China is particularly interesting because we are seeing significant developments in AI.

China is emerging as one of the most underappreciated opportunities in Asian equities as investors broaden beyond the region’s established AI and semiconductor leaders, according to Aberdeen Investments.

Pruksa Iamthongthong, head of APAC equities at Aberdeen Investments, said investors remained positive on Asia’s AI-driven growth story but were becoming more selective on valuations and looking beyond a small group of technology champions.

“Investors haven’t rotated away from Asia’s AI winners, but they are broadening their exposure across the ecosystem and becoming more selective about valuation and positioning,” said Iamthongthong.

“We are seeing opportunities beyond the obvious AI leaders, particularly where fundamentals are improving faster than market expectations. China is particularly interesting because we are seeing significant developments in AI, advanced manufacturing and innovation, while global investor positioning remains cautious.”

More than 80 per cent of China Fortune 500 companies have begun adopting AI, while Chinese AI capital expenditure is expected to reach US$116 billion in 2026, up from US$89 billion in 2025[1].

Iamthongthong said investor sentiment towards China remained dominated by concerns around property and domestic consumption, potentially overlooking the strength of its technology and industrial sectors.

“Some of the most exciting developments in China are happening across AI, semiconductors, automation, software and advanced manufacturing,” she said.

“Yet global investors remain underweight China. We see a compelling gap between improving fundamentals and investor positioning, with valuations still undemanding.”

Taiwan is also one of Aberdeen’s highest-conviction markets with opportunities across the broader AI supply chain, including advanced packaging, connectivity, semiconductor equipment and networking.

“Taiwan remains one of the clearest ways to gain exposure to the structural growth in AI and technology spending globally.

“We particularly like the ‘picks and shovels’ of AI – the companies providing the critical infrastructure and enabling technologies required for the next stage of AI adoption.”

Korea remains a preferred market, with opportunities extending beyond semiconductors into industrial and shipping businesses benefiting from power-grid investment, electrification and the energy transition.

“Korea offers an interesting combination of AI-driven earnings growth and improving capital discipline. We are seeing stronger dividends, better capital allocation and a greater focus on shareholder returns.”

Iamthongthong said the next phase of the Asian equity story would require investors to look beyond broad market exposure and focus on companies where fundamentals were improving faster than market expectations.

“We are looking for companies where fundamentals are improving faster than market expectations, while remaining disciplined on valuation and position size,” she said.

“In Taiwan, that means AI infrastructure and companies with strong earnings visibility. In Korea, it means businesses benefiting from the memory cycle, industrial policy and improving capital discipline. In China, we see opportunities where innovation, AI adoption and advanced manufacturing are translating into stronger earnings potential.”

While the outlook remains constructive, Iamthongthong said key risks included a sharper-than-expected slowdown in the US, a pullback in AI capital expenditure or semiconductor demand, changes in China’s growth trajectory, currency volatility and geopolitical tensions, particularly around US-China relations and Taiwan.

“AI remains an important structural driver for Asia, but we are moving into a phase where investors need to look beyond the obvious winners.

“We believe the next opportunities will come from identifying companies where structural growth, improving fundamentals and attractive valuations come together, and that is where active stock selection becomes increasingly important.”

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Min Zeng

Japanese equities have performed strongly this year, supported in part by enthusiasm around AI-related opportunities. As markets entered the third quarter, however, they began to digest the narrow rally that drove Q2 performance. Semiconductor and AI-related stocks have pulled back notably, but Min Zeng, portfolio manager, Fidelity International, views this primarily as a reassessment of valuations and earnings expectations rather than a meaningful deterioration in corporate fundamentals.

Min Zeng comments: “The key point is that the market appears to be shifting from a theme-led phase to one more focused on earnings delivery. Demand for AI infrastructure, data centres, memory, advanced components and related supply-chain investment remains intact, but investors now require clearer evidence of order growth, pricing power, margin resilience and guidance support. In this environment, companies that can convert strong demand into sustainable earnings and returns on capital should be better placed than those relying mainly on thematic momentum.

“Japanese companies continue to occupy important positions across the AI value chain, including memory and storage, advanced substrates, passive components, power semiconductors, optical components, industrial automation and precision manufacturing. While some of these areas have faced near-term valuation pressure, the pullback appears to reflect a rebalancing of crowded positions after strong prior gains, rather than a reversal in underlying demand trends.

“Beyond the semiconductor supply chain, we remain constructive on selected areas linked to electrical equipment, industrial automation and power infrastructure. As AI adoption expands, investor attention is broadening from computing capacity to the infrastructure needed to support AI deployment, including transmission and distribution networks, cooling technologies and data-centre-related equipment. While Japanese companies possess strong technological advantages across these sectors, selective positioning and a disciplined focus on valuations remain essential.

“Financials are also an important area of opportunity. The Bank of Japan’s gradual policy normalisation should support a more favourable earnings environment for banks through improving net interest margins and reinvestment income. At the same time, corporate governance reform is encouraging better capital allocation, higher dividends and share buybacks. As market leadership broadens beyond AI-related names, selected financial companies with resilient earnings profiles and attractive valuations have shown relative strength.

