1 December 2025
The macro and market environment in 2025 has been characterised by resilient growth, moderating (though sticky), inflation, policy uncertainty, and broadly positive markets. So, what is the outlook for next year?
For a start, global markets have been driven by improving sentiment this year – helped by fading US exceptionalism and a weaker dollar. Price-to-earnings multiples in stocks have expanded, and corporate credit spreads have reached decade-lows. But with valuations no longer a tailwind, and further big falls in the dollar not guaranteed, 2026 performance will be much more dependent on profits growth and credit fundamentals.
Secondly, the US’s role as a growth leader faces challenges. While tech investment is driving growth, other key parts of the economy – like employment and consumer spending – are fragile. So, growth rates across western economies are expected to come together next year, with the fastest growth still in Asia, the Gulf, and Frontier regions.
Thirdly, emerging market central banks have had space to ease policy ahead of the Federal Reserve this year. Faced with sticky inflation, further Fed cuts look achievable in 2026, with similar easing likely in Europe. And while EM policymakers are expected to cut too – next year, it will be more a case of them following the Fed than leading it.
Overall, a shifting macro and policy backdrop is consistent with changing characteristics of key asset classes.
Performance in the private credit market has been strong this year, with high single-digit annual gains, rapid market growth, and abundant liquidity. And while returns could moderate in response to falling rates in 2026, some alternative investment experts expect them to remain robust. Moreover, investors are increasingly being drawn to “multiple engines” in the asset class, including compelling risk-adjusted returns, diversification, and income stability.
Part of the appeal of private credit is its low correlation to public markets, which makes it a potential diversifier to conventional stocks and bonds. Intra-asset class diversification plays a part, too. Direct lending (the largest private credit sub-category), for example, has a higher-risk, higher-reward profile given its specialisation in providing loans to private equity-backed firms. But infrastructure debt, another key part of the market, is more defensive, given its focus on financing projects in areas like transportation, energy transition, and digitalisation.
In the context of recent signs of credit stress in parts of the market, a focus on high quality and the role of private credit as a portfolio diversifier are key. With the recent industry data suggesting that default rates are still low overall, it underscores the asset class’s defensive appeal.
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. 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. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management, Bloomberg, Macrobond. Data as at 7.30am UK time 28 November 2025.
The UK’s public finances have been in the headlines lately. However, the country’s fiscal problem is more of a productivity problem. Since the global financial crisis, productivity has been poor, and supply side shocks and worsening demographics have lowered potential growth. The upshot is that tax revenues have disappointed and public spending has risen. In the Autumn Budget, the Chancellor attempted to fix the situation by raising taxes, albeit with most measures kicking in a few years down the road. This allowed her to forecast a meaningful narrowing in public sector net borrowing to 1.9% of GDP by 2029/30, from 4.5% in 2025/2026. |
The Gilt market took the news positively – longer-dated yields fell on reduced supply concerns, with some expected returns models showing yields have already factored in a sizeable risk premium. Moderating wage growth and an improving inflation outlook also bode well for further BoE easing during 2026. Nonetheless, the risk remains that the host of smaller tax measures fail to stabilise the fiscal position over the medium term, necessitating a more comprehensive package of measures.
But there is room for caution. Historically, there were spikes in the ratio of US margin to GDP before major market sell-offs in 2000, 2007, and 2022. In the first two instances, margin debt growth ran well ahead of the S&P 500’s performance – and the recent rise is starting to follow the same pattern. There is a risk that margin debt acts an “amplification mechanism” in market pricing – with investors leveraging up on strong performance but selling quickly on weakness – which can intensify volatility by magnifying upside and downside moves.
It has been a stellar year for stocks in China’s burgeoning technology sector. Despite recent global volatility, the MSCI China Tech 100 index has surged by nearly 30% year-to-date, outperforming the USA Tech 125, and global stock markets generally. Q3 earnings season has been promising, too, with major tech firms largely beating expectations, particularly those in hardware and internet services. While US firms continue to be the focus of global AI, Chinese firms are competing hard. Some analysts expect the drive for self-developed AI models (like those from DeepSeek and Alibaba) and production localisation to persist. That should be bolstered by cost advantages, pro-innovation government support, and China’s strength in high-end manufacturing. The country’s power generation security, dominance in key mineral supplies, and strength in AI research should also help. |
For now, Chinese tech stocks trade at a steep discount to US sector peers. The China Tech 100 index has a forward PE ratio of 17x, which is 40% lower than the USA Tech 125. But as China’s tech firms grow more competitive, and profits growth improves, there is scope for that discount to narrow.
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, OECD.AI. Data as at 7.30am UK time 28 November 2025.
Source: HSBC Asset Management. Data as at 7.30am UK time 28 November 2025. 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. *The US government shutdown has ended, but there may still be delays to the expected releases of official data.
Dovish Fed comments triggered a re-pricing of US rate expectations last week, with the market now factoring in a significantly higher probability of a 0.25% rate cut in December. This bolstