HSBC China Wealth Insights: Four Investment Themes to Help You Build Your Portfolio | HSBC Q1 2026 Investment Outlook

Artificial Intelligence Transformation Supports Market Outlook

As a year full of uncertainties comes to an end, it is the right time to filter out various market noises and refocus on the fundamentals driving market performance to deploy an appropriate investment portfolio for 2026.

In recent months, the uncertainty surrounding tariffs has gradually become clearer. Thanks to technology-driven productivity improvements and a strong capital expenditure cycle that is still undervalued by the market, the earnings performance of U.S. companies remains robust. However, soaring valuations, accumulating debt, and the longest government shutdown in U.S. history have triggered some investors to take profits recently, while others are concerned about whether the current bull market can continue.

What does this mean for the market outlook in 2026?

We believe that the key driving factors supporting our positive outlook will continue. The rapid adoption of artificial intelligence remains an important theme for global markets in 2026. The likelihood of a reversal of this trend is very low, and opportunities within the artificial intelligence ecosystem are expected to further expand across various industries. The industrial and utility sectors may benefit from the rising demand for digital infrastructure and electricity; at the same time, long-term structural drivers such as reshoring manufacturing and reindustrialization remain prioritized policies to strengthen strategic autonomy in supply chains, especially in technology and defense sectors.

According to estimates by the Organisation for Economic Co-operation and Development (OECD), artificial intelligence is expected to contribute 1% to 2.5% growth in labor productivity over the next decade. Unlike other regions, most of the returns in the U.S. stock market come from earnings growth rather than price-to-earnings ratio expansion. Although valuations have risen, they remain far below the levels seen during the internet bubble, and the earnings forecasts for the first quarter of 2026 are still relatively conservative, leaving potential room for positive earnings surprises. Therefore, we are not concerned about an artificial intelligence bubble, but we expect that a short-term market correction will be difficult to avoid.

Outside of the U.S., Asia benefits from dual favorable factors: one is a diversified and rapidly expanding artificial intelligence ecosystem with attractive valuations; the other is resilient domestic demand supported by policies. In terms of data center capacity growth, Asia is expected to outperform other major markets from 2025 to 2030; corporate governance reforms are also expected to enhance net asset returns within the region. Our "barbell strategy" aims to balance between leading technology innovation companies and high-dividend stocks or quality bonds. These factors support our recent upgrade of the outlook for the Hong Kong, Japan, and South Korea stock markets to a positive stance, making them preferred markets alongside the U.S., mainland China, and Singapore. Additionally, we are optimistic about the structural and cyclical potential opportunities in the UAE and South Africa within the emerging Europe, Middle East, and Africa markets.

Preparing for Short-Term Market Volatility in an Upward Trend

Despite the overall upward trend, we remain closely attentive to uncertainties in policy and macroeconomics. The Federal Reserve may end its rate-cutting cycle earlier than expected; data center construction may also be delayed due to labor shortages, and geopolitical risks in any region may escalate Our analysis of different asset classes shows that no single asset can provide comprehensive defense across various risk scenarios. Therefore, we will continue to implement a multi-asset strategy, diversifying allocations across asset classes, regions, industries, and currencies to manage concentration risk and downside risk. We have adjusted our investment strategy, moderately reducing the allocation to the U.S. market, but remain optimistic about U.S. stocks while increasing our positioning in Asia. We have also downgraded our outlook on U.S. consumer staples and high-yield bonds, strengthening the resilience of our portfolio through global investment-grade bonds, emerging market local currency government bonds, and gold.

The trend of strengthening diversified allocation is on the rise

Due to the market's heightened focus on Federal Reserve policies, the correlation between various asset classes has significantly increased recently. Therefore, we believe that allocating to alternative assets will further help diversify risk.

We hope that the investment themes and in-depth analysis in this quarter's "Thinking Ahead 2026" will assist you in seizing opportunities and moving forward steadily in the new year. Wishing you success in your investment journey!

Four Major Investment Themes to Help You Build Your Portfolio

U.S. corporate earnings continue to deliver positive surprises, driving the stock market upward, supported by factors including the U.S.'s leading position in technology, strong capital investment related to artificial intelligence, interest rate cuts by the Federal Reserve, regulatory easing, and long-term structural trends. With multiple favorable factors still in place, the long-term outlook for U.S. stocks remains positive. However, U.S. stock valuations are at high levels, and the risk of excessive concentration should be managed. Although we are optimistic about U.S. stocks, we have slightly reduced the allocation to the U.S. market in our positioning strategy and strengthened regional diversification.

The weakening dollar, U.S. interest rate cuts, and attractive valuations are attracting capital inflows into emerging markets, particularly in Asia. Mainland China, under the "14th Five-Year Plan," has reiterated its strategic direction for high-quality development and technological independence, with artificial intelligence innovation and domestic demand remaining two major growth engines. South Korea benefits from strong earnings growth prospects driven by the technology sector and improved shareholder returns; Japan benefits from the new prime minister's stimulus inflation policies, corporate governance reforms, and stable yen exchange rates. Hong Kong is supported by strong capital inflows and active new stock listings; Singapore attracts investors with its defensive advantages and high dividend returns.

