Investment Weekly: Back to broadening

22 June 2026

In 2025, market performance broadened beyond the US to Europe, Asia and emerging markets. This shift was driven by a weaker dollar, Federal Reserve rate cuts, and US GDP and corporate profit growth that appeared less exceptional than in the past. However, this year’s energy shock significantly undermined these drivers, as the US economy is insulated by its energy independence and markets remain laser-focused on AI.

This year, market broadening has shifted towards regional and sectoral winners within the AI boom. Emerging markets are likely best positioned to benefit, given their exposure to semiconductors (South Korea, Taiwan), commodities essential to the AI buildout (Latin America), and advanced technology (mainland China).

Last week’s news regarding progress towards reopening the Strait of Hormuz could now reignite the trends that broadened market performance last year. Reduced inflationary pressure and a less hawkish Fed could place some downward pressure on the US dollar, even if strong AI-linked US activity limits the downside. Profits in major energy-importing economies (mainly in Europe and Asia) would receive a boost, helping them meet expectations that already point to stronger growth than last year.

Challenges remain. The news flow is unpredictable and uncertainty persists. Growth in Europe and Japan appears fragile, making corporate profits vulnerable to disappointment. But emerging markets continue to stand out as AI winners and major beneficiaries of lower energy prices.

The global economy is in a regime of “two shocks and a boom” – with commodity spikes, the China shock 2.0, and the AI megatrend creating lopsided growth and spiky inflation. For markets, it means that sector dynamics and themes can be just as important as country fundamentals when it comes to investment returns. Three key messages stand out:

First, earnings revisions in the technology sector remain strong, but the pace is softening. After a Q1 de-rating, the sector has rallied, pushing price-to-book valuations close to 2000 levels. Tech stocks in emerging markets could offer good value. Second, there may be defensive growth opportunities in overlooked, low-volatility sectors such as healthcare, which has seen upward profit revisions. Third, despite the headwind of higher rates, real estate looks like a potentially strong income play, with yields at decade-high relative levels (see Page 2).

Overall, the takeaways are to stay diversified, remain disciplined on tech valuations, pay attention to high dividends and undervalued defensives, and watch for cyclicals benefitting from themes like reshoring, de-regulation, and AI.

The near-term forecasts led markets to price in at least one rate hike this year. However, projections for 2027 and 2028 point towards policy easing, suggesting limited conviction in the correct path. That uncertainty is understandable in a K-shaped economy, where an AI-driven boom contrasts with softer activity elsewhere, creating risks in both directions. While Warsh favours reduced guidance – which may be appropriate given plausible upside and downside risks – it could increase market volatility as incoming data shift rate expectations. 

On valuations, forward price-to-earnings ratios still look reasonable given some sizeable earnings upgrades (notably in South Korea, Taiwan and Japan). But trailing metrics – especially in North Asia, where tech exposure is concentrated – have become more stretched. In tech-focused markets, that could be a headwind to the earnings upgrade cycle. On the upside, there may be scope for a further pick-up in profits from non-technology sectors across the region – particularly if geopolitical risks ease and oil prices fall further.

With an encouraging outlook, real estate remains a potentially compelling source of defensive growth and diversified income. 

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, Refinitiv, Factset, Moody's, S&P, Fitch. Data as at 7.30am UK time 19 June 2026.

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. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 19 June 2026.

A fall in oil prices helped support a broad-based rally in global equities, led by strong gains in emerging markets. The Kospi, Sensex and Shanghai Composite all rallied. In developed markets, the Euro Stoxx 50 and the Nikkei 225 both broke to all-time highs. US equities were mixed, with the tech-focused Nasdaq and the Philadelphia Semiconductor index both strengthening. In rates markets, hawkish comments from new Federal Reserve Chair Kevin Warsh prompted a sharp rise in 2-year Treasury yields. The FOMC “dot plot” showed a more hawkish tilt, with around half of participants projecting higher policy rates in 2026. Ten-year Gilt yields fell on benign UK inflation data, with 10-year Japanese government bond yields declining despite a 0.25% rate hike by the BoJ. The US dollar strengthened against major peers.