October 2026 Investment Outlook: U.S. – Neutral | Europe – Neutral | Japan – Neutral | China and Hong Kong – Slightly Negative | Asia – Neutral

Global equities were volatile in September. Earnings momentum from artificial intelligence remained strong, but a sharp sell-off in global bond markets became the main source of pressure. The most notable change this month is that major central banks have moved from expected rate increases to synchronised rate increases: the Federal Reserve, the European Central Bank, and the Bank of Japan all raised rates in September, the 10-year U.S. Treasury yield rose to its highest level since 2002, long-dated yields in Japan, France, and the United Kingdom reached multi-decade highs, and conflict in the Middle East pushed Brent crude back above US$100 per barrel. U.S. corporate earnings are being driven by AI, although the sharp rise in long-dated yields limits valuations. In Europe, inflation has climbed to a near three-year high, pressure for further rate increases has not eased, and fiscal risk in France has intensified. In Japan, manufacturing confidence has improved, but rate increases and energy costs create pressure. In China and Hong Kong, domestic demand has weakened further and local interest rates have risen, so the view has been downgraded to slightly negative. Exports across Asia reached new records, although foreign capital continues to flow out. Investors should maintain geographical diversification and remain selective, focusing on quality companies with high earnings visibility, stable cash flows, and reasonable valuations.

🇺🇸 United States – Neutral

AI earnings remain strong, but renewed rate increases and surging long-dated yields limit upside potential

The outlook for the U.S. market remains neutral. U.S. equities diverged in September: the S&P 500 Index edged down by 0.4%, the Dow Jones Industrial Average and the Russell 2000 Index fell by approximately 4.3% and 5.4% respectively, while the Nasdaq Composite Index rose by 1.8% and reached a record high on 22 September. AI remains the most important source of earnings support. Micron reported quarterly revenue of US$54.23 billion in late September, above the market expectation of US$51.49 billion, and raised its guidance for the following quarter. Oracle's quarterly cloud revenue grew by 62% year on year, and its remaining performance obligations rose to US$664 billion. The market expects third-quarter earnings for S&P 500 constituents to grow by approximately 29.5% year on year.

However, funding pressure from AI investment is beginning to surface. Oracle's capital expenditure reached US$28.5 billion in a single quarter, turning free cash flow negative by approximately US$5.4 billion, and its share price swung sharply after the results, indicating that the market has begun to focus on the financing costs and payback period of AI infrastructure. In addition, gains in U.S. equities remain highly concentrated in a small number of AI heavyweights, while small caps and traditional sectors clearly underperformed as yields surged, so valuation and concentration risks should not be overlooked.

On monetary policy, the restart of the rate-hiking cycle is the most important development this month. On 16 September, the Federal Reserve voted unanimously to raise rates by 25 basis points to a target range of 3.75% to 4.00%, its first increase since 2023, and the dot plot showed 16 of 18 officials expecting another increase this year. On the data front, the Personal Consumption Expenditures (PCE) price index rose by 3.4% year on year in August, below the expected 3.7%, while core PCE held at 3.0%. Non-farm payrolls rose by only 29,000 in September, far below the expected 84,000, and the unemployment rate rose to 4.2%. Futures markets have raised the probability of a hold at the late-October policy meeting to around 75%, but still expect a further increase in December.

Bond markets and external risks are the biggest variables this month. The 10-year U.S. Treasury yield briefly rose to 5.34% on 1 October, its highest level since 2002, while the 30-year yield climbed above 5.6%, a 24-year high. In the Middle East, the war involving Iran continues and shipping through the Strait of Hormuz remains disrupted; Brent crude briefly rose to US$108 per barrel in mid-September and moved back above US$100 in early October. The prices component of the ISM manufacturing index rose to 77.9 in September, meaning inflation risks remain tilted to the upside. Overall, AI earnings growth continues to provide genuine support for U.S. equities, but surging long-dated yields, the restart of the rate-hiking cycle, and valuation and concentration risks limit the scope for further gains. Therefore, maintaining a neutral view on the U.S. market remains appropriate at this stage.

🇪🇺Europe – Neutral

Inflation rises to a near three-year high, the ECB raises rates again, and fiscal risk in France intensifies

The outlook for European markets remains neutral. The STOXX 600 Index fell by approximately 2% in September, its first monthly decline in six months, leaving it down 0.6% for the third quarter. The surge in global bond yields and higher oil prices weighed on risk appetite, and the index fell to a three-month low in mid-September. On inflation, the flash estimate of eurozone inflation rose to 3.8% year on year in September, up from 3.2% in August and above the market expectation of 3.6%, the highest level since September 2023. Energy prices surged by 18.8% year on year, core inflation edged up to 2.5%, and services inflation rose to 3.2%.

