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Latest asset allocation views for Asia Q3 2026

Three key global themes for the third quarter: 1.Central banks turned hawkish—is another reset likely; 2. Headwinds persist, but tailwinds dominate; 3. Geopolitical fragmentation: a persistent market reality now.
While valuations, inflation pressures, and broader geopolitical uncertainty present ongoing risks, the current macro backdrop still leans supportive of risk assets.
We’ve upgraded US small and mid-cap equities to overweight, and remain overweight Emerging market, Japan, Asia-Pacific ex-Japan, Canadian, and commodities equities.
We’ve moved neutral on Canadian investment grade as strong investor demand continues to absorb new supply, and Canada maintains a healthier fiscal position than peers.

Examining an evolving market: aligning with policy shifts, tailwinds, and structural change

Central banks turned hawkish—is another reset likely?

The conflict in the Middle East has had a profound impact on central bank policy. Central banks have gone from largely settling into neutral policy rates (i.e., rates that neither stimulate nor weigh on the economy) to being more hawkish as they contend with the conflict’s effects on key commodities.
With peak disruptions seemingly behind us, we could be approaching another reset in policy paths as central banks reassess the extent to which energy price disruptions will have meaningfully altered countries’ inflation paths.
Incoming US Federal Reserve (the Fed) chair Kevin Warsh has quickly made his mark, with shorter communications, an announced review of key processes at the Fed, and the removal of forward guidance. All told, these developments likely indicate greater market volatility.

Headwinds persist, but tailwinds dominate

Headline risks remain elevated, including persistent inflation, geopolitical uncertainty, extended valuations, rising government deficits, and an unclear monetary path. Despite these concerns, equity markets have continued to absorb the noise and push through near term uncertainty.
Markets remain supported by strong underlying fundamentals, including steady growth, resilient earnings, a firm labour market, improving industrial activity, and a healthy consumer, alongside fiscal support and accelerating capital expenditure (capex) tied to the ongoing AI buildout.
Absent a clear shift in fundamentals, we remain constructive on equities. However, risks and opportunities aren't evenly distributed across markets. Opportunities extend beyond crowded trades, making diversification and active management critical to capturing them effectively.

Geopolitical fragmentation: a persistent market reality now

The Middle East conflict has dominated headlines and market conversations in the second quarter. As of this writing, periods of de-escalation have eased a key market overhang, pushing oil prices lower and lifting equities in the near term, although the situation remains fluid.
While the recent conflict may ultimately reach an end, it adds to a list of macroeconomic shocks that have been a defining feature of markets over the past five years, from COVID 19 and the ensuing supply chain disruptions to the Russia–Ukraine conflict and expanding US tariffs.
As the world continues to resynchronise toward deglobalisation, geopolitical uncertainty is likely to persist as a structural market feature, elevating volatility without necessarily derailing growth. Notably, markets have shown a pattern of quickly looking through these shocks after the initial reaction, refocusing on corporate earnings and forward expectations. This reinforces the importance of resilient, well-diversified portfolios rather than attempts to time macro events.

Broad Asset Class Outlook²

Broad Asset Class Outlook

We remain overweight equities, supported by robust earnings trends, steady global growth, and productivity‑driven investment themes such as AI. While valuations, inflation pressures, and broader geopolitical uncertainty present ongoing risks, the current macro backdrop still leans supportive of risk assets.

We continue to be underweight fixed income given upside inflation risks and rising fiscal pressures that leave long‑end yields vulnerable. We favour shorter duration, and note that tight credit spreads, particularly in investment grade, limit upside despite healthy corporate balance sheets.

Active Asset Allocation Views²

Active Asset Allocation Views

Broad Equity³

We remain neutral on US equities, supported by solid earnings and capital expenditures funding the AI infrastructure buildout. Headwinds remain in the form of market concentration, increased inflation, and uncertainty surrounding the Middle East conflict.
We remain overweight Canadian equities, driven by the underlying sector makeup of their economy, with tailwinds supporting cyclical sectors including materials, industrials, and energy.
Emerging market equities remain overweight, supported by the ongoing semiconductor upcycle, which is unlikely to peak this year given the global expansion of AI infrastructure. Global energy and food prices remain a key risk to the broader region.