“We continue to see opportunities in companies linked to infrastructure investment, defence spending and corporate capital expenditure. Supply-chain reconfiguration, energy transition, infrastructure modernisation and national-security investment are creating demand for industrial equipment, engineering and advanced manufacturing technologies. In parallel, labour shortages and the need to improve productivity should support investment in automation, machinery and related infrastructure.

“Looking ahead, Japanese equities are likely to experience further volatility as investors assess earnings results and reset expectations after a strong rally. Nevertheless, the broader investment case remains intact. Current market dynamics suggest rotation rather than a broad withdrawal from risk assets. As Japan moves from an AI-driven market to a more earnings-driven market, active stock selection should become increasingly important.”

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Angel Zhong

The South Korean stock market has plunged almost 40 per cent over the last few weeks, wiping billions from investor wealth. An RMIT expert says the sell-off is a stark reminder that market enthusiasm for AI can quickly outpace economic reality.

Professor Angel Zhong, School of Economics, Finance and Marketing: “What we’re seeing in South Korea is a reminder of how quickly technology narratives can translate into market enthusiasm, and how quickly that enthusiasm can reverse.

“The AI revolution is creating genuine economic opportunities, but markets often price in expectations long before those benefits are fully realised.

“When investors become heavily concentrated in a single theme, whether that’s AI infrastructure, semiconductors or any other high-growth story, valuations can drift away from underlying fundamentals.

“The key takeaway is not the decline in share prices, but how leverage amplified both the gains and the losses.

“Investors should be careful not to mistake a correction in market sentiment for a failure of underlying technology. AI will continue to transform industries, but markets often move through cycles of exuberance and reassessment.

“Financial literacy is more important than ever in an environment where technology, social media and low-friction trading platforms can rapidly draw investors into speculative trends.”

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China remains central to the global outlook, but the opportunity set has evolved.

China’s economic trajectory is shifting, but not in the way many had once expected. Consumption-led rebalancing has not materialised. Instead, economic policy continues to emphasise industrial modernisation, aligned with a long-term strategy focused on supply-chain resilience and national security.

Policymakers appear willing to tolerate only a moderate slowdown, with longer-term guidance pointing to lower but more sustainable growth, implicitly anchoring real GDP growth in the low-4% range over the next decade. The 2026 growth target range of 4.5%-5% reinforces room for expansion when it aligns with strategic objectives. What is emerging is not a fundamentally new model, but an upgraded version of the existing one.

This approach has a clear logic, channelling resources toward industrial capability and national self-sufficiency to capture potential tailwinds from technology and trade, while reinforcing economic resilience. But it also means the gap between what China produces and what it consumes is unlikely to close meaningfully. For the global economy and for investors, the gap remains a critical variable.

A policy framework built around national resilience

At the centre of China’s direction is a deliberate set of policy choices. The 15th Five-Year Plan (2026-30) signals an ongoing rotation away from scale-led expansion towards a framework focused on productivity, resilience and technological upgrading. Strategic sectors, particularly artificial intelligence and advanced manufacturing, remain central to this transition, alongside a continued emphasis on reducing external dependencies, particularly in an increasingly contested geopolitical environment.

Demand stimulus serves more as a fallback plan

The FYP does elevate domestic demand as a more prominent growth driver, supported by services consumption, people-oriented investment and social reforms aimed at unlocking household spending. However, the overall framework remains supply-side centric, with no binding targets for consumption, reflecting a reluctance to set firm commitments for structural variables that require broad, long-term reforms.

The FYP includes commitments on income growth, social protection, housing stabilisation and expanded access to public services, all aimed at reducing precautionary savings and encouraging spending.

However, progress has been gradual. These commitments remain largely qualitative and may not be pursued in full if external demand proves sufficient to meet growth targets. Meanwhile, structural constraints, including income uncertainty, insufficient social safety nets and the lingering effects of the property downturn, continue to reinforce a high saving bias.

Notably, services are positioned as a key driver of jobs and consumption, with the State Council projecting the sector to reach RMB 100 trillion by 2030. But even that implies slower nominal growth than the prior five years, and the emphasis is as much on producer services as consumer-facing ones.

As a result, consumption is likely to be supportive at the margin, but not a baseline growth driver over the next few years.

Technology and industrial upgrading are supporting investment

Where policy is most decisive is in its support for technology and industrial upgrading. Investment is being channelled into semiconductors, artificial intelligence, advanced manufacturing and clean energy.

Investment as a share of GDP is gradually declining, but its composition is shifting toward manufacturing, technology and other high-priority sectors. At the domestic level, this helps offset weakness in traditional sectors such as property. Over the medium term, this could support productivity, particularly given increased emphasis on R&D and innovation, helping to offset the structural drag from a declining population and fast-ageing demographics. Regionally, it reinforces demand across supply chains, particularly in Taiwan and Korea’s semiconductor ecosystems.

The global consequence: reinforcing imbalances, not resolving them

The cumulative effect of these domestic choices has clear external implications. A persistent gap between production and consumption means China will continue to rely on exporting goods to the rest of the world as a key engine of growth.

