20 July 2026
Key takeaways
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The technology story has become more nuanced lately. Semiconductor and data centre hardware stocks have outperformed by benefitting directly from the AI build-out. But the performance of hyperscalers and many software firms has been more mixed.
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Kevin Warsh, in his first testimony to Congress as Federal Reserve Chair, said the FOMC “share a resolute commitment to restoring price stability”. The day before, influential FOMC policymaker Christopher Waller warned that “If we get another reading on core inflation this week. Then the FOMC will need to consider tightening monetary policy in the near term”.
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For decades, Japan has been one of the world’s great exporters of capital. Its pension funds and life insurers accumulated overseas bond holdings because ultra-low domestic yields left them little alternative. Yet the forces driving that outflow are changing – both in Japan and beyond.
Chart of the week – Sleeping giants in EMs
Last year’s surge in emerging market (EM) equity performance was no fluke. Positive momentum has continued this year, led by outsized gains in tech-heavy South Korea and Taiwan. Together, they now account for just over 50% of the overall MSCI EM index. Despite a recent pick-up in volatility across semiconductor names – and questions over the durability of massive hyperscaler capex – the AI-led boom could continue to be a major driver of returns for some time.
The question for investors is what happens if the AI trade falters? Does EM performance go down the pan? Not necessarily. We could see a rotation into parts of the EM universe that have recently lagged – notably mainland China and India.
Mainland China played catch-up last year, yet still offers potential value – with the forward PE for MSCI China currently 45% below its US equivalent. The economy is expanding its advanced manufacturing base, with growth supported by an export boom. Interestingly, some of the disruptions that could challenge the broader AI trade – such as another low-cost AI model breakthrough, or further developments in semiconductor capabilities – could also reignite interest in mainland China’s technology sector. Meanwhile, India has seen valuations moderate despite strong earnings growth, with EPS growth for MSCI India expected to be around 12% in 2026 – following similar growth of 13% in 2025. That may create a more attractive entry point for investors seeking exposure to the country’s long-term structural growth story.
Dispersion among EM constituents remains an important source of diversification.
Market Spotlight
Quality over quantity
After last year’s pick-up in buyouts and mergers & acquisitions (M&A), the global private equity market entered 2026 on a firmer footing. Even so, the post-pandemic dealmaking highs still look out of reach. Market conditions also appear more buyer-friendly, with activity concentrated in a relatively small number of large, high-quality deals. Meanwhile, the broader exit environment (for asset sales) has continued to struggle in some markets.
According to some private equity specialists, three themes stand out. First, the concentration of capital in high-quality businesses is favouring areas such as healthcare and AI-related sectors, where earnings visibility is stronger. Second, while the overall exit environment is challenging, initial public offerings (IPOs), M&A, and sponsor-to-sponsor sales are showing signs of improvement. Secondary activity is also helping liquidity, including stake sales and continuation vehicles (where assets are moved into a new vehicle, typically backed by secondary investors). Third, the focus on building operational value in private equity-backed companies is increasingly overtaking financial engineering, with managers relying less on leverage and more on business improvement to drive returns.
For investors, the message is clear: manager selection is key. Firms with strong sourcing networks, operational expertise, and credible exit routes are best placed to navigate market volatility.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 17 July 2026.
Lens on...
Two-way tech
The technology story has become more nuanced lately. Semiconductor and data centre hardware stocks have outperformed by benefitting directly from the AI build-out. But the performance of hyperscalers and many software firms has been more mixed. Investors are questioning whether massive capital spending will translate into attractive returns, and whether software business models can withstand more intense pricing pressure, greater competition, and weaker customer retention.
Recent signs that some firms are funding AI plans by reallocating budgets away from traditional IT spending have added to the uncertainty about AI winners and losers. The “Magnificent Seven” and semiconductor stocks, which largely moved together until late 2025, have diverged.
While chip and memory firms are enjoying immediate sales, they risk relying on unusually high capex rather than a durable demand base. They could also be vulnerable if hyperscalers trim spending.
With Q2 earnings season now kicking off, hyperscalers’ capex plans and returns on investment will be under scrutiny. Investors will also want to see that AI is driving broader productivity gains, margin expansion, and sustainable earnings growth.
Summer storms?
Kevin Warsh, in his first testimony to Congress as Federal Reserve Chair, said the FOMC “share a resolute commitment to restoring price stability”. The day before, influential FOMC policymaker Christopher Waller warned that “if we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term”.1
Waller’s remarks prompted markets to price in a meaningful probability of a July rate increase. However, June CPI data came in markedly softer than expected: the headline index fell month-on-month, while the core measure was unchanged. This adds to evidence that the tariff-related lift to inflation is waning. In addition, neither the labour market nor the housing sector currently appears to be generating significant inflationary pressure.
Instead, renewed geopolitical tensions – and the associated rise in oil prices – may prove pivotal in determining whether further tightening is required. For now, the good news on CPI could dampen concerns over supply-side disruption. But the complex macro backdrop – plus Warsh signalling a move away from forward guidance – means there’s scope for volatility in rate expectations, which could make for occasionally stormy conditions in markets this summer.
Going home
For decades, Japan has been one of the world’s great exporters of capital. Its pension funds and life insurers accumulated overseas bond holdings because ultra-low domestic yields left them little alternative. Yet the forces driving that outflow are changing – both in Japan and beyond.
Japanese government bond yields have risen meaningfully over the past two years, boosting the appeal of holding JGBs for the long term. At the same time, Japan’s Finance Minister has recently signalled that the Government Pension Investment Fund and other investors could increase allocations to domestic assets. This points to a shift in policy priorities – and an effort to stabilise the bond market, which has been volatile of late.
The implications extend beyond Japan. In the UK, moves to give ministers powers from 2028 to steer pension assets towards domestic investment highlight how policy-driven home bias could become a broader global theme. After years of foreign asset accumulation, the structural case for some home bias may be strengthening. In Japan’s case, a gradual reallocation of maturing assets towards domestic bonds could support long-end JGBs, improve financial stability and modestly reduce its role as a supplier of capital to global markets.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Costs may vary with fluctuations in the exchange rate. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 17 July 2026. 1. Testimony by Chairman Warsh on the semiannual Monetary Policy Report to Congress - Federal Reserve Board
Key Events and Data Releases
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This week
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 17 July 2026.
Market review
Global equities edged lower amid higher oil prices as investors monitored geopolitical tensions and the Q2 earnings season. US stocks fell on renewed weakness in chipmakers, partly offset by strength in some banks. European markets were range-bound and mixed. Meanwhile, Asia diverged: semiconductor-heavy indices such as KOSPI extended weekly losses, while the Hang Seng Index and Sensex rose modestly alongside broad gains in ASEAN. In rates, benign inflation data supported US Treasuries, as Fed Chair Kevin Warsh reaffirmed his commitment to price stability in semi-annual testimony, and the curve bull steepened. JGB yields mostly fell after Japan’s Finance Minister Katayama suggested that pension funds could increase “home bias”. In FX, the US dollar drifted lower against most major currencies, while gold prices fell below USD4,000/oz.
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