On monetary policy, the European Central Bank raised interest rates by 25 basis points on 10 September, lifting the deposit rate to 2.50%, its second increase this year. The meeting account showed that the Governing Council unanimously supported the increase, although President Lagarde declined to commit to the next move. The central bank's latest projections put inflation at 3.0%, 2.5%, and 2.1% for 2026, 2027, and 2028 respectively. Following the September inflation data, market-implied expectations of a further increase at the 29 October policy meeting rose to around 90%.

In bond markets, France has become the focus. The 10-year French government bond yield rose to 4.96% in early October, its highest level since 2002, and the spread over German Bunds widened to more than 140 basis points, the widest since 2012, with French yields rising above those of Italy and Greece for the first time. France's 2027 budget plans savings of €43 billion to reduce the deficit from 5.4% of GDP this year to 5.0%, but whether it will pass parliament remains uncertain, while public debt has risen to a post-war high of 119% of GDP. The 30-year UK gilt yield also rose above 6%, the first time since 1998.

From a macroeconomic perspective, the eurozone economy remains resilient. The composite Purchasing Managers' Index rose to a near three-and-a-half-year high in September, indicating that demand has held up despite inflationary pressure. Overall, corporate earnings, valuations, and dividend returns continue to provide support for European markets. However, the region's participation in the AI value chain remains limited, making it difficult for AI to become an independent core driver of sustained market gains. Combined with energy-driven inflation, the risk of further rate increases, and fiscal risk in France, maintaining a neutral view on European markets remains appropriate at this stage.

🇯🇵 Japan – Neutral

Manufacturing confidence improves, but rate increases, rising long-dated yields, and energy dependence create multiple pressures

The outlook for the Japanese market remains neutral. The Nikkei 225 Index edged up by 0.7% in September, a second consecutive monthly gain, while the TOPIX Index fell by 1.2%, its first monthly decline in six months, reflecting gains concentrated in semiconductor and AI-related heavyweights. On fundamentals, the Bank of Japan's September Tankan survey showed the large manufacturers' business conditions index rising from +22 to +24, a sixth consecutive quarterly improvement and the most optimistic reading since 2018, supported primarily by AI-related demand. Exports grew by 19.3% year on year in August, the twelfth consecutive monthly increase.

However, energy dependence remains a structural risk. Japan's imports surged by 28% year on year in August, producing a trade deficit of approximately ¥1.1 trillion and a fourth consecutive monthly deficit, driven primarily by higher oil prices stemming from the war in the Middle East. The Tankan survey also showed weaker conditions among non-manufacturers, as rising energy and food costs erode household real purchasing power and service-sector margins.

On monetary policy, the pace of normalisation is accelerating. On 18 September, the Bank of Japan voted 7 to 2 to raise its policy rate by 25 basis points to 1.25%, the highest level since 1995, and signalled that it stands ready to raise rates further. Following the expiry of some energy subsidies, core inflation in Tokyo jumped from 1.8% in August to 2.7% in September, a ten-month high, and markets expect that the central bank may raise rates again before the end of the year. In bond markets, the 10-year Japanese Government Bond yield rose above 3% on 1 September for the first time since 1996 and reached a 30-year high of approximately 3.12% in late September.

Foreign-exchange risks remain two-sided. The yen weakened past 160 against the U.S. dollar again at the end of August, erasing most of its gains from the joint U.S.–Japan intervention at the end of July, and failed to rebound meaningfully after the rate increase, so pressure from imported energy and food costs persists. Conversely, should a faster pace of rate increases trigger a rapid appreciation of the yen, the earnings outlook for exporters would come under pressure. Overall, improving fundamentals coexist with policy normalisation, and maintaining a neutral view on the Japanese market remains appropriate. From an investment-strategy perspective, investors may wish to pay relatively greater attention to financial stocks that benefit from a rising-rate environment, as well as leading manufacturers with stable cash flows that benefit from AI demand, while avoiding excessive concentration in highly valued semiconductor heavyweights.

