Global risk assets have entered the year with strong momentum despite elevated valuations and crowded positioning, reflecting supportive liquidity but increasing sensitivity to geopolitical and policy risks. Tensions in Latin America and the Middle East remain key overhangs, while market complacency warrants caution.

Within Greater China, Hong Kong equities trade at reasonable historical valuations, but mixed macro data, weak consumption, and ongoing property-sector headwinds suggest a continued K-shaped recovery led by growth sectors. China A-shares are supported by a firmer RMB and policy backing for technology localization, although high valuations and a still-fragile macro backdrop keep investor focus on sectors with clearer earnings visibility, such as AI, materials, and healthcare.

Across Asia ex-Japan, valuation dispersion is widening. South Korea stands out on the back of a strong memory upcycle and advances in robotics, while Taiwan’s market appears expensive with profit-taking emerging. Southeast Asia shows early signs of stabilization, though a sustained recovery in sentiment will take time.

In fixed income, Asia investment-grade and high-yield spreads remain tight, limiting upside and increasing sensitivity to rate and duration risks, even as refinancing conditions support low default expectations.

Gold remains supported by geopolitical uncertainty and ongoing diversification away from USD assets, though volatility is rising. In this environment, diversified multi-asset strategies and income generation remain increasingly important.

Source: J.P. Morgan, MSCI, Morningstar, Data as of 31 December 2025

China / Hong Kong Equities

• While equity valuation is high around the world and sentiment and positioning have become crowded, momentum remains strong in equity markets globally to start the year.
• Geopolitical risk remains elevated with the new center stage around Venezuela and Iran.  However, the market is becoming too complacent, which some caution should warrant.
• Hong Kong China equities are trading slightly above their historical averages, which are still at a reasonable valuation.  However, macroeconomic data in China is still mixed, with service PMI below expectations, and the property market is still dragging down.
• Consumption remains soft, and overall earnings have not bottomed yet. The economy and the equity market will continue a K-shape recovery, with the growth sectors continuing to lead ahead.

China A-Shares

• Momentum in China A-shares is picking up, helped by the strengthening of the RMB.  PBOC allows a gradual appreciation of the RMB to aid in supporting domestic demand.
• This is a positive signal to China A-Shares.  The policy support of technology localization increases foreign interest in the Chinese technology space.
• On the other hand, as valuation not cheap in general and the remaining weak macroeconomic environment, investors continue to focus only on sectors with higher earnings visibility and sustainable growth potential, such as AI/ tech, material, and healthcare sectors, while interest in the consumption sector remains very weak.  This divergence will continue as domestic consumption takes a longer time to recover.

Asia ex-Japan Equities

• Valuation in North Asia has gotten stretched, although there were also positive earnings revisions, while Southeast Asia remains cheap due to political and growth concerns.
• South Korea, with the much stronger than expected upcycle in memories and the recent breakthrough in robotics, continues to catch the spotlight within Asia with the highest return so far to start the year.  However, there is profit-taking in most other sectors besides memory and robotics.  Higher market volatility and more frequent rotation are likely to occur.
• Taiwan has become the third most expensive market globally, only after the US and India.  Most names are trading at relatively high multiples with a perfect growth scenario priced in.  We start to see some profit-taking in the non-TSMC names at high valuations.
• There are some early signs of turning in Southeast Asia, with money starting to flow back to the region, given positive development on the tariff front with the US, and bottoming of the political situations, although it will take time for sentiment to fully recover in the region.

Emerging Market ex-Asia Equities

• Valuation in emerging markets outside Asia has become stretched.  Geopolitical risk remains the biggest concern, as the developments in Latin America and the Middle East are highly uncertain.

Japanese Equities

• Japan’s PM Takaichi’s proposal of a snap election of the lower house fueled a rally in stocks while driving the JPY closer to 160, at which there could be some intervention by the BOJ.
• While the weaker JPY supports the export sector, the higher bond yields support the banks, volatility will increase, especially valuation of the Japanese market is getting expensive.

Asia Investment Grade Bonds

• Credit spreads of Asia investment-grade bonds are very tight now.  The Treasury yield curve may get steeper as the independence of the Fed is being challenged by the recent subpoena of Powell by the DOJ.
• This incident also creates uncertainty about the rate cut path under the next Fed chair.  Duration risk is becoming higher.  The market now does not expect any further rate cut before the end of Powell’s term in May.  Upside risk to Treasury yields is getting higher.

Asia High Yield Bonds

• Spreads of Asian high yield continue to remain very tight at levels way below average, although they remain above the spreads of US high yield.
• As new supply remains subdued, investors are chasing the same set of names in Asian high yield bonds as the search for yield continues.  Although valuation is high, default will remain low as the refinancing progress is improving in Asia.

Emerging Market Debt

• Spreads have become even tighter, but without many alternatives for yields, investors are still chasing.  Higher commodity prices are supporting the market.

Gold

• Gold is breaking up again with the heightened geopolitical risk in Latin America and Iran, and the concern about the independence of the Fed.
• We remain long-term positive on Gold as the “debasement trade” to diversify the risk from government bonds and USD assets has not ended.
• Central banks continue to increase their gold holdings to diversify their FX reserve.  However, speculative positioning is building up very fast, and volatility will only get higher.

Multi-Asset

• A multi-asset strategy offers lower volatility compared to traditional single-asset or balanced portfolios. However, the correlation between risk assets, such as equities, credits, and commodities, has recently increased dramatically. In an uncertain environment, income becomes an essential source of return for investors.

Source: Bloomberg, Data as of 31 December 2025.

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^{The views expressed are the views of Value Partners Hong Kong Limited only and are subject to change based on market and other conditions. The information provided does not constitute investment advice and it should not be relied on as such. All materials have been obtained from sources believed to be reliable as of the date of presentation, but their accuracy is not guaranteed. This material contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.}

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