Dollar slide, tariffs and AI doubts to test investors in 2026

Chinese stocks and US small caps are good bets, analysts said.

The next twelve months bring uncertainties that could make or break investors’ returns depending on how they manage risk, with the dollar’s decline, ongoing US tariffs, and questions around artificial intelligence (AI) investments as key factors.

The weakening US dollar is expected to influence global investment flows and may require investors to reassess currency exposure.

Shihan Abeyguna, managing director for Southeast Asia at Morningstar Asia Ltd., said this could drive a global reallocation of assets.

“Markets are unpredictable, and 2026 will test investor discipline in ways both familiar and new,” he told Hong Kong Business. “Trade tensions and tariffs remain a key topic.”

Investors in Singapore and Hong Kong are showing greater openness to diversify out of the US and into Asian markets.

“Tariffs will be one of the biggest what-ifs leading into 2026, with US President Donald Trump likely to roll out more next year,” said Hugh Chung, chief investment officer at Endowus Pte. Ltd. 

Meanwhile, AI investments are under increasing scrutiny. After years of high valuations, the market is questioning whether the billions of dollars invested in AI tools and companies will generate matching profits.

Luke Pais, EY-Parthenon private equity leader for ASEAN and CEO at Ernst & Young Corporate Finance Pte. Ltd. in Singapore, argues that an AI bubble is unlikely at this stage. “While… AI has yet to deliver returns commensurate with the capital invested to date, we are still in the very early stages of use cases maturing.”

Investors should not overreact to headlines.

“Don’t sell assets during market downturns,” Abeyguna said in an emailed reply to questions. “Periods of heightened uncertainty often lead to sharp recovery rallies. Missing these can significantly affect long-term investment outcomes.”

He cited the April 2025 tariff shock, which created compelling buying opportunities, as a historical example of how volatility could reward disciplined investors.

1. Focus on Chinese stocks
Chinese and Hong Kong equities could perform well in 2026. Morningstar’s top stock picks include Alibaba Group Holding Ltd., Industrial and Commercial Bank of China Ltd., and Yum China Holdings, Inc.

Abeyguna said the Chinese government is likely to continue supporting domestic growth, even as debt constraints limit broader fiscal stimulus. “While we would like to see grander measures to support consumers and help turnaround consumer confidence, we think debt constraints remain.”

Throughout 2025, China rolled out support measures and pushed banks to participate in boosting the economy. For example, a circular issued on 14 December 2025 urged banks to support key consumer sectors such as durable goods and electronics to boost domestic demand.

2. Invest in AI adopters, not builders
Rather than focusing on companies building AI infrastructure, such as chipmakers and cloud providers, investors may benefit more from companies that adopt AI.

“The market is obsessed with AI builders, leaving adopters dramatically undervalued,” Abeyguna said. Traditional companies particularly in healthcare, finance, and industrial sectors could use AI to cut costs and improve operational efficiency, he added.

Healthcare is a particularly promising area. Administrative costs can be significantly reduced, and AI may accelerate drug discovery. Despite these advantages, healthcare is trading below fair value, presenting a potential investment opportunity.

But Abeyguna said the AI infrastructure market could follow the historical Railroad Paradox of the 19th century, when investors lost money due to overbuilt railroad tracks. Margins for infrastructure providers may struggle even as AI adoption grows, he added.

3. Mixed outlook for the US
The US market presents a split scenario. Tim Fung, head of equity strategy at J.P. Morgan Private Bank Asia, forecasts near double-digit S&P 500 returns for 2026. But labour market weaknesses and the lingering impact of tariffs pose risks, he wrote in the bank’s 2026 Global Investment Outlook report in November.

Chung said investors should diversify beyond the S&P 500 or Nasdaq, whilst keeping US stocks as a core holding because they include innovative, cash-generating global companies.

Abeyguna said Asia-Pacific markets could provide better value and diversification opportunities given the weak US dollar. 
In a 2026 investment outlook report for Asian investors released in December, Vincent Chung, co-portfolio manager of diversified income bond strategy at T. Rowe Price Hong Kong Ltd., said investors should hold less US fixed income, as higher yields might be available in other markets.

4. Consider US small-cap stocks
US small-cap stocks add diversification and have less exposure to AI-driven trends. After lagging large caps, they trade below fair value, making them a useful option for balanced growth portfolios, Abeyguna said.

Small caps have lagged bigger stocks, making them a good way to diversify, Endowus’ Chung said.

5. Europe and India
Europe and emerging markets outperformed the US in 2025. Fung expects Europe to benefit from increased defense and fiscal spending. India is projected to experience strong earnings growth, potentially surpassing China as the leading emerging market.

A survey by Natixis Investment Managers Singapore Ltd. found that 51% of investors identified India-specific equities as one of the top three emerging markets likely to outperform in the next 12 months.

6. Avoid corporate bonds
Tight credit spreads make corporate bonds less appealing. Investors may prefer intermediate-term bonds, local-currency emerging-market debt, or high-quality government bonds with attractive yields.

Abeyguna cited opportunities in local-currency emerging-market sovereign debt, whose yield has averaged 6.3%, with select segments offering above 9% potential, including currency appreciation.

High-quality government bond yields are expected to remain elevated due to expansionary fiscal policies in the US, UK, Germany, and France. Vincent Chung noted that governments would need to tap more sensitive buyers for funding, keeping long-term yields high.

7. Caution on pharmaceuticals
Rising tariffs could disrupt pharmaceuticals and semiconductors. In Singapore, companies paused US expansion until tariff exemptions were clarified. Minister Gan Siow Huang confirmed negotiations to secure favorable terms for Singaporean drug exports.

8. Healthcare remains a strong sector
Healthcare is expected to dominate private-equity activity in Southeast Asia, driven by ageing populations and rising private consumption. Diversifying into healthcare and biotechnology offers strong potential for portfolio resilience, Chung said.

9. Private markets attract the rich
Private markets are expected to see increased interest among mass affluent and high-net-worth investors in 2026.

“For affluent investors, private credit has become the practical 'on-ramp,'”Abeyguna said. “These funds offer the yield enhancement and floating-rate income that investors currently crave.”

But semi-liquid funds might limit redemptions during market stress, he said. Infrastructure, healthcare, and consumer-driven sectors remain the primary areas for private equity, with digital infrastructure—data centres, fiber networks, and telecommunication towers—expected to continue driving growth, EY-Parthenon’s Pais said.

10. Gold prices may rise further
Gold prices could reach $6,064 (US$4,700) per troy ounce in 2026, up from $5,652 (US$4,381),  according to data from Hua Seng Heng Commoditas Co. Ltd., a Thailand-based company dealing with gold trade and investments.

In Thailand, demand for gold bars as savings instruments has risen, whilst jewellery purchases declined, Hua Seng Heng CEO Thanarat Pasawongse told a wealth management forum in December.

He advised cautious accumulation to avoid missing out on other asset opportunities. “Nor should they chase gold at high prices. The $4,773-$4,903 (US$3,700- US$3,800) per ounce range is considered appropriate for gradual accumulation,” he said.
Investor takeaways

The year ahead presents complex challenges and opportunities. Currency fluctuations, trade tensions, AI adoption, and sector-specific trends will shape returns. Strategic diversification across Asia, healthcare, private markets, and selective US and European equities can provide resilience. Caution in corporate bonds and measured exposure to gold may protect capital.

Discipline and long-term planning matter. Investors who assess markets carefully, manage risk, and position portfolios well can still find growth whilst limiting losses. The year ahead will favour patient, informed, and flexible strategies amidst global volatility.