🇨🇳China and Hong Kong – Slightly Negative

Domestic demand weakens further and local interest rates rise, putting pressure on Hong Kong equity valuations

The outlook for the China and Hong Kong markets has been downgraded from neutral to slightly negative. Hong Kong equities came under clear pressure in September: the Hang Seng Index fell to a two-month low of 24,275 on 25 September and closed the month at 24,613, approximately 4.6% below its early-month high and down about 4.3% year to date, while the Hang Seng TECH Index has fallen by around 23% year to date.

From a macroeconomic perspective, weakness in domestic demand has deepened. Retail sales rose by only 0.4% year on year in August, slower than July's 0.6% and the weakest pace since May, while fixed-asset investment for the first eight months fell by 7.2% year on year, a deeper decline than the 6.7% recorded for the first seven months. On 28 September, the State Council pledged to step up counter-cyclical adjustment and stabilise the property market, but the market response was muted. Cross-regional passenger trips during the National Day Golden Week reached 2.14 billion, but consumers remained broadly cautious, and strong travel activity did not translate into a recovery in spending.

The production side nevertheless remains resilient. The official manufacturing Purchasing Managers' Index rose by 0.3 points to 50.1 in September, returning to expansion territory for the first time in three months, and the non-manufacturing index rose to 50.2; industrial value-added grew by 5.2% year on year in August, with high-tech manufacturing maintaining double-digit growth. However, the producer price index rose by 3.8% year on year in August, reflecting higher input costs such as oil rather than a recovery in demand; with domestic demand weak, companies find it difficult to pass on costs, and margins are under pressure.

In Hong Kong, the Hong Kong Monetary Authority followed the Federal Reserve by raising its base rate by 25 basis points to 4.25% on 17 September. The surge in U.S. Treasury yields has been transmitted to the local market through the currency peg: on 2 October, the Hang Seng Index fell by as much as 3%, led by financial and mainland property stocks. Although the IPO market remains buoyant, cornerstone investors have recently turned more cautious, and the heavy supply of new shares is diverting liquidity from the secondary market. Overall, weak domestic demand, doubts over policy effectiveness, and rising local interest rates have tilted risks clearly to the downside, and the market is watching the Fifth Plenum to be held from 26 to 29 October. Therefore, the view on the China and Hong Kong markets has been downgraded to slightly negative at this stage.

Asia – Neutral

AI exports reach new records, but foreign outflows, oil prices, and rising rates limit overall performance

The outlook for Asian markets remains neutral. Performance across the region diverged markedly in September, with AI and semiconductor exports remaining the strongest growth engine. South Korea's exports surged by 83.5% year on year to US$120.9 billion in September, exceeding US$120 billion in a single month for the first time, with semiconductor exports reaching a record US$60.3 billion. Taiwan's exports grew by 60.9% year on year to US$87.22 billion in September, a monthly record for the second consecutive month and the 35th consecutive month of growth. The Taiwan Weighted Index reached a record high in early October and has risen by approximately 65% year to date.

However, capital flows have diverged from fundamentals. Between 1 September and 2 October, foreign investors net sold approximately ₩20.3 trillion (around US$15.1 billion) of South Korean equities, concentrated in SK hynix and Samsung Electronics, and the KOSPI Index fell below 7,000 in mid-September, more than 20% below its June peak. In India, foreign investors turned net sellers in September, both the Nifty and Sensex indices fell by around 6% during the month, and the Sensex dropped to a 33-month low on 8 October.

Monetary policy in the region is also turning tighter. India's inflation rose to 4.82% in August, and the Reserve Bank of India raised its repo rate by 25 basis points to 5.50% on 7 October, its first increase since February 2023, with some analysts expecting further increases at its next two meetings. Asian currencies generally weakened in September, as a firm U.S. dollar and elevated U.S. Treasury yields increased pressure on capital outflows from the region.

On external risks, the war involving Iran continues and shipping through the Strait of Hormuz remains disrupted. Brent crude briefly rose to US$108 per barrel in mid-September and moved back above US$100 in early October. South Korea relies on the Middle East for around 70% of its crude imports, and energy-importing economies face simultaneous pressure on inflation, currencies, and fiscal subsidies. In addition, synchronised rate increases by major central banks have pushed long-dated yields to multi-decade highs, raising financing costs across the region.

Overall, AI infrastructure investment and semiconductor demand continue to provide structural support for Asian markets. Nevertheless, high concentration in technology stocks, rapid foreign outflows, energy-price volatility, and upside risks to interest rates all limit the potential upside. Therefore, maintaining a neutral view on Asian markets remains appropriate at this stage. From an investment-strategy perspective, investors should maintain geographical diversification and favour companies with higher earnings visibility and stable cash flows.

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