Beyond Asia, the UAE offers robust structural investment opportunities, while South Africa benefits from its loose policies and favorable market conditions for gold; the fiscal conditions of several emerging markets are better than some developed markets.

We maintain a bullish view on global equities and continue to be optimistic about U.S. stocks.

In Asia, we prefer Mainland China, Singapore, South Korea, Japan, and Hong Kong. In emerging markets in Europe, the Middle East, and Africa, we are optimistic about the UAE and South Africa.

The recent rise in the stocks of American tech giants has been driven by robust earnings growth, with analysts expecting the growth rate to increase further to 14% or higher by 2026, primarily supported by the leading position of the U.S. tech industry. This is further propelled by substantial investments in software and infrastructure, including chips, cloud services, data centers, and power systems.

As the application of artificial intelligence continues to expand, we believe its advantages will gradually penetrate a wider range of industries, not just limited to the early beneficiaries. To avoid excessive concentration in the tech sector, we are extending our allocation strategy to other industries with profit-generating potential. Utilities benefit from rising electricity demand and infrastructure investment; the financial sector leverages artificial intelligence to enhance efficiency and automation. The industrial sector also benefits from the momentum of digital infrastructure, the return of manufacturing to the U.S., and increased defense spending.

In Asia, apart from the tech sector, overall consumption continues to benefit from policies aimed at boosting domestic demand amid rising external uncertainties; advancements in medical innovation and attractive valuations also provide favorable conditions for the healthcare sector. Although Europe is still catching up in the field of artificial intelligence, certain areas of industry and utilities still offer upside potential driven by national security and enhanced digital capabilities.

In the U.S., we have expanded our sector preferences from information technology and communication services to finance, industrials, and utilities; financials, industrials, and utilities in Europe are relatively attractive.

In Asia, we are optimistic about the information technology, consumer discretionary, financials, communication services, and healthcare sectors.

The market continues to be influenced by inflation data and trade negotiations, with the direction of the Federal Reserve's policies remaining a major factor in market volatility. We continue to strengthen the potential income sources of our diversified asset portfolio through high-quality bonds, which can help enhance portfolio stability regardless of how market volatility manifests.

With U.S. inflation remaining stubborn and economic activity maintaining a relatively stable outlook, the Federal Reserve's rate cuts may be lower than market expectations, thereby limiting further downside for U.S. Treasury yields. Therefore, we have adjusted our duration preference for dollar-denominated bonds to 5 to 7 years to reflect the increased volatility risk of long-term bonds. We prefer global investment-grade bonds as they still offer attractive yields and diversification benefits. Given the narrowing spreads and relatively weak credit environment, we maintain a cautious stance on high-yield bonds.

Some emerging market local currency bonds also offer potential opportunities, primarily supported by policy easing space, robust fiscal conditions, and credit rating upgrades. A weaker dollar may also enhance their attractiveness while reflecting the importance of non-dollar allocations. A diversified asset strategy can achieve more comprehensive diversification across asset classes, sectors, and currencies.

We maintain our preference for global (including dollar, euro, and pound) and Asian investment-grade corporate bonds, and are optimistic about emerging market local currency government bonds due to their lower correlation with risk assets. We also emphasize foreign exchange diversification to prepare for fluctuations in the US dollar and the relative appreciation of other currencies.

We expect the bull market to continue, but market volatility will persist. Given the high correlation between traditional assets, the importance of deepening diversification by incorporating assets with lower correlation is increasingly highlighted. Gold has recorded an increase of over 50% year-to-date, marking its best performance since 1979. Although the upward momentum has slowed, gold prices are still expected to receive support against the backdrop of strong central bank demand, concerns over US dollar depreciation, and significant inflows into gold ETFs (exchange-traded funds). Therefore, gold's position as an important diversification asset may remain solid.

Alternative assets are increasingly gaining attention. Hedge funds offer diversified strategies that can capture macroeconomic changes, the differentiation of companies driven by artificial intelligence, and various opportunities arising from increased merger and acquisition activities. Private equity uncovers growth potential in emerging industries, while the private credit market provides stable income through yield-driven lending. Additionally, infrastructure can help hedge against inflation risks.

The transition to clean energy is a long-term theme that continues to advance, aimed at enhancing energy independence and environmental protection. Long-term policy support and ongoing investment are driving this trend, making related industries relatively more resilient to short-term market fluctuations.

Gold and energy transition-related assets help enhance the balance of investment portfolios to withstand downside risks.

Investors can strategically allocate to alternative assets.

The above content is from HSBC China Wealth Insights. For more content, click on【HSBC China Wealth Insights Column】.

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