Global markets entered a consolidation phase after a strong first half, as investors reassessed the outlook for inflation, interest rates and valuations following the first FOMC meeting under Kevin Warsh.

Persistent inflation and expectations of at least one further Fed rate hike have reinforced a higher-for-longer environment, supporting a flatter US Treasury yield curve and contributing to healthy deleveraging across previously crowded AI and semiconductor-related sectors.

Within equities, technology fundamentals remain constructive despite near-term volatility. Taiwan and South Korea have corrected following strong gains, although AI hardware demand and earnings expectations remain robust.

Meanwhile, China, Hong Kong, and other value-oriented markets have begun to outperform amid sector rotation and increasingly attractive valuations. India and ASEAN have also benefited from easing oil prices, although a strong US dollar continues to pose macro challenges.

In fixed income, duration remains the key performance driver as higher policy-rate expectations keep yields elevated. Asia investment-grade and high-yield bonds continue to benefit from resilient demand and supportive technicals, although risks from the US leveraged credit market warrant monitoring.

Against this backdrop, diversification, disciplined portfolio positioning and sustainable income remain essential for navigating elevated market volatility.

Source: J.P. Morgan, MSCI, Morningstar, Data as of 30 June 2026

China / Hong Kong Equities

• The market enters the second half of the year with some de-leveraging in the crowded semiconductor sectors after a buoyant first half.
• Kevin Warsh held the first FOMC meeting in mid-June, emphasizing the 2% inflation target and committing to changing the Fed’s communication without forward guidance. Together with still-high inflation data, the market has repriced from no rate hikes to at least one this year.
• Although the June nonfarm payroll was lower than expected, with the prior two months revised lower, the market has not changed its view of the rate-hike path this year. The bearish flattening of the yield curve has historically been unfavorable for most risk assets.
• As a result, the market started to correct from the extremely crowded positioning. However, as we are going into the Q2 earnings season which earnings are expected to continue to be strong, it will give support to the market after some healthy deleveraging.
• With the deleveraging and rotation from the hot sectors to the value sectors, the Hong Kong/ China market has started to outperform as valuation is approaching an attractive level.
• However, the macroeconomic environment in China remains challenging, and earnings have not reached the bottom yet. In addition, with the rate hike expectation this year, many domestic Hong Kong sectors that are interest rate sensitive continue to be pressured.

China A-Shares

• China A-Shares, particularly the technology hardware sectors, rallied significantly in the first half of the year. Valuations have been getting extreme; therefore, with the global deleveraging in the semiconductor sectors, China A shares also corrects and there is a rotation back to the value sectors.
• A stable but stronger RMB is favorable for both supporting the consumption and export sectors.
• While the macroeconomic environment remains challenging, the old economy sectors would still be difficult to have a turnaround recovery, while the semiconductor localization story will continue to favor the tech hardware sectors after valuations go back to more reasonable levels.

Asia ex-Japan Equities

• After the best performing Q2 and first half in history, Taiwan and Korea markets start to correct.
• High leverage in the Korea market is starting to become a problem; for example, with SK Hynix’s 2/3 daily trading volume now coming from the leveraged ETFs, volatility in the Korea market is surging to historical high levels. South Korea’s ruling party is set to review the leveraged ETF framework.
• While there is overall concern about the excess AI infrastructure investment and worry of a slowdown in AI hardware demand, we still see a significant shortage in most of the AI hardware supply chain, and earnings growth outlook has not changed.
• India and ASEAN countries, on the other hand, benefited from the US-Iran deal and the reopening of the Strait of Hormuz. Oil prices have dropped significantly since then.
• We see outperformance of India and ASEAN because of the oil relief and rotation back to value sectors amid the selloff in tech. However, given the strong USD, these countries will continue to be under pressure as they will need to raise interest rates further to protect their currencies.

Emerging Market ex-Asia Equities

• After the March and April rally due to the surge in oil and commodity prices, EM ex-Asia corrected in May and June due to the drop in commodity prices.
• After the correction, valuations returned to average levels, and these EM markets should stabilize. However, a strong USD will remain a concern for these EM countries.​

Japanese Equities

• Although the BOJ hiked the interest rate in June to 1%, USD/JPY remains under pressure, breaking above the 160 level and seeing a 40-year low for the yen. There is increasing pressure for BOJ to hike again but the probability of further rate hikes this year remains divided.
• Although BOJ said they may intervene in the market without any warning signs, short positioning in JPY is now the highest. This one way bet in JPY is a big risk in the market as carry trade positioning is building up again after dying down in the past two years.
• Japan market has also seen a volatile correction along with the US, Korea, and Taiwan markets, especially in the technology sector. As Softbank and Kioxia now become the biggest players in terms of market caps, replacing Toyota, the Japan market has also become more concentrated in the technology sector with higher volatility.

Asia Investment Grade Bonds

• Kevin Warsh held the first FOMC meeting in mid-June, with an emphasis on the 2% inflation target, and committed to changing the Fed’s communication without forward guidance.
• Along with still-high inflation data, the market has repriced from no rate hikes to at least one this year.
• Duration continues to be the biggest factor moving the Asia investment grade bond prices recently.
• We expect the US yield curve remains flat and the long end yields to remain at a high, range-bound level.

Asia High Yield Bonds

• Spreads of Asian high-yield continue to remain at levels well below average amid subdued new supply. However, the impact of defaults and spread widening in the US high yield bonds due to cracks in private credit and bank loans will remain as a risk factor. On the other hand, lower oil price gives more relief to the ASEAN bond issuers.

Emerging Market Debt

• Spreads remain tight but stable. However, with a strong USD and a US Treasury yield curve flattening, which is not favorable for commodities, EM bonds may start to face some pressure in the near term but will still be relatively stable given the strong demand.

Gold

• In the near term, gold prices remain in a range bound due to the strong USD and higher interest rate-hike expectations. Bearish flattening of the US yield curve has historically not been a favorable environment for commodities, including precious metals.
• On the other hand, we remain positive on gold over the long term as most central banks, including China, will continue to buy Gold to diversify away from US Treasuries after the oil situation stabilizes.
• Especially in China, the PBOC has been increasing gold in its reserves consecutively for over 9 months, and this trend will continue.

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 30 June 2026.

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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.}

^{Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. Investors should seek advice from a financial adviser before making any investment. In the event that you choose not to do so, you should consider whether the investment selected is suitable for you.}

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