As I explained in my email at the end of last year, my plan for 2026 is to post a detailed Deep Dive article as previously at the start of the month and then add another post, which will be of whatever content I think might be useful to readers, in the middle of the month. As always, I can research and write a piece on request, if any reader wants me to.
In terms of word count and read time, the longer article will be about 2500 words with a 10 to 15 minute reading time required (and perhaps complex enough to require a second look over!) and the mid-month pieces about 1000 words and only 5 minutes demanded!
This month, I have been thinking about the markets which I have a less concrete or confident opinion about. I am pretty sure that it makes sense to invest less in the USA and more in Europe and the UK and I don’t see merit in spending time on the Japanese market, so that leads me to focus on the Asia Pacific ex-Japan region and on Emerging Markets, which two sectors would have quite an overlap in a Venn diagram.
As a start, I listened to Morningstar’s Asia region forward looking webinar for the first quarter of 2026 and I want to share a short precis of what I assessed were useful points. To be frank, the presenation was not up to the quaility of the European equivalent that I have referred to from time to time and so I am only passing on a few observations from the main presenter, MS’s Director of Asian Research.
Asia Pacific Market Overview
As it turned out 2025 was a perhaps surprisingly good year for the region, when you consider the shock generated by the Liberation Day tariffs announcement. That means that there is now less room for upside and Morningstar expect sector rotation as investors look for the best value.
In 2025 the outperforming sectors were Materials (gold miners especially), Technology (AI led) and Healthcare (biotech led). The likely best themes for 2026 were suggested as Technology based on ongoing AI investment and China Consumers who are tentatively becoming confident again with an improving housing market and lower interest rates, plus stocks that will otherwise benefit from likely lower interest rates.
Risks were summarised as geopolitical in terms of Sino-Japanese and Sino-US relationships, the latter being pretty obvious and in my view a global risk for all investors, plus private credit defaults (again not just an Asia Pacific issue).
Opportunities and Areas to Avoid
China as a market is rated as being 10% under value on Morningstar’s methodology, with Japan at fair value. The Materials sector is the most overpriced and Consumer Defensive looks attractive.
India is still seen as expensive and maybe not so well placed to benefit from AI capex investment. India also failed to cave in to US pressure (and keeps buying Russian oil) and as a result, contrary to expectations, is suffering higher tariffs than China. I personally fear negative investor sentiment towards India across the market in the near term, based on a range of observations.
Korea (a large part of the regional market and a mature economy) still has potential for upside but the equity market has become somewhat dominated by Samsung Electronics. In Taiwan of course the default stock is usually going to be TSMC.
Should You Up Your Asia Pacific Asset Allocation?
My assesment for now is that there is no really strong case for stating that the region is ‘out of the woods’ in terms of trade with the USA, but I think that this is still the part of the world where most of the world’s manufacturing goes on and there are plenty of other large economies to trade with as well as internal organic growth. Most other big trading counties (say Canada or the EU) are also thoroughly irritated with the US, so more open to tariff free trade deals. I think we may well see an emergence of integrated free trade areas that are more or less ‘the world ex-USA’. But that will take a little longer to fully come to pass, not to say that it is not under way.
Since drafting this note, I saw a media piece suggesting Trump has done more to make China great again that the USA, because China just reported a record trade surplus for 2025!
I suggest that how you allocate to the region will depend on where you are now, in terms of asset alloaction. If, like me, you almost fully withdrew, you are likely to want to add back some asset fraction, maybe 10% or so initially. If you stayed in the market, you will have been rewarded in 2025 apart from in India focused funds, and you may not want to add more. India allocations are hard to support at all at the moment in the near term, but remain a likely place for gains over the longer term, given the scope for increased industrialisation.
As always, there is a difference between the long term strategic logic, which is that the Asia Pacific region should be a large block of any equity asset allocation because that is where there is economic growth, and shorter term tactical decsions based on the factors I have lightly dealt with above, amongst others.
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