10 November 2025
Last week’s volatility in tech stocks is a significant development for the AI trade. It tells us that despite very solid earnings reports for the sector, there is now a much higher bar for big tech names to perform, in a backdrop where phenomenal capex spend is increasingly scrutinised.
AI remains an important theme for investors and a driver of potentially significant returns. But questions around the longer-term business model adds uncertainty to a global economy already filled with major unknowns, including the impact of shifting trade policies and the underlying resilience of developed market economies.
At this juncture, amid all the short-term noise, it can be helpful for investors to take a step back and zoom out to the bigger picture: what could investment returns look like over the coming years, rather than just the next 6-12 months?
First of all, returns on developed market equities – including the US – are still expected to remain decent by historical standards, helped by higher cash rates in a higher-for-longer world, undemanding valuations in EAFE markets and solid earnings growth in the US. But the outlook for emerging markets is potentially even better, especially given lowly valued currencies.
Meanwhile, corporate bond returns look less appealing than they did in the recent past. But for investors worried about the hedging properties of the US dollar assets, they are increasingly seen as bond substitutes. Many alternative asset classes also appear potentially attractive for long horizon investors, offering the possibility of superior returns and portfolio diversification.
Hopes of a pick-up in private equity dealmaking this year faltered in the first half as market volatility and policy uncertainty, particularly US tariffs, dampened confidence and put buyouts on the back-burner.
But industry data suggest that activity turned positive in Q3 in response to strong equity markets, moderating inflation, and US rate cuts. Crucially, the window for new stock market listings re-opened and valuation expectations between buyers and sellers narrowed – paving the way, not just for new deals, but for exits (asset sales) too.
This resurgence comes at a time of “democratisation” in private equity. Once a largely institutional-only asset class – involving closed-ended drawdown funds with typically 10-15 year lifespan – new open-ended funds are providing PE exposure but with more flexibility for investors. While the traditional model continues to deliver compelling long-term returns overall, open-ended funds offer ongoing investment and the potential for periodic partial redemptions. With private equity historically achieving strong returns after challenging periods, the Q3 pick-up – alongside the growth of open-ended funds – could widen private equity’s appeal as a source of long-term returns and a portfolio diversifier.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 07 November 2025.
Investor interest in both Emerging and Frontier Market stocks has been a major theme in markets in 2025. But while both benchmark indices have delivered year-to-date returns above 30%, they’ve been on quite different journeys. After April’s Liberation Day sell-off, FM stocks had a very strong summer, as Vietnam (a big chunk of the FM index) secured an early trade deal with the US. But then, EM stocks caught up, boosted by September and October’s Fed rate cuts. Liberation Day was also less severe for FM stocks, and volatility has been less pronounced so far in 2025. |
This highlights a key benefit of FM stocks: potentially strong returns, but with lower volatility. From here, the current outlook for FM stocks is encouraging. Vietnam’s economic miracle continues with GDP growth expected at 7%+ this year. Investment is likely to be strong as the government launches a new infrastructure programme, while firms take advantage of lower tariff rates versus China. The country’s stock valuations look compelling. Meanwhile, FM is also exposed to the growth and economic diversification efforts of the Gulf economies, and the global trend of nearshoring out of China.
Amid the global enthusiasm for AI, South Korea’s stocks have been a big beneficiary. This isn’t surprising given the market’s high exposure to big tech and semiconductor names, and a starting point of robust profits and valuation discounts in the sector. A US trade deal has helped too. But it’s also worth looking at some important ongoing reforms, which could be paying off. Efforts to enhance corporate accountability and market practices, building on last year’s “Value-Up” programme, have accelerated under the administration’s commitment to corporate reform. Profits – as measured by return on equity – have since picked-up. This suggests that the so-called “Korea Discount”, driven by corporate governance concerns and weak profitability, could melt away. |
Nevertheless, this year’s rally – with the MSCI Korea up 90% – has meant richer valuations, even if they remain at a material discount to many global peers (a 12-month forward PE of just over 11x). This might mean that bouts of volatility, as we saw last week, could become more common in 2026, especially if confidence around the AI trade starts to falter.
The Japanese yen weakened past the key 150 level against the US dollar in early October. This has come amid the Bank of Japan’s reluctance to tighten policy and worries about potential fiscal loosening. The continued weakness is in sharp contrast to the direction of real-rate differentials – the currency is not only fundamentally cheap, but it looks short-term oversold. New Japanese PM Takaichi has called for a slower pace of policy normalisation by the BoJ, raising concerns that the central bank is “behind the curve”. And since Japan is a net importer of energy, there could also be headwinds from upside risks to oil prices amid recent geopolitical developments, including sanctions on Russian companies, and OPEC+ halting output increases. On top of that, a near-term repricing of the US Federal Reserve’s policy path could pile further pressure on the yen. |
Any turning of the tide for the yen would need a decisive shift in BoJ policy, or a global risk-off episode, which would drive flows into the currency, given its relative safe-haven status.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg. Data as at 7.30am UK time 07 November 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 07 November 2025. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. *The ongoing government shutdown in the US may delay the expected releases of official data.
Risk appetite waned last week as technology stocks turned volatile following recent rallies amid growing concerns over stretched valuations. Investors also monitored remarks from Fed officials and macro prints for clues on the US rate outlook. The October ISM services index rose, yet other indicators pointed to soft labour market demand. Long-end Treasury yields rose modestly, accompanied by widening credit spreads, particularly in high yield. In equity markets, US stocks declined, with the Euro Stoxx 50 also trading lower. Asian markets endured choppy trading: Japan’s Nikkei 225 and Korea’s Kospi pulled back noticeably from recent highs. India’s Sensex slid in a holiday-shortened week. In contrast, Chinese equities outperformed, with Hong Kong’s Hang Seng and China’s Shanghai Composite posting gains. In commodities, oil prices fell amid renewed worries over global oversupply.
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