The FYP does signal an intent to rebalance trade. Import expansion, outbound direct investment and rules-based alignment to international standards with trading partners all feature prominently, alongside measures to reduce blanket subsidies and upgrade export product structures. If delivered, these could gradually rebalance China’s growing trade surplus and ease some of the friction with trading partners.

But the gap between ambition and execution remains wide. For now, China’s export share continues to grow. It may also gain tailwinds from a potentially accelerating global green transition given China’s growing strength in electric vehicles, lithium-ion batteries and solar. As we noted in our recent Secular Outlook: Rupture and Resilience^[1], China remains a pivotal player in global fragmentation, an ongoing source of disinflation, and holds significant geoeconomic leverage in international trade and security discussions.

That disinflationary impulse is itself being reshaped by the changing trade landscape. As tariffs reroute goods away from the U.S., the disinflation that once flowed primarily to American consumers is now landing in other markets, particularly in emerging economies. It is a double-edged dynamic: while trade diversion can depress local prices and compete with domestic manufacturing, it also means that inflation across many emerging market (EM) economies is now running structurally lower than U.S. levels for the first time in history. For EM central banks with credible policy frameworks, this creates room to ease and support domestic growth at a time when developed market policy remains constrained.

Geopolitics remains a key variable

If the baseline outlook is one of steady but unbalanced growth, geopolitics is the factor most likely to shift the picture.

Trade tensions and technology restrictions continue to shape the environment in which China operates. The trajectory of U.S.-China relations stands out as particularly consequential, with tariff escalation and export controls creating direct implications for supply chains, corporate earnings and market access. Competition in critical technologies is unlikely to ease, regardless of the diplomatic cycle.

But China’s geopolitical relevance extends well beyond its bilateral relationship with the U.S. As a supplier of green energy technology, a growing exporter of digital infrastructure and technology standards, and a potential architect of alternative payment systems, China is building a network of partnerships that reaches across Asia into the Middle East, Latin America and Africa. This positions China not merely as a trade partner but as an alternative anchor in a fragmenting global order.

This dynamic is central to what has been described as the “middle power moment”. Without a credible alternative to U.S. economic and strategic influence, middle-income countries have limited bargaining power. China’s presence changes that calculus. Countries such as Brazil, for example, can leverage competing demand for critical minerals. The result is a more multipolar landscape in which alliances are negotiated rather than assumed, and in which China’s role as a counterweight is itself a source of geopolitical significance.

Beyond these structural shifts, broader geopolitical developments, from regional security tensions to evolving alliances around trade blocs, can introduce bouts of volatility. This reinforces the importance of active risk management and scenario planning within portfolios.

What this means for fixed income and portfolio positioning

Against this backdrop, China’s domestic bond market has remained notably stable. Banks and other domestic institutions continue to provide a consistent base of demand for government bonds, and the market retains a low-volatility profile relative to other major fixed income markets.

However, the outlook is more nuanced for global investors. Structurally, China remains in a low-rate environment, anchored by weak domestic demand, excess capacity and elevated debt levels. Policy retains an easing bias, even if overall policy space is more constrained. Low yields limit the appeal of Chinese government bonds as standalone investments, and they are often used as funding instruments for higher-yield opportunities elsewhere. The offshore renminbi market is expanding and issuance patterns are shifting as both Chinese and foreign borrowers adapt to changing funding dynamics. Demand for U.S. dollar bonds from Chinese issuers has been strong, driven largely by financial institutions recycling the trade surplus. This favourable technical backdrop may persist, though the spread pickup over comparable global investment grade bonds has narrowed relative to historical norms.

From a currency perspective, we remain constructive on gradual renminbi appreciation, supported by a stronger current account and stated policy intentions to rebalance. However, the RMB is unlikely to outperform meaningfully the appreciation already priced into the forward USD/RMB market.

The investment case for China has changed

China remains central to the global outlook, but the opportunity set has evolved. For investors, this argues for selective exposure to areas aligned with policy priorities, less directional beta, and a focus on relative value across onshore and offshore credit and rates markets.

It also reinforces the case for diversification across both developed and emerging markets. EM now provides important portfolio diversification against the very disruptions emanating from the developed world. In a regime where U.S. fiscal dynamics, dollar rebalancing and developed market policy uncertainty are primary sources of portfolio risk, EM exposure offers a genuine hedge rather than simply an additional source of yield. With China serving as an increasingly significant geopolitical and economic partner for many of those same EM countries, its relevance to the broader investment case only grows.

In a world shaped by imbalance rather than convergence, the case for China exposure remains intact, but it is no longer about broad participation in a growth story. It is about navigating a more complex, policy-driven landscape and recognising that China’s influence extends well beyond its own borders.

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Notes:
[1] https://www.pimco.com/au/en/insights/rupture-and-resilience

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Asian equities can play a role in investor portfolios and this is becoming increasingly important in the current environment.

The investment playbook has long been anchored by the security of the Australian sharemarket, notably the ASX200. Investors have leaned on the ‘big four’ banks for yield and the mining giants for growth, supplemented by a tilt toward US mega-cap technology. However, with the ASX200 trading at record highs and forward P/E ratios stretched well above historical norms, the risks that a home bias can have on portfolios are acute.

