Asia Stock Markets Outlook For 2026

(MENAFN- DailyFX (IG)) Hang Seng Index 2025 performance review

• Index overview

The Hong Kong HS50 (Hang Seng Index) delivered its best year since 2017, rising 29% year-to-date. Several catalysts reignited investor interest in Hong Kong equities.

The launch of DeepSeek before Chinese New Year boosted prospects for technology stocks and showcased China's competitive capabilities in the artificial intelligence (AI) race. An accommodative monetary stance, combined with proactive fiscal measures, signalled Beijing's commitment to supporting domestic recovery and stabilising equity markets.

The rally also reflected a valuation catch-up to historical averages and global peers. While United States (US) – China trade tensions created episodic volatility as tariffs escalated, the market showed resilience during negotiation periods. Ongoing dialogue between the two nations helped stabilise investor sentiment.

• Sector analysis

The materials sector led the charge with a remarkable 143% gain, driven by strong metal prices health care sector surged 91% on notable breakthroughs in drug discovery. High-growth sectors attracted significant capital flows as investors positioned for China's innovation advancement.

In contrast, the utilities sector posted the weakest performance at just 6% as investors rotated away from defensive plays toward high-growth opportunities. Industrials gained a modest 19%, as ongoing trade tensions tempered enthusiasm despite the sector's fundamental strengths.

Hang Seng Index sector performance Source: London Stock Exchange Group Source: London Stock Exchange Group Catalysts in 2026

Several structural factors underpin our constructive outlook for Chinese equities in 2026.

• People's Bank of China

The People's Bank of China (PBOC) still has room to ease monetary policy by lowering the reserve requirement ratio and cutting the policy rate. However, we do not expect aggressive stimulus. The PBOC recently downplayed the significance of loan growth deceleration while promoting 'cross-cyclical' policy adjustments, signalling a focus on long-term stability rather than short-term recovery.

• Innovation and consumption

Technology innovation, industrial upgrade, and domestic consumption remain key development areas under the central government's five-year plan. Targeted support for these sectors is likely.

• IPO market

The Hong Kong initial public offering (IPO) market should remain active. Hong Kong emerged as the top fundraising hub globally in 2025, raising US$24 billion from 66 IPOs in the first three quarters. Although this is below the fundraising boom of 2021, the Hong Kong Exchange maintains an active pipeline with around 300 listing applications as of early October, suggesting sustained capital markets activity ahead.

• Household deposits

Perhaps most compelling is the potential from Chinese household deposits. A mere 5% deployment of the RMB163.7 trillion (US$23 trillion) deposit pool as of October, without leverage, would equal 6% of the total market capitalisation (market cap) of onshore and offshore China equity markets combined. This represents substantial dry powder that could flow into equities as confidence strengthens.

Key risks to watch

Despite positive momentum, several headwinds warrant attention.

• Weak domestic demand

The domestic economy continues to show weakness. Industrial output grew just 4.9% year-on-year (YoY) in October, while retail sales rose only 2.9%, both marking the slowest growth rates since August 2024. Property price declines have deepened alongside fixed-asset investment contraction, reflecting persistent challenges in the real estate sector.

• Involution challenges

Structural issues also pose concerns. Intense competition and excess capacity in certain industries are eroding margins, which will weigh on corporate earnings growth. This 'involution' dynamic could limit profitability improvements even as top-line growth remains positive.

• Geopolitical risks

US-China relations remain a wild card. While tensions have stabilised for now after reciprocal tariffs were suspended until November 2026, unknown factors could affect geopolitical risks, including United States's stance on Taiwan and trade restrictions around high-tech chips and rare earths. Any escalation could quickly reverse market gains.

Setting the base case for 2026

The rally in Chinese equities since 2024 has been mainly driven by valuation re-rating, while corporate earnings growth has remained in the low to mid-single digits. For the rally to sustain, earnings growth must accelerate meaningfully.

The Hang Seng Index's forward 12-month price-to-earnings (P/E) ratio currently stands at 11.8x according to London Stock Exchange Group (LSEG) Institutional Brokers' Estimate System (IBES), almost one standard deviation above the index's 10-year average forward P/E ratio of 10.7x, but still well below the 10-year peak of 15.5x reached in 2021. While valuation is not cheap relative to history, the premium is justifiable given rapid technological advancement and recovering global investor demand. Relative to global peers such as the S&P 500, which trades at a forward P/E ratio of 22x, Chinese equities remain at a significant discount.

Our base case anticipates that some capital outlays in innovation will start translating into profit in 2026, though monetisation will be gradual. We expect corporate earnings YoY growth to accelerate from 4% in 2025 to 8% in 2026. Assuming the P/E ratio remains at a similar level, our base case price target for the Hang Seng Index is 28,300 by end-2026.

From an investment theme perspective, key focus areas align with the central government's five-year plan priorities. We favour technology and consumer companies that can lead the AI race and capture market share in innovative sectors. Within cyclicals, industry leaders positioned to gain market share under structural reform may outperform peers, benefiting from anti-involution policies designed to reduce wasteful competition and promote sustainable growth.

