Key takeaways

• Japanese policymakers face a trilemma – balancing a desire for fiscal stimulus and accommodative monetary policy while avoiding yen weakness. Any two are achievable – but at the cost of the third.
• In early 2025, many investors were unconvinced about the outlook for Asian stocks this year. Nearly 12 months on, the region has not only delivered a rip-roaring performance, but it’s also seeing a surge in new company listings.
• Italy’s good progress in improving its fiscal position and building a more stable political climate is a positive development for an economy traditionally known as “the sick man of Europe”. Despite all the hype surrounding tech and AI, Italy's FTSE-MIB has quietly outperformed the US Nasdaq year-to-date.

Chart of the week – US tech versus the rest

The AI boom has fuelled investment markets in 2025, with US stocks in the technology and communications services sectors delivering exceptional profits growth and driving the market to new highs. Given the surging valuations, those two US sectors alone now account for nearly a quarter of the market cap of all global stocks.

Looking ahead to 2026, it’s difficult to deny that the outlook is supported by AI and the strong revenue generation potential that comes with it. But there are some big questions around mega-cap tech valuations now, and uncertainty about the returns from the vast capex spending and the circularity of the financing involved. Recent volatility in tech share prices reflects a sense of unease among investors.

So, next year, a “broadening out” of investment returns that has been under way in global markets this year, could spread to the technology sector. That means tech in Asia – including China and India – could be just as profitable, but with less concentration and valuation risk for investors. Innovation in China’s tech sector has already captured attention from the West – for example, in the volatility that followed the release of new AI models from DeepSeek earlier this year.

But broadening out doesn’t stop there. It is clear that the AI investment boom isn’t just a tech play, and could spill into other sectors like utilities, construction, healthcare, and basic materials – driving performance in sectors that have lagged this year, and reinforcing a positive view on Asian and other EM stocks.

Market Spotlight

Diversifying the diversifiers

Heading into 2026, multi-asset investors face some key challenges. One is that the combination of a highly complex economic backdrop and uncertainty around AI leaves significant scope for market volatility. We have already seen examples of episodic volatility in 2025, including the tech-led sell-off in November.

And when it comes to managing this volatility, there has been a continuing shift this year in the role that US assets – notably traditional diversifiers like Treasuries – play in portfolios. Their correlation with stocks has turned positive in recent years, which has disrupted their ability to act as a portfolio hedge. And that’s left many investors reconsidering old assumptions and looking for “bond substitutes”.

In such a scenario, alternative asset classes – including hedge funds, infrastructure, and other real assets – are natural candidates for investors to consider. Private markets can also play a diversifying role: with private credit seeing a strong performance this year, and private equity, which tends to offer structurally low volatility, potentially set to benefit from US rate cuts. So, as a broad asset class, alternatives benefit from different economic and regional exposures, as well as different investment time horizons, making them a potentially effective way of diversifying from traditional diversifiers.

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 05 December 2025. 

Lens on…

Japan’s trilemma

Japanese policymakers face a trilemma – balancing a desire for fiscal stimulus and accommodative monetary policy while avoiding yen weakness. Any two are achievable – but at the cost of the third.

Under the newly-elected PM Sanae Takaichi, the government has recently passed a sizeable fiscal stimulus package (estimated at around 3% of GDP). It’s now clear that the new leadership is prepared to use more active fiscal policy to support growth. But given Japan’s already high debt level, this has driven longer-dated yields higher. It has also put downward pressure on the yen, leaving the BoJ in a bind. Having trodden carefully since starting to normalise policy in March 2024, pressure is building on the central bank to raise the policy rate more quickly, and possibly implement other measures, to support the currency.

Japan, alongside other economies such as the UK, is discovering that the pre-Covid world of markets accommodating easy fiscal and monetary policy is a thing of the past. Policy makers now face constraints, trade-offs, and no easy choices.

Asia’s IPO boom

In early 2025, many investors were unconvinced about the outlook for Asian stocks this year. Nearly 12 months on, the region has not only delivered a rip-roaring performance, but it’s also seeing a surge in new company listings.

In terms of money raised, Asia’s market for initial public offerings (IPOs) has been a world-beater, with USD81 billion raised year-to-date. That’s already an increase of nearly 60% on 2023. Industry data suggest that Q3 was particularly strong for IPOs, given fading tariff concerns and Fed rate cuts. Hong Kong, in particular, has reclaimed its position as a major hub for new listings, helped by supportive policy on dual-listings and fast track channels to attract tech firms. Mainland China’s onshore market has also thrived, and so have other ASEAN hubs. India also stands out, where there has been a boom in new listings across sectors, and strong retail demand.

For 2026, Asia’s equity markets are expected to remain robust, supported by a stable macro outlook, an increasingly supportive regulatory backdrop, and ongoing shareholder-friendly corporate reforms. Some analysts think that these steadily-expanding markets should continue to offer investors quality growth and diversification opportunities.

Molto bene

Italy’s good progress in improving its fiscal position and building a more stable political climate is a positive development for an economy traditionally known as “the sick man of Europe”. Even though this title could now arguably be applied to Germany, Italy’s growth remains chronically weak.

However, the same cannot be said of its equity market performance. Despite all the hype surrounding tech and AI, Italy's FTSE-MIB has quietly outperformed the US Nasdaq year-to-date. This is not a one-off – since the start of 2021, Italian stocks have matched US tech sector gains. The drivers behind this are largely rooted in sector composition, with Italy's FTSE MIB dominated by banks, energy, and industrial cyclicals, all of which were relative winners in a regime of higher interest rates and inflation, and commodity price volatility. Lower government bond spreads have also contributed to boosting stock multiples.

The lesson for investors here is that economic growth is not always an important driver of stock market performance, and valuations matter – Italy entered the post-pandemic period with depressed multiples and room for catch-up on positive news.

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 05 December 2025.

Key Events and Data Releases

Last week

The week ahead

Source: HSBC Asset Management. Data as at 7.30am UK time 05 December 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 US government shutdown has ended, but there may still be delays to the expected releases of official data.

Market review

Positive risk appetite persists. Soft US labour market data cemented market expectations of a 0.25% rate cut at this week’s meeting of Federal Reserve officials, with the market now pricing in three to four 0.25% rate cuts over the next 12 months. The US dollar weakened against a basket of major currencies, while 10-year US Treasury yields remained range-bound. Hawkish comments by Bank of Japan governor Ueda weighed on JGBs amid growing expectations of a December rate hike. In equities, both the US and European markets saw broad-based gains, whilst tech stocks lifted Japan’s Nikkei 225. Other Asian stocks markets were mixed, with Korea’s Kospi seeing gains, but Hang Seng Index and China’s Shanghai Composite were little changed. India’s Sensex index weakened, while Frontier equity indices performed strongly.

https://www.hsbc.com.my/wealth/insights/asset-class-views/investment-weekly/article/