Domestic inflation remains stickier than anticipated. This has forced the RBA into a hawkish stance that challenges some domestic equity valuations. However, our northern neighbours have entered a structural renaissance. While Asia has long been considered a ‘satellite’ allocation for somewhat speculative growth, in 2026 it has become an engine for growth, diversification and income.

These domestic issues take place while geopolitical events continue to reshape global capital markets. The extreme concentration in US assets, driven by fiscal policies that have now propelled US national debt close to a US$39 trillion^[1] milestone, is showing clear signs of peaking. At the same time, the US dollar is navigating a period of structural softening; its long-standing safe haven premium is being eroded by the gravity of the country’s debt burden and a global trend toward currency diversification.

As well as these broad global thematics, there are other, more granular reasons to consider Asian equities for your clients. Each of these will be explored in further detail in this article.

1. The ASX duopoly – the concentration of the Australian market means that many client portfolios are over-exposed to Financials and Materials. Asia offers diversity via direct exposure to a range of growth sectors, many of which are not accessible through the domestic market. This includes semiconductors, industrials and AI.
2. The income evolution – traditionally, Australian investors looked to Asia for capital growth and stayed home for dividends. However, a growing number of Asian companies are delivering record share buybacks and yields that rival our domestic income staples (such as banks), but with far superior growth runways.
3. A structural portfolio shift – large industry funds and other institutional investors are pivoting their private and public equity mandates toward Asia. AustralianSuper CEO Paul Schroder recently noted the fund is ‘just at the beginning’ of its Asian private equity expansion (Asia Asset Management, February 2026), while Aware Super’s $6bn digital infrastructure push has increasingly focused on Asian markets (i3 Insights, March 2026). This institutional appetite signals a shift from treating Asia as a volatile satellite to a core portfolio engine.

The case for Asia

For Australian investors, the case for Asia in 2026 has become stronger, driven by a fundamental shift in how global capital is allocated. As domestic valuations on the ASX face headwinds from a mature credit cycle and geopolitical factors, the Asian region offers a multi-speed growth profile that provides both a valuation cushion and exposure to sectors unavailable on the local exchange.

1. Diversifying beyond the banks and miners

For many Australian investors, diversification can be challenging to achieve in the domestic sharemarket. The S&P/ASX200 remains one of the most concentrated developed indices in the world, with 54.4 percent of the index weight tethered to just two sectors: Financials (29.5 percent) and Materials (24.9 percent)^[2]. While this has historically provided a reliable stream of franked dividends, it can leave portfolios exposed to a ‘two-engine’ economy.

The Australian market is somewhat sparse when it comes to the sectors defining investment trends and economic power in the late 2020s. Asia, however, provides the structural bridge to these missing industries, such as:

Semiconductors – while the ASX has virtually no semiconductor footprint, Asia houses the entire global supply chain. Investing in the region provides direct exposure to several companies that are the gatekeepers of global computing power, from high-end logic chips to the high-bandwidth memory (HBM) required for generative AI.

The new industrial revolution – Australia’s industrial sector is largely comprised of transport and logistics firms. In contrast, Asia offers exposure to advanced robotics, precision manufacturing and automation. As China’s 15th Five-Year Plan prioritises new productive forces, the region is seeing a surge in industrial tech firms that are automating the world’s factories. This is a sector that does not exist at scale in the domestic market.

Artificial intelligence – Asia represents the Applied AI frontier, the practical integration of artificial intelligence into tangible hardware and industrial processes to solve real-world problems. Such businesses are focused on the commercialisation of the technology and converting AI capability into immediate, scalable revenue.

A strong rationale for the Australian investor is the shift from raw materials to refined technology. Many investors’ portfolios are dependent on the price of raw lithium or nickel; an allocation to Asia also provides exposure to those companies that turn those minerals into EV batteries, energy storage systems and so much more.

2. The income evolution

The traditional home bias of Australian investors has long been justified by a single, powerful incentive: franked dividends. This has been particularly important for retirees. Historically, Asia has been considered the investment destination for capital growth, while the domestic market remained the engine for yield.

However, GSFM’s investment partner Eastspring Investments believes dividend yield has increasingly become a foundational pillar of long‑term wealth creation in Asia. A decomposition of returns for the MSCI Asia Pacific ex‑Japan Index from March 2006 to February 2026 reveals three distinct drivers: earnings growth, valuation changes through multiple expansion or contraction and dividends (figure one).

While valuation multiples can be highly volatile, swinging sharply between expansion and contraction and acting as both a tailwind and a headwind at different points in the cycle, earnings growth has been comparatively more consistent but remains subject to cyclical variation. Meanwhile the dividend component has delivered the most reliable and steadily compounding contribution to total returns over time.

Income from Asian equities is also being driven by a wave of corporate governance reforms that are forcing companies to prioritise shareholder returns over cash hoarding.

While the headline yields of Australian banks often hover between 5-6 percent, they frequently consume 75-90 percent of corporate earnings to maintain those payments. In contrast, several key Asian segments are now delivering similar total returns with payout ratios closer to 30-40 percent.

