Investment Weekly: Three bond markets
28 September 2026
Key takeaways
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The surge in profit growth in emerging market (EM) stocks this year has mostly come from South Korea and Taiwan. Thanks to their deep exposure to the global AI build-out, South Korean stocks are on course to deliver profits growth of more than 300% y-o-y in 2026, with Taiwan at around 50%.
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One of the big investment stories of 2025 was how a weaker dollar and Fed cuts contributed to a broadening of investment returns across regions, and specifically to excellent performance in emerging market assets.
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After stellar gains in 2025, it was uncertain whether Japanese stocks could keep up the momentum this year. Yet, a range of factors are helping to drive another world-leading performance.
Chart of the week – Three bond markets
The three biggest economies have three very different-looking bond markets. In the US, we’re going back to the old normal. Real yields are back at pre‑global financial crisis levels. This comes amid “government deficits forever”,
USD1 trillion of hyperscaler capex, and less kindness from strangers as global capital flows fragment. When investment is high and capital is scarce, the price of money rises – and that’s helped push market yields to multi‑decade highs.
China is the mirror image. Bond yields are around 1.5%, basically the lowest this decade. Excess savings are pushing rates down – households are saving more, while corporates are investing less. Low‑flation, policy easing, and a two‑speed economy all matter, but the big story is simple: savings are being funnelled into the bond market rather than property or non-tech stocks.
And then there’s India. Yields are around 7% – which sounds normal, and that’s exactly the point. They’re within their historic range, despite US and G7 yields selling off, higher commodity prices, and India’s gangbusters growth. Credible policy, fuel subsidies, and captive local investors are keeping yields anchored. The rate differential versus the US looks unusually low.
Three economies, three bond markets, three very different macro regimes.
Market Spotlight
How does the boom end?
Surging capital spending on the global AI build-out has seen the capex-to-sales ratio of tech sector stocks reach levels that are twice as high as they were during the dotcom bubble. The question for investors is whether capex is on course for a hard landing – as it was in 2000 – or whether it will be softer this time around.
In a soft-landing scenario, firms would start adopting AI at scale, lifting hyperscalers’ sales fast enough to bring the spending ratio back to earth naturally. So, all eyes are on the pace of monetisation in areas like enterprise software and demand growth from corporate IT departments. Unlike the 2000 bubble, many current hyperscalers have profitable legacy businesses, making the prospect of a dotcom-style capex crash less likely.
But if revenues fail to materialise or markets begin to suffer from “ROI fatigue”, tech giants may have little choice but to slam the brakes on spending. Even a short pause in the capex boom could knock sentiment and hurt valuations, especially among chipmakers and equipment suppliers.
As the initial infrastructure rush matures, it may pay to look beyond hardware to the next phase of the AI boom – and stocks that can turn computing power into sales.
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. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific company, 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. 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, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 25 September 2026.
Lens on…
Worth concentrating on
The surge in profit growth in emerging market (EM) stocks this year has mostly come from South Korea and Taiwan. Thanks to their deep exposure to the global AI build-out, South Korean stocks are on course to deliver profit growth of more than 300% y-o-y in 2026, with Taiwan at around 50%. At the EM index level, the tech sector is expected to account for roughly three-quarters of the 73% increase in earnings. EM stocks have become a play on the AI supercycle. But while this has helped drive the exceptional earnings backdrop, it also creates vulnerability if AI investment unexpectedly cools. July’s huge volatility in South Korean and Taiwanese stocks provided a display of how bad things can get. |
For 2027, global earnings are expected to slow, with y-o-y growth rates roughly halving in many countries while remaining above historical averages. A more normal profit picture and broader sector participation should help alleviate the pressure on Technology to drive overall market gains. But for EM, technology is still expected to be a big driver of growth – but it’s worth keeping an eye on concentration risks.
It’s not you, it’s me
One of the big investment stories of 2025 was how a weaker dollar and Fed cuts contributed to a broadening of investment returns across regions, and specifically to excellent performance in emerging market assets. A significant driver of performance came from currency exposure, as international investors profited from EM FX appreciation. This year, the dollar has strengthened. This has come amid a more hawkish Fed and perhaps a sense that US exceptionalism isn’t quite over as the AI boom rolls on and the Fed seems to be retaining its independence under Chair Warsh. Traditionally this would have been bad news for EM assets, but 2026 marks a relationship break-up where some EM currencies have gained nonetheless. This likely reflects the effects of better and more orthodox policymaking, the development of macro “fortresses”, and wide real yield cushions established by early rate hikes. |
With EM currencies trading at historically cheap valuations and increasingly detached from Western cycles, there are opportunities for currency exposure to provide a durable, independent source of total return in global portfolios.
Not just a fluke
After stellar gains in 2025, it was uncertain whether Japanese stocks could keep up the momentum this year. Yet, a range of factors are helping to drive another world-leading performance. First, long-running efforts to encourage companies to run themselves more efficiently and profitably, via the corporate “Value-Up” agenda, continue to bear fruit. That’s contributed to an upgraded earnings outlook for 2026. Meanwhile, there’s also been a shift away from the deflationary mindset of recent decades. Whereas higher costs once typically compressed margins, more firms are now passing on higher input and wage costs. This pricing power has been good news for profits, too. Despite some volatility, a weak yen has also been helpful, particularly for major exporters in sectors such as autos and industrial machinery. And it comes amid strong global demand for Japan’s advanced tech and industrials sectors, which have given it exposure to the global AI boom. |
These drivers have helped attract foreign capital and domestic retail participation, adding further impetus to the market’s rise. Together, it’s looking like Japan’s market run is increasingly sustainable – making it worth a closer look for global investors.
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 25 September 2026.
Key Events and Data Releases
Last week
This week
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 25 September 2026.
Market review
Global equities started the week higher as oil prices continued to decline, but gains faded amid a surge in major government bond yields. Higher US tech stocks propelled the Nasdaq to a new all-time high, while the Philadelphia Semiconductor Index—a key barometer of AI-focused chip stocks—built on its recent increases. The S&P 500’s rise was more modest, while the more domestically focused and generally more rate-sensitive Russell 2000 Index fell. European bourses were range-bound amid encouraging economic data. Asian stock markets were mixed, with positive sentiment towards the technology sector boosting markets exposed to the AI boom; however, major indices in mainland China, Hong Kong and India were more subdued. In bond markets, strong US economic data drove 10-year Treasury yields to multi-year highs. German Bunds, UK Gilts and Japanese government bonds also weakened. In FX markets, the US dollar strengthened against major currencies.
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