved in Tier 1 cities (the largest metropolitan areas), but the rebound has yet to translate into broad-based recovery.

Overall, we expect China credit to favour selectivity, with better risk-reward in higher-quality State-owned enterprises, financials, and selected industrials, while weaker private-sector issuers warrant caution.

Japanese government bond (JGB) yields have risen sharply this year, extending last year’s move to multi-year highs. Although domestic institutions were net sellers last year, a cautious stance that now appears justified, we think higher yields are making JGBs attractive again, prompting a reallocation away from foreign bonds and back towards domestic fixed income. Foreign investors are also buying longer-dated JGBs, supported by the currency-hedged yield pickup over U.S. treasuries. While fiscal concerns remain, falling net debt and a modest primary government balance suggest to us that yields could remain anchored with JGBs increasingly looking attractive at current levels.
Overall, we think Asia fixed income should continue to offer steady income, but the easy gains from tighter spreads may be behind us.