This shift is most visible in markets such as South Korea and Taiwan, where programs have incentivised boards to aggressively deploy capital back to investors. In 2025 and 2026, share buyback activity in these regions reached record highs, effectively creating a ‘synthetic yield’ that complements traditional dividends. Unlike the Australian banking sector, which is currently operating in a mature, low-growth credit environment, these high yield Asian companies are anchored in high-growth industries such as advanced semiconductors and regional logistics.

Case study: South Korea’s ‘Value-up’ Program^[3]

South Korea’s corporate Value-up Program, which reached full maturity in early 2026, has seen major conglomerates move toward a 30/30/30 model: 30 percent payout, 30 percent buybacks and 30% reinvestment.

From a yield comparison perspective, top-tier Korean financials such as KB Financial Group are currently yielding approximately 5.2 percent. This is being achieved with a payout ratio of roughly 35 percent.

3. A structural portfolio shift

The shift toward Asia by Australia’s major industry super funds is significant. Historically, Australian industry funds treated Asian markets as high-beta satellites, allocations designed to provide a small growth kicker at the expense of significant volatility.

However, the sheer scale of the Australian retirement pool, now exceeding $4.5 trillion^[4], has made the ASX a somewhat crowded trade. For Australia’s large institutional investors, Asia has become a necessary frontier for absorbing large-scale capital in sectors that offer structural longevity.

The announcement in late 2025 of a ‘strategic pivot’ into Southeast Asia was aimed at mobilising superannuation capital into the region’s high-growth sectors. The pivot was being formalised through a partnership between the Australian government and IFM Investors, specifically to target long-term opportunities in manufacturing, the energy transition and infrastructure^[5].

When institutional investors move, they create the liquidity and corporate engagement that eventually lowers the risk profile for individual retail investors. This institutionalisation provides three key benefits for client portfolios:

• The presence of large institutional funds in these markets signals that the regulatory and governance frameworks have reached institutional grade.
• Through professional managers, clients can now tap into both private and public markets in Asia, some of which were previously inaccessible.
• As the benchmark for a ‘balanced’ super fund shifts toward a higher Asian weighting, it may become easier to present a positive investment case to your clients.

The China story remains intact

GSFM’s investment partner Man Group believes the Gulf conflict indicates that the world’s second-largest economy’s push for self-reliance appears to be paying off.  China’s first quarter gross domestic product growth recently came in at 5 percent, beating expectations and accelerating from 4.5 percent in the final quarter of last year. This was mostly driven by better-than-expected exports and a rebound in infrastructure spending.

China is probably the least impacted economy in Asia from the Gulf conflict. Its reliance on oil as a share of the energy mix is considerably lower than most countries (figure two), largely because of years of investment in renewables, making its oil stockpiles go a lot further.

The structural build out continues

Meanwhile, the structural build-out continues to gather pace. China is no longer simply catching up with the US in AI. In areas like AI inference – the process of using a trained machine learning model to make predictions, decisions, or generate outputs from new, unseen data – it is beginning to overtake.

What makes this particularly significant is the phase that AI is now entering. As the technology moves from software into the physical world through robotics and humanoids, China’s manufacturing dominance becomes a decisive advantage. This is where decades of industrial capacity meet cutting-edge innovation, and it is difficult to see how competitors can close that gap quickly.

The innovation story is also broadening into biotech. The government recently signalled its willingness to reform China’s drug pricing system, recognising that ‘high level innovative drugs with a high degree of innovation and significant clinical value’ should command prices consistent with their higher investment and risk. In Man Group’s view, this likely drives further upside to an already much improved biotech sector in China.

Easing headwinds

Several persistent drags on sentiment with respect to China are also stabilising. In the property market there has been slowing deterioration, as well as some early signs of stabilisation and improvement in both sales volumes and pricing.

On deflation, higher oil prices have driven the Producer Price Index back into positive territory for the first time since September 2022, ending a 41-month streak of deflation. Consumer prices rose one percent year-on-year in March but remain well below the government’s two percent target, and core inflation (excluding food and energy) was 1.1 percent

The export question

The open question is whether China can maintain its export momentum as global growth likely slows under the weight of a more prolonged increase in energy costs. China may stand to benefit as competitors feel the drag from the energy shock and a global desire to reduce reliance on hydrocarbons sourced from the Middle East drives demand for renewables. China manufactures 92 percent of the world’s solar modules and 82 percent of wind turbines.

If global exports do eventually slow, that may become the catalyst for an internal consumption pivot. Man Group believes China has delayed consumer-related policy reform partly because the strength of its broader export volumes has offered a credible backstop to sustained GDP growth, and partly because the focus has shifted to ensuring self-sufficiency against a backdrop of increasing geopolitical fragmentation. A prolonged decline in external demand could be what finally forces China’s hand.

Asian shares are shifting from a high-risk growth satellite allocation to a core part of a well-balanced portfolio. For Australian investors, this is one of the biggest opportunities in years. By moving beyond the local focus on banks and mining stocks, and investing in areas such as AI, semiconductors and other advanced industries, you can reduce the home bias from clients’ portfolios and improve long-term outcomes. Asia is no longer just an option; it’s becoming a key foundation for building a strong, future-ready portfolio.

