26 January 2026
Amid last week’s geopolitical turmoil, we have seen echoes of last April’s “Liberation Day” market action: US stocks declining in lockstep with US Treasuries and the US dollar. This is important. It provides further evidence that traditional portfolio diversifiers may struggle to perform as expected, particularly when US policy decisions – whether it be around trade, the Fed, or foreign relations – are driving investor caution.
For investors looking to hedge against further market turbulence in 2026, it makes sense to “diversify the diversifiers”. Gold and the Swiss franc, for example, have performed very well last week. And with concerns about the health of US public finances overlaying geopolitics, high-quality corporate bonds could be structurally less risky. Meanwhile, private markets continue to offer an attractive way to dampen portfolio volatility and gain exposure to the ongoing Fed rate-cutting cycle. Additionally, hedge funds are also displaying uncorrelated returns amid elevated dispersion and macroeconomic volatility.
Overall, coming into 2026, investors were already revisiting assumptions about how much weight to place in US stocks and bonds, and – for international investors – how much dollar currency risk to hedge. Investors have faced questions about high valuations and concentration in parts of the stock market, challenges to the Fed’s independence, and uncertainty about the fiscal outlook. Episodes of geopolitical turmoil are adding to that uncertainty.
Last week’s updated IMF forecasts point to firmer global momentum – with notable growth upgrades for the US and emerging markets. Policy support and the AI investment boom are reinforcing a constructive 2026 outlook. For many investors, recession risks are now low on the agenda. But the growth picture remains uneven. This is the K-economy – strength concentrated in tech, while other parts of the economy are stuck in a “vibecession”. For many investors, it feels like a form of Goldilocks: growth not too hot, leadership clear, and policy still supportive.
What matters for 2026 is whether the limbs of the K remain wide. If they do, investors can continue to back tech leadership – and even a renewed phase of US exceptionalism. The main risks in this scenario are the concentration in mega-cap tech, and how it crowds out the rest, or that the lower limb of the K weakens further because of higher unemployment and cost-of-living pressures.
But, if 2026 is the year the K starts to converge – helped by improving global momentum, easier policy, a weaker dollar, and profit growth outside the US – market leadership will broaden. That would favour left-behind cyclicals, value, and could open another window for EAFE and emerging market assets to shine.
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 23 January 2026.
A pick-up in yields on long-dated Japanese government bonds (JGBs) in January turned into a surge last week. It follows growing nervousness over Japan’s medium-term fiscal outlook, with PM Sanae Takaichi signalling big spending plans ahead of next month’s general election. Japan’s government debt to GDP ratio has declined in recent years – driven by higher tax revenues and the positive impact of nominal growth outpacing interest rates on government borrowing. Low coupon JGBs issued during the era of ultra-loose monetary policy will gradually be refinanced at higher rates, pushing up debt servicing costs. Stabilising debt may then need a primary government surplus (excluding interest payments). |
JGBs remain an anchor for major sovereign bond markets, although periods of volatility may emerge. But Japan isn’t alone. Developed market governments’ increasing fiscal activism also risks incurring the wrath of the bond vigilantes.
After a year-on-year rise of more than 200% in the silver price, you may wonder if it’s time to sell the family silver! The rally has flipped the gold/silver ratio (the number of ounces of silver that can be bought with one ounce of gold) from being unusually high in April 2025 to unusually low now, despite gold rising by around a third in that time. It’s unlikely that silver has become a new safe-haven asset. What’s more likely is that, as it began to catch up with gold, momentum took over and retail investors joined in, just as industrial demand has been picking up. And with the silver market significantly smaller than that of gold, volatility has been amplified. A reversal in retail interest could mean further big moves. |
Silver’s surge may also be down to changing drivers of the gold price. Through early 2025, the rising gold price coincided with a falling US dollar. Since then, the dollar has been broadly stable, while the rise in gold appears to be a part of a wider metals rally – some of which may be justified (copper) and some of which may be froth (silver). While some analysts are positive on gold’s medium-term prospects given elevated geopolitical risks, there could be some price volatility if the recent run-up in silver unwinds quickly.
Chinese stocks have got off to a solid start in 2026 – buoyed by a fresh wave of homegrown tech advances, from a new AI model and robotics to commercial rockets and flying cars. As part of China’s new five-year plan, technological innovation (especially in AI) remains a key priority. But after last year’s market re-rating, investors will want stronger fundamentals and profits this year. Key to this will be the macro backdrop. Strong exports and industrial production helped China meet its real GDP growth target of 5% in 2025. But weak domestic demand, with the property market extending its decline, means more work is needed to rebalance towards a more consumption and services driven economy. Policymakers have prioritised expanding domestic demand by boosting consumption and stabilising investment this year. Fiscal policy is set to remain proactive, and monetary policy moderately loose. |
In stocks, earnings are seeing signs of stabilisation, with improving ROE driven by corporate reforms, government support, and new tech leaders. But in the economy, progress on achieving sustainable growth and reflation is likely to be more gradual.
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 23 January 2026.
Source: HSBC Asset Management. Data as at 7.30am UK time 23 January 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.
Heightened geopolitical concerns injected volatility into financial markets last week. Gold prices surged, while the US dollar retreated against a basket of major currencies. In Japan, rising fiscal unease weighed on long-dated yields, steepening the yield curve ahead of February’s general election. Long-end sovereign yields in Europe broadly climbed, and 10-year US Treasury yields rose modestly in the run-up to next week’s rate decision by the Federal Reserve. In the US stock market, the small-cap Russell 2000 index maintained its recent outperformance, whereas tech sector stocks lagged. Elsewhere, the Euro Stoxx 50 was on course to close the week lower, with Nikkei 225 edging down amid elevated volatility in JGB yields. Emerging market stocks advanced, with LatAm leading the rallies. EM Asian indices traded mixed: Kospi hit a record high, but Sensex declined.
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