Asia's 2026 Recovery Driven by Non-Tech Exports and China Equity Stability
TL;DR
- Asia's export growth will broaden beyond tech in 2026, driven by recovering U.S. domestic demand and reduced tariff uncertainty, fostering wider economic recovery through increased CapEx, job growth, and consumption.
- A shift from capital-intensive tech exports to non-tech exports in Asia will stimulate broader economic benefits, including job creation and consumption, unlike tech's limited multiplier effect.
- Asia's inflation is projected to pick up modestly in 2026 due to improved capacity utilization from non-tech export recovery and easing disinflationary pressures from China.
- Asian central banks are expected to conclude rate-cutting cycles by mid-2026, with policy rates stabilizing as disinflationary pressures subside, moving away from current accommodative stances.
- China's equity market in 2026 is positioned for stability rather than a breakout, with upside driven by solid earnings growth (around 6%) rather than further valuation expansion.
- Global investors are expected to increase allocations to Chinese equities in 2026, driven by renewed interest and current underweight positioning, particularly in R&D and innovation-heavy sectors.
- Thematic investment opportunities in China will focus on sectors aligned with national growth strategies, emphasizing R&D, innovation, AI, smart manufacturing, and biotech, alongside dividend plays.
Deep Dive
Asia's economic recovery is set to broaden in 2026, shifting from tech-driven export growth to a more robust, non-tech driven expansion that will fuel domestic demand and job creation. While China's equity market experienced a significant rebound in 2025, 2026 is projected to be a year of stability, characterized by steady earnings growth and a gradual return of global investor capital, particularly into innovation-focused sectors aligned with national growth strategies.
The drivers for this broadening economic recovery are twofold. Firstly, an anticipated improvement in U.S. domestic demand will support Asia's exports, particularly in non-tech sectors. Secondly, the resolution of much of the tariff-related uncertainty will remove a significant headwind for regional trade. This shift from tech exports, which are capital-intensive and offer limited job growth benefits, to non-tech exports is crucial because it carries a broader multiplier effect on the economy. As seen in Taiwan, strong GDP growth driven by tech exports did not translate into robust consumption. The expected recovery in non-tech exports in 2026 should lead to increased capacity utilization across the region, driving CapEx, job growth, and a consumption recovery. This will also contribute to a modest pickup in inflation as disinflationary pressures ease, prompting central banks to conclude their rate-cutting cycles and maintain stable policy rates through the end of 2026.
For China's equity market, 2026 is positioned as a year to consolidate the substantial gains of 2025. Valuations have already seen significant re-rating, meaning that future market upside will primarily stem from solid earnings growth, projected at around 6% for MSCI China. Despite the current underweight positioning by many global investors, there is considerable room for increased allocation, especially given easing U.S.-China tensions and China's strategic focus on AI and smart manufacturing. Opportunities are expected to be concentrated in sectors aligned with this national strategy, including AI, smart manufacturing, automation, robotics, and biotech. Furthermore, the continued policy support for Hong Kong as a global financial hub is expected to fuel capital market activities, including IPOs, creating thematic opportunities. Investors are also advised to maintain exposure to high-quality dividend stocks to navigate potential market volatility as deflationary pressures may persist into 2027.
The key takeaway is that Asia's economic trajectory in 2026 will be defined by a more inclusive recovery driven by non-tech exports, which will have a tangible impact on domestic economies. For investors in China, 2026 represents a phase of steady growth and capital reallocation towards innovation-driven sectors, supported by a return of global interest and robust domestic market activity.
Action Items
- Analyze Asia export shift: Quantify non-tech export contribution to GDP growth for 3-5 key economies (2026 forecast).
- Measure China equity valuation: Calculate MSCI China P/E ratio and compare to 5-year average to assess 2026 stability.
- Track R&D sector investment: Monitor capital inflows into AI, smart manufacturing, and biotech in China for 2026.
- Evaluate dividend stock performance: Assess correlation between high-dividend stocks and market volatility for 3-5 Asian markets (2026).
- Assess Hong Kong IPO market: Track number and value of IPOs in Hong Kong compared to global benchmarks (2026).
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View Episode Notes →Key Quotes
"However, what has happened is that tech exports have driven the strength in the overall exports for the region. And that is all because of the story on AI and tech development that we have all been watching. But the good news is that non-tech exports will recover in 2026. In fact, that's the key call we are making -- that from early next year, you will see that improvement in the U.S. domestic demand that helps Asia's exports, and at the same time, we are expecting that bulk of this tariff-related uncertainty would be behind us."