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Notes:
[1] https://www.us-debt-clock.com/, accessed 27 April 2026, debt figure $38.8 trillion
[2] Spglobal.com, S&P/ASX200 Fact Sheet, 31 March 2026
[3] Korea Exchange (KRX) Market Data, 2025 Annual Shareholder Return Report, January 2026
[4] ASFA Super Statistics, 30 September 2025
[5] Super funds to drive south-east Asia investment growth, Super Review, 28 October 2025

The information included in this article is provided for informational purposes only and is general advice only. It does not take into account an investor’s own objectives. The information contained in this article reflects, as of the date of publication, the current opinion of GSFM, Eastspring Investments and Man Group, and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. None of Eastspring Investments, Man Group or GSFM Pty Ltd, their related bodies nor associates give any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.

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Asia-Pacific is looking underpenetrated and increasingly relevant.

Private credit is entering a more demanding phase. For much of the past decade, the asset class benefited from a highly supportive macro backdrop. Rising base rates, coupled with floating-rate structures, provided a largely mechanical uplift to income. Returns were often driven as much by macro conditions as by credit selection. That dynamic is now shifting.

Recent geopolitical developments, notably the escalation of conflict involving Iran, have complicated the outlook for inflation and monetary policy. Energy-driven price pressures have reintroduced volatility, forcing central banks into a more cautious, data-dependent stance. Interest rates are no longer expected to follow a single trajectory, with markets pricing a wider range of outcomes. For private credit investors, this marks a transition from broad tailwinds to a regime defined by dispersion, selectivity, and structure. In that environment, geography matters more.

The US market: scale, maturity, and emerging constraints

The US remains the largest and most developed private credit market, fueled by bank retrenchment and private equity expansion. This has created a deep direct lending ecosystem. But success has brought maturity and constraints.

Global private debt AUM reached about $2.5 trillion by the end of 2025, mostly in North America (PitchBook). Fundraising remains resilient, but scale has introduced pressures: spread compression, competitive deal dynamics, weaker covenants in some segments, and rising leverage. Sector exposure is concentrated in technology, software, and AI-adjacent businesses. Rapid advances in generative AI challenge assumptions underpinning these models, including pricing power, customer retention, and long-term growth. Seat-based SaaS models are increasingly vulnerable to disruption, risking margin compression and faster obsolescence.

Public markets have already reflected this shift through volatility and multiple compression. Private markets are slower to adjust, but private credit implications are clear: loans underwritten in a different valuation environment may face elevated refinancing and recovery risk, particularly for asset-light borrowers reliant on enterprise value for downside protection. The US remains indispensable, but outcomes will be more idiosyncratic, with greater dispersion driven by sector exposure and underwriting discipline.

Liquidity is being repriced: lessons from BDCs and interval funds

Liquidity structures are under scrutiny. Interval funds and business development companies (BDCs), which offer periodic liquidity, are showing strain. Elevated redemption requests, gating mechanisms, and persistent NAV discounts highlight a shift in investor perception.

This is not systemic stress but a repricing of liquidity risk. Private credit is increasingly understood as a long-duration, illiquid asset class, with conditional liquidity. Concerns are rising around underlying portfolio exposures, especially in software-heavy strategies facing AI-driven disruption. In the US wealth channel, where retail capital drives interval funds and BDCs, this has translated into higher redemption activity and sensitivity to performance dispersion.

The implications for investors are clear. There is a greater emphasis on cash yield rather than mark-to-model returns, alongside increased attention to duration, amortization, and the visibility of exit paths. Portfolio construction and the liquidity of individual assets are under heightened scrutiny. These pressures are particularly pronounced in US direct lending, where sponsor-backed, covenant-light, and asset-light structures dominate.

Asia-Pacific: underpenetrated and increasingly relevant

Against this backdrop, Asia-Pacific offers a distinct opportunity. Despite representing roughly 40% of global GDP and over 60% of growth, the region accounted for just 3.2% of global private credit capital raised in 2025 (PitchBook). Momentum is building: AUM is projected to rise from $59 billion in 2024 to $92 billion by 2027 (AIMA). More important than headline numbers is the structural imbalance between capital supply and demand.

Private credit in Asia-Pacific operates differently. Banking systems remain conservative, lending is concentrated among large corporates, and mid-market and asset-heavy sectors are underserved. This creates a persistent funding gap. Transactions are bespoke and directly originated, allowing lenders stronger structural protections. Around 90% of deals are non-sponsor, with more conservative capital structures, stronger covenants, lower leverage, and higher cash-pay income. Sector exposure is also distinct: more asset-backed and cashflow-driven sectors, such as real estate, infrastructure, logistics, and energy, rather than asset-light software businesses.

This distinction matters. In a world where AI disrupts traditional software models, lending anchored in tangible collateral and contractual cash flows offers a fundamentally different risk profile, less exposed to valuation swings and more resilient to market sentiment shifts. Many investments are shorter duration or self-liquidating, with clearer paths to repayment. These features are especially valuable as liquidity is reassessed and macro uncertainty remains high.