Regional/Sector-specific Equity³

We’ve moved overweight US small and mid-cap equities, driven by technical support, favourable valuations versus both large cap equities and their own historical valuations, and improving earnings growth. Small and mid-caps also provide diversification and exposure to areas of the market that look attractive outside of large cap technology.
We remain overweight Japan equities, supported by improving macro momentum with positive real GDP and wage growth, strong corporate earnings, and favourable foreign investor participation.
We remain overweight Asia-Pacific ex-Japan equities, focusing on select opportunities in markets benefiting from resilient regional growth and AI-linked supply-chain demand, e.g., Taiwan, South Korea. The prolonged conflict in the Middle East has exerted inflationary pressure on commodity importers in the region.
We remain underweight REITs given ongoing pressure from higher interest rates, relatively muted earnings growth, and sector-specific fundamental challenges. However, there's an opportunity for improvement as valuations adjust to these known headwinds.
We remain overweight commodities, with a preference for base metals such as aluminum and copper, supported by strong demand from the AI infrastructure buildout. Oil also remains supported by geopolitically driven supply constraints and resilient global economic growth.

Active Asset Allocation Views²

Active Asset Allocation Views

Fixed Income³

We remain underweight US investment grade overall, driven primarily by tight spreads. From a duration perspective, we continue to favour short and intermediate opportunities in the United States.
We’ve moved neutral on Canadian investment grade as strong investor demand continues to absorb new supply, and Canada maintains a healthier fiscal position than peers. Additionally, the asset class could benefit from a market overpricing of future rate hikes.
While we remain neutral on US high yield, we continue to favour the asset class relative to leveraged loans as the high yield market remains more insulated from AI-related software risk, the index remains higher quality, and has shown less sensitivity to rate volatility.
We remain overweight Asia high yield given more attractive relative value and stronger risk-adjusted return potential versus investment grade. Our view is supported by higher all-in yields and shorter duration profiles, alongside resilient regional fundamentals and ongoing policy support in key markets.
We remain neutral on convertible bonds, but cautious as the convertibles market is trading with an equity-heavy profile, with many issues close to converting, thereby reducing the typical bond floor diversification benefit. At the same time, performance and composition are increasingly concentrated in technology.

Japan Equities: Structural Tailwinds and AI-Driven Growth³

Earnings momentum, reform, and AI exposure support a strong outlook

Japanese corporate earnings continue to be revised upward, supported by recovering domestic demand, sustained wage growth, and strong corporate profitability. Improving business sentiment, as reflected in recent survey data*, and Japan’s leveraged exposure to the global AI buildout further reinforce earnings momentum, despite modest direct index-level exposure.

While higher energy prices tied to the Middle East conflict have been a headwind, Japan’s growth outlook remains supported by fiscal policy, strong business investment, and improving corporate activity. Continued wage gains and a gradual path toward Bank of Japan policy normalisation support the recovery, although a more hawkish stance could pose risks to earnings estimates.

Investor sentiment toward Japanese equities is improving, supported by renewed foreign inflows, moderating hedging activity, and broad-based market participation. This strengthening backdrop reflects growing confidence in the outlook and reinforces momentum behind the market’s recent gains.

Ongoing corporate governance reforms continue to support Japanese equities, driving improved shareholder alignment through reduced cross-shareholdings, fewer takeover defenses, increased M&A activity, and more disciplined capital allocation. These improvements are creating a sustained tailwind for earnings growth and valuation re-rating over time.

1 Source: Manulife Investment Management, 30 June 2026. Projections or other forward-looking statements regarding future events, targets, management discipline or other expectations are only current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different than that shown here. No forecasts are guaranteed. These views are updated on a quarterly basis. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. No forecasts are guaranteed. Diversification does not guarantee a profit or eliminate the risk of a loss.

2 Source: Multi-Asset Solutions Team (MAST), as of 30 June 2026. Projections or other forward-looking statements regarding future events, targets, management discipline or other expectations are only current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different than that shown here. Information about asset allocation view is as of issue date and may vary. Active asset allocation views will be updated on a quarterly basis.

*TANKAN Business Survey, large enterprises. Bank of Japan, Q2 2026

3 Source: Multi-Asset Solutions Team (MAST), as of 30 June 2026. Projections or other forward-looking statements regarding future events, targets, management discipline or other expectations are only current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different than that shown here.

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