Chetan Ahya explains that while tech exports have been the primary driver of Asia's export growth, the recovery in non-tech exports is anticipated for 2026. Ahya attributes this expected recovery to improving U.S. domestic demand and a reduction in tariff-related uncertainties, suggesting a broader economic uplift.
"I think the best example I can give you is when you look at the Taiwan economic numbers. We've seen very strong GDP growth year-to-date. But at the same time, consumption numbers have been very weak. And so, non-tech exports recovery is very important for the broader economic recovery, and that is precisely what we expect in 2026. You will see that broadening out of growth with follow up in CapEx, job growth, and consumption recovery."
Chetan Ahya uses Taiwan's economic data to illustrate the limited impact of tech exports alone, noting strong GDP growth but weak consumption. Ahya emphasizes that the recovery of non-tech exports is crucial for a more comprehensive economic rebound in 2026, which should include increased capital expenditure, job growth, and consumption.
"Well, as the non-tech exports recovery materializes, you should see improvement in capacity utilization across the board in the region. That should reduce the disinflationary pressures that we've been seeing year-to-date. And at the same time, we're expecting that the disinflationary pressures that the region was facing from China is also going to ease in 2026."
Chetan Ahya forecasts a modest pick-up in Asia's inflation for 2026, driven by increased capacity utilization resulting from the non-tech export recovery. Ahya also anticipates that inflationary pressures originating from China will diminish, contributing to this trend.
"Going into 2026, we see it as a year for investors and for the market to preserve and protect what has been achieved in 2025 so far, but not with significantly much higher upside at this point. This is because the valuation re-reading we've seen so far in 2025 is already more than 30 percent, close to 40 percent."
Laura Wang characterizes 2026 as a year for consolidation in the China equity market, focusing on preserving gains from 2025 rather than expecting significant new upside. Wang explains that this outlook is due to substantial valuation increases observed in 2025, which have already priced in considerable growth.
"We want to make sure that we focus on the sectors that are very well aligned with the national growth strategy with a strong focus in R&D and innovation -- and that would include AI as well as smart manufacturing, automation, robotics, and biotech."
Laura Wang advises investors to concentrate on sectors that align with China's national growth strategy, particularly those emphasizing research, development, and innovation. Wang specifically highlights artificial intelligence, smart manufacturing, automation, robotics, and biotechnology as key areas of opportunity.
"One very positive development we have observed in 2025 is the strong capital market activities in Hong Kong. Hong Kong at single stock exchange basis actually is the most active IPO market in the world in 2025, and with policy support for Hong Kong to continue as a global financial hub, we expect this trend to continue."
Laura Wang points to Hong Kong's robust capital market activity in 2025, noting its position as the world's most active IPO market. Wang anticipates this trend will persist, supported by policies aimed at maintaining Hong Kong's status as a global financial hub.
Resources
External Resources
Articles & Papers
- "Asia’s Economy and Markets in 2026" (Thoughts on the Market) - Discussed as the primary topic of the episode, focusing on Asia's economic recovery and China's market stability.
People
- Chetan Ahya - Co-host, Chief Asia Economist, discussed Asia's economic outlook and inflation trends.
- Laura Wang - Co-host, Chief China Equity Strategist, discussed China's equity market outlook and investment opportunities.
Organizations & Institutions
- Morgan Stanley - Mentioned as the source of the "Thoughts on the Market" podcast and insights.
- MSCI China - Referenced for its performance in 2025 and projected earnings growth for 2026.
- Hang Seng Index - Referenced for its performance in 2025.
Other Resources
- AI - Discussed as a key driver of tech export strength and a focus for R&D and innovation in China.
- Smart manufacturing - Identified as a sector aligned with China's national growth strategy and an area of investment opportunity.
- Automation - Mentioned as a thematic opportunity aligned with China's national growth strategy.
- Robotics - Mentioned as a thematic opportunity aligned with China's national growth strategy.
- Biotech - Mentioned as a thematic opportunity aligned with China's national growth strategy.
- Corporate governance reform - Identified as a thematic opportunity for investors.
- Anti-evolution - Identified as a thematic opportunity for investors.