Structure over beta: from tactical to strategic allocation

The current environment underscores the importance of prioritizing structure over beta. While higher rates support income, they heighten downside risks. Strategies dependent on refinancing conditions or multiple expansion are increasingly vulnerable. By contrast, investments with strong collateral, predictable contractual cash flows, and shorter durations with early capital return are better equipped to withstand a wide range of macro outcomes.

These attributes are more consistently found in less crowded, structurally inefficient markets, particularly across Asia-Pacific. Exposure to the region is evolving from a tactical or opportunistic position to a more strategic portfolio role. The focus is on diversification, access to less competitive deal flow, and downside protection—not taking on additional risk, but finding markets where risk is better priced and rewarded.

Conclusion

Private credit is entering a period of differentiation, not decline. The next phase will be defined by greater dispersion of returns, increased focus on liquidity and structural protections, and a return to fundamental underwriting. Capital will migrate toward markets where competition is lower, structures stronger, and return drivers less reliant on optimistic growth assumptions. Asia-Pacific meets these criteria. For investors positioning for the next cycle, it is no longer a peripheral allocation, it is central to the private credit opportunity set.

By Jamie Tadelis, Chief Product & Investor Officer

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George Efstathopoulos

“In recent years, many investors have asked whether China remains investible. Between the property downturn, regulatory tightening, and geopolitical frictions, global capital turned away from Chinese equities in favour of perceived safety elsewhere. Yet markets have a way of challenging consensus, and China’s market performance this year suggests a quiet but meaningful shift. 

“China has proven more resilient than many had expected. Earnings stabilised, corporate reforms accelerated, and confidence is slowly returning. Flows typically follow stock market performance and earnings, and China is now delivering both. For investors, diversification remains the cornerstone of portfolio construction and China now offers not only diversification but also innovation. As such, it is regaining its status as an indispensable component within Asian and emerging-market allocations, precisely at a time when foreign investors remain structurally underweight Chinese equities.

“Perhaps the biggest surprise this year has been China’s resilience. Growth has held up in the face of tariffs and soft global demand, and the government has managed to navigate its relationship with the US more deftly than most expected. In many respects, China has achieved more in negotiations while offering less, shifting dynamics and bargaining power.” 

Rebalancing China’s two engines

“China’s economic model has long relied on two engines: exports and domestic consumption. The former has been operating in overdrive, while the latter continues to lag. To sustain growth, China is in the process of rebalancing towards domestic demand. The signals from the Fourth Plenum suggest policymakers are fully aware of this need. Fiscal policy remains the key. China holds the fiscal keys to help fight its own deflationary forces, rebalance its economy and create more sustainable growth domestically – and by doing so, boosting status as a key trading partner to the rest of the world, which would in turn also elevate the Chinese Yuan’s role in the world stage. 

“For markets, the next phase of the China rally may hinge on inflation dynamics. The return of moderate inflation would signal not just cyclical normalisation but structural health. For years, investors have drawn parallels with Japan’s deflationary episode, fearing a similar “lost decade”. Yet recent data points have been more encouraging. Core inflation has been rising since May, while service-sector inflation – from recreation to healthcare and transport – is broadening. Sequential producer price inflation has improved for three consecutive months, reflecting early success in addressing overcapacity and anti-involution can help earnings broaden beyond tech sector. A convincing exit from deflationary concerns could be the catalyst for further re-rating.”

Looking ahead

“As the narrative on China continues to shift, foreign flows are likely to follow. Yet perhaps the more powerful force lies within China itself. With one of the highest household savings rates globally, China holds a vast pool of untapped domestic capital. Historically, property was the preferred savings channel, but with the property market undergoing structural adjustment, equities may increasingly become a credible alternative.

“Meanwhile, government policies aimed at strengthening the social safety net could gradually reduce the need for precautionary savings. If households begin to deploy even a fraction of their deposits into the equity market, the implications for valuations could be profound. Opportunities span both onshore and offshore markets. Offshore equities, with their heavier weighting in technology and AI, are benefiting from the innovation theme and China’s relative strength in energy infrastructure – a key advantage in an electrifying global economy, while valuations remain much lower than global peers. Onshore markets, which are more exposed to domestic consumption, could be the main beneficiaries if fiscal stimulus surprises to the upside. Mid-caps, in particular, offer high sensitivity to domestic demand recovery. While anti-involution could drive corporate margins and profitability higher, benefiting sectors such as EVs, an industry China has come to dominate worldwide.

“Looking into 2026, the foundations are in place for a sustained rally. China’s macro and corporate resilience, coupled with the gradual return of inflation and a more supportive policy stance, suggest further upside potential. The combination of improving fundamentals, policy pragmatism, and renewed investor confidence marks a distinct departure from the cycle of hope-driven rallies of recent years. China’s equity market is in a bull phase that foreign investors have yet to fully appreciate. For those willing to look beyond the lingering skepticism, the risk-reward balance has shifted decisively. In my view, dips remain opportunities to buy, not to sell. China has turned the corner – not through hope, but through resilience, innovation, and policy conviction.”

