Global markets have entered a more volatile phase following the strong rally in April and May, as investors reassess inflation, interest-rate expectations, and geopolitical risks. Stronger-than-expected US economic data, coupled with renewed US-Iran tensions and persistently high energy prices, have reinforced the higher-for-longer rate narrative and increased market sensitivity to inflation developments.

Within equities, technology and AI-related sectors remain the key long-term beneficiaries, although markets such as Taiwan and South Korea have experienced healthy corrections following increasingly crowded positioning and elevated leverage. China A-shares continue to appear relatively attractive, supported by resilient exports and technology-sector opportunities, while Hong Kong equities face headwinds from weaker capital flows and higher rate expectations. Elsewhere, ASEAN and India remain challenged by elevated oil prices and currency pressures.

In fixed income, duration remains the primary driver of performance as markets reassess the outlook for inflation and policy rates. Asia investment-grade and high-yield bonds continue to benefit from supportive technical factors and strong investor demand, although credit risks in parts of the US leveraged finance market warrant close monitoring.

Looking ahead, elevated market correlations and ongoing macro uncertainty reinforce the importance of diversification, selective positioning, and income generation as key drivers of portfolio resilience.

Source: J.P. Morgan, MSCI, Morningstar, Data as of 31 May 2026

China / Hong Kong Equities

• At the end of May, market positioning had reached an extreme level of bullishness, with elevated equity exposure, particularly in the technology sector, alongside rising leverage. Against this backdrop, we had expected some form of market correction, given the stretched positioning and increasingly one-sided sentiment.
• The correction was triggered by the stronger-than-expected US non-farm payrolls report released on June 5, together with renewed tensions between the US and Iran. These developments led markets to fully price in a rate hike in December, followed by an additional rate hike next year.
• Meanwhile, US CPI and PPI inflation in May rose to their highest levels since 2023. With many countries likely to rebuild oil reserves ahead of a hot summer, during which record-high power consumption is expected, inflationary pressures may remain sticky in the near term. As a result, we expect market volatility to remain elevated throughout the summer.
• The Hong Kong market also followed the broader correction. In addition, tighter capital flows from onshore China into Hong Kong have weighed on sentiment, contributing to a notable correction in Hong Kong financials. Near-term market sentiment is likely to remain cautious, as visibility remains limited at this stage.
• Higher interest rate expectations have also put pressure on Hong Kong equities, given the interest-rate sensitivity of many sectors in the market. At the same time, southbound flows into Hong Kong have slowed, resulting in weaker market momentum.

China A-Shares

• China A-shares, particularly the technology hardware sector, entered a consolidation phase following the strong rally seen in April and May. Nevertheless, we continue to believe that investors will show greater interest in China A-shares relative to the offshore China market.
• In addition, the upcoming mega memory-sector IPO in July is expected to provide support to sentiment across A-share technology names. Market performance remains highly divergent, with old-economy sectors continuing to lag.
• While China’s PPI increased in May, CPI remained slightly below expectations at 1.2%. Exports also remained strong during the month. We believe the government is unlikely to introduce significant consumption stimulus measures until export growth begins to show signs of slowing.

Asia ex-Japan Equities

• Following the significant rally in April and May, the Taiwan and Korea markets have corrected alongside the US market. We view this as a healthy pullback given the previously crowded positioning and rising leverage. We expect both markets to remain volatile over the summer, with some valuation reset likely as investors adjust to expectations of further US interest rate hikes.
• Fundamentals remain strong, and there have been no signs of easing demand or supply shortages across the AI supply chain. However, valuation multiples may normalize toward more reasonable levels, which would ultimately be supportive of the longer-term outlook for these markets.
• India and ASEAN countries, on the other hand, have been negatively affected by persistently high oil prices given their heavy reliance on energy imports. Heading into the summer, rising coal prices have added further pressure.
• In Indonesia, the central bank delivered an off-cycle rate hike following the currency’s decline to a record low to stabilize the market and currency. Nevertheless, sentiment across ASEAN remains weak. Given the continued strength of the US dollar, these markets are likely to remain under pressure.

Emerging Market ex-Asia Equities

• As the US dollar remains strong amid expectations of further interest rate hikes in the US, emerging markets, including Latin America, have also begun to experience a correction after benefiting from higher oil prices.
• In addition, the recent pullback across other commodity markets has triggered profit-taking, placing further pressure on emerging markets outside Asia.​

Japanese Equities

• The BOJ could potentially raise interest rates in June, with the JPY remaining weak above 160 against the US dollar and inflation continuing to rise. However, the timing of the next rate hike and the future policy path remain uncertain.
• The BOJ’s announcement that it will halt further reductions in JGB purchases starting next April is a positive development, but volatility in the JPY and uncertainty surrounding interest rates are likely to continue weighing on market sentiment.
• The Japanese market has also experienced a volatile correction alongside the US market. As SoftBank and Kioxia have overtaken Toyota to become the largest companies by market capitalization, the Japanese market has become increasingly concentrated in technology-related names. As a result, its correlation with the US market is likely to continue rising.

Asia Investment Grade Bonds

• The stronger-than-expected May non-farm payrolls report, together with elevated CPI and PPI readings, has increased the likelihood of further interest rate hikes and contributed to a flattening of the US Treasury yield curve.
• The June 17 FOMC meeting will be closely watched as it marks the first meeting under new Fed Chair, Kevin Warsh. Given his preference for limited forward guidance, the future path of interest rates may become less predictable, likely resulting in greater market volatility and increased sensitivity to economic data.
• Duration has remained the primary driver of Asia investment grade bond performance in recent months. We expect long-end US Treasury yields to trade within a range as markets continue to weigh the inflation outlook against the seemingly inevitable increase in fiscal deficits.

Asia High Yield Bonds

• Spreads in the Asia high yield market have remained well below historical averages, supported by subdued new issuance. The asset class has so far been relatively resilient to recent economic data releases and developments surrounding US-Iran tensions.
• However, potential default risks and spread widening in the US high yield market, particularly stemming from emerging cracks in the private credit and leveraged loan markets, remain key risk factors to monitor.

Emerging Market Debt

• Spreads remain tight but stable. Latin America has benefited from elevated oil prices, as many countries in the region are net oil exporters. However, with the US dollar remaining strong and the US Treasury yield curve flattening, a backdrop that is generally less supportive for commodities, emerging market bonds may face some near-term pressure. Nevertheless, the asset class is likely to remain relatively stable given the continued strength in investor demand.

Gold

• In the near term, gold prices are likely to remain range-bound amid a strong US dollar and rising expectations of further interest rate hikes. In addition, some central banks may need to sell gold to replenish their oil reserves. As a result, oil prices and developments surrounding US-Iran relations are expected to be the key drivers of gold prices in the near term.
• Over the longer term, however, we remain constructive on gold. We expect many central banks, including China’s, to continue increasing their gold holdings as part of efforts to diversify reserve assets away from US Treasuries once the oil situation stabilizes. In particular, the PBOC has increased its gold reserves for more than nine consecutive months, and we expect this trend to 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 31 May 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.}

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