Hang Seng Index weekly candlestick chart Source: TradingView, as of 3 December 2025 Source: TradingView, as of 3 December 2025 Source: Bloomberg images Nikkei 225 Index 2025 performance review

• Index overview

The Japan 225 (Nikkei 225) delivered an impressive 24% year-to-date return in 2025, demonstrating remarkable resilience amid considerable headwinds.

US tariff threats cast a persistent shadow over Japanese equities throughout the year, creating significant volatility for export-oriented sectors. The initial announcement of a 25% tariff on automobiles and 24% on general goods triggered extreme market turbulence. However, sentiment stabilised following a bilateral trade agreement that reduced these rates to 15%, providing much-needed clarity for investors.

The Bank of Japan's (BoJ) cautious monetary normalisation trajectory created a supportive backdrop. Foreign capital flows remained constructive as international investors were drawn to ongoing corporate governance reforms and improving shareholder returns. Political transition in the fourth quarter (Q4) added fresh momentum, with Sanae Takaichi's election as Japan's first female prime minister reviving expectations for fiscal stimulus and reflationary policies reminiscent of Abenomics.

• Sector analysis

The utilities sector led the charge with 46% gains, followed closely by the real estate sector at 40%, based on market cap-weighted average returns. The restart of nuclear power generation to meet surging AI power demands and robust commercial real estate growth were the primary catalysts. Conversely, the consumer discretionary sector lagged at 14% as US tariffs pressured automaker margins.

Nikkei 225 year-to-date sector returns Source: London Stock Exchange Group Source: London Stock Exchange Group Tailwinds in 2026

• Fiscal stimulus

The Takaichi administration's fiscal policy provides substantial support for our constructive outlook. The government has already announced ¥2.7 trillion in stimulus measures targeting pricing relief and enhanced defence capabilities. This fiscal injection will add liquidity to the market, creating a favourable environment for Japanese equities.

• Inflation

If inflation moderates by the government's projected 0.7 percentage points from the pricing relief measures, consumer confidence and spending should strengthen further, providing additional momentum for domestic-focused sectors.

• Corporate reforms

Corporate reform continues to gain traction since the Tokyo Stock Exchange's directive three years ago urging Japanese companies to improve disclosure and enhance profitability. The proportion of companies achieving a return on equity (ROE) of 8% or above with a price-to-book ratio (PBR) of 1x or higher has risen from 37% in July 2022 to 43% in July 2025. Share buyback volumes have roughly doubled during this period. While progress is evident, Japanese corporate profitability still has considerable room for improvement when benchmarked against US and European peers, suggesting further upside potential as reforms deepen.

Headwinds on the horizon

• Interest rate hikes

Rising interest rates pose a potential headwind to equity performance. The futures market currently prices in two additional 25 basis point (bp) hikes from the BoJ through 2026, which would lift policy rates to approximately 1.1%. Gradual normalisation should limit near-term disruption.

• Political uncertainty

Political uncertainty warrants attention as the new government implements meaningful changes to foreign and economic policy. The prime minister's recent reminder to corporations about allocating resources to employees alongside shareholders potentially conflicts with ongoing corporate governance reforms, creating ambiguity around the reform trajectory.

• Currency volatility

The sharp unwinding of Japanese yen carry trades in 2024 that triggered a 26% Nikkei crash in less than a month remains fresh in investors' minds. Although the yield spread between US Treasuries and Japanese Government Bonds has tightened significantly over the past 18 months, reducing the interest rate pickup, persistent yen weakness continues generating foreign exchange (forex) benefits that keep carry trades attractive. A sharp currency reversal could trigger equity sell-offs.

• Geopolitical tensions

Regional geopolitical tensions may create additional volatility. Recent disputes with China have already produced knee-jerk reactions in tourism-related stocks. Further escalation could affect trade relationships and impede Japan's economic recovery path.

Base case for 2026 constrained by valuations

Earnings growth is expected to accelerate, with market consensus on MacroMicro projecting 9% growth over the next 12 months. This provides a solid fundamental foundation for equity appreciation.

Valuations have expanded rapidly in 2025, with the forward P/E ratio climbing from April's low of around 13x to 22x, reflecting investor optimism regarding policy support. While this appears elevated relative to the 10-year average of 18x, historical comparisons may be less meaningful given Japan's predominantly deflationary environment during that period. Relative to global peers, Japanese stocks trade at a discount to US equities but command a premium to European markets.

Assuming valuations moderate by 5% to revert to one standard deviation above the 10-year average at 20.5x forward earnings, combined with expected earnings growth, our base case price target for the Nikkei 225 is 52,000 by end-2026.

Nikkei 225 weekly candlestick chart Source: TradingView, as of 5 December 2025 Source: TradingView, as of 5 December 2025

• Source: TradingView. The figures stated are as of 2 December 2025 unless otherwise stated. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation.

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This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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