By George Efstathopoulos, portfolio manager

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Andrew Swan

The next five-year plan from the Chinese government is likely to move the country from deflation to reflation, according to portfolio manager of Man GLG Asia Opportunities Fund, Andrew Swan. He says the focus will be on domestic demand to lift consumption levels in the economy.

“The Chinese government has described its next five-year plan as aiming to vigorously improve consumption as a share of GDP. This reflects the government’s desire to achieve balanced growth by providing greater economic incentives to increase household disposable income and boost consumer confidence to spend more in the local economy.

“If all the goals set out in the five year plan are delivered, it will positively impact investment markets as increased consumption will drive up corporate profits of Chinese companies,” says Mr Swan.

As with China’s previous five year plan there will be winners and losers, he says.

“The previous plan resulted in a fairly narrow set of winners, but it may be different this time around.

“The structural reforms that will encourage higher consumption will in turn drive prices higher. Higher prices have a positive impact on GDP, which bodes well for corporate profitability and for the broader equity market,” says Mr Swan.

In terms of trade negotiations with the US, Mr Swan says that China is in a stronger position than many assumed, as highlighted by with the recent trade tensions around rare earths.

“In recent weeks there has been a back down from the US on some of its trade threats. While this is good news, there still isn’t a permanent long-term solution that’s been agreed, instead, we have seen a delay in addressing the trade issues at hand.

“As it stands, while the tariffs are still there, they are certainly lower than what was anticipated. Importantly, they are in line with some of the tariffs that have been placed on other countries in the region.

“This is not a bad outcome for China compared to what the market feared earlier in the year,” says Mr Swan.

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Amit Goel

The Indian equity market came under pressure in 2025 amidst a domestic growth slowdown and adverse US policy actions. Both consumption and capital investment showed signs of fatigue after two to three years of strong expansion, leading to weaker corporate earnings growth.

The US imposed 50% tariffs on Indian imports, including a 25% penalty on Russian oil purchases, and introduced a USD 100,000 fee on new H-1B visa applications. The latter raised concerns as Indians account for nearly 70% of visa holders. The US remains a key trading partner, accounting for 20% of India’s goods exports and 50% of its services exports. Tariffs have particularly affected labour-intensive sectors such as textiles, gems and jewellery. While services exports remain exempt, rumours of a potential outsourcing tax persist.

Our corporate interactions indicate that additional H-1B visa costs are manageable for Indian IT services firms, which continue to reduce dependence on H-1Bs through increased local hiring in the US and greater nearshore/offshore recruitment. However, an outsourcing tax would pose a more material challenge if implemented. Encouragingly, recent reports suggest that New Delhi is moving closer to securing a tariff resolution with Washington.

India’s economy remains largely domestic-driven, with private consumption accounting for about 60% of GDP and gross fixed capital formation contributing 30%. In contrast, merchandise and services exports represent roughly 12% and 9.5% of GDP, respectively. This domestic orientation – supported by favourable demographics and rising consumption – underpins India’s position as one of the fastest-growing major economies globally.

The government appears to have recognised both internal and external challenges and has responded with structural reforms and fiscal stimulus. On 21 November, it implemented the four labour codes consolidating 29 existing laws. These reforms are expected to simplify compliance, address industrial disputes, and boost manufacturing competitiveness. For employees, they expand social security coverage, broaden enforcement of minimum wages, and promote gender pay parity.

Earlier in the year, the government increased the income threshold for tax exemption to enhance middle-class disposable income. In September, it simplified the Goods and Services Tax (GST) structure and lowered rates, making key consumer goods – including automobiles and durables -more affordable. In October, it approved the 8th Pay Commission, which will raise government employee salaries from 2026.

On the monetary front, the sustained decline in inflation has enabled the Reserve Bank of India to cut policy rates by 100 basis points over the past year and reduce the cash reserve ratio to improve credit availability. These measures should further support domestic demand and investment.

Overall, recent US policy actions have created short-term headwinds for India’s external sector, particularly if an outsourcing tax is implemented. While we await a trade deal with the US, India’s domestic demand-led growth model remains intact. The government’s policy measures are aimed towards a recovery in consumption and promoting investments. Indian equities continue to be supported by strong structural fundamentals and high returns on equity and periods of cyclical weakness may therefore offer attractive opportunities for systematic accumulation and medium-term alpha generation.

By Amit Goel, portfolio manager

The post India Holds Firm Amidst Global Headwinds appeared first on AdviserVoice.

Overall, China’s economy must deal with excess economic capacity by stimulating domestic private activity or set growth targets at lower levels that strictly contain production.

China’s ability to sustain fairly robust economic growth despite a massive property sector downturn is now facing new tests as global trade barriers rise, and domestic demand shows fresh signs of weakness.

Looking ahead, China’s excess industrial capacity and mounting inventories are likely to intensify deflationary pressures – forcing policymakers either to further stimulate domestic consumption or to tolerate slower growth. The readout from China’s recent fourth plenum acknowledges this economic reality. However, how quickly China can shift its growth model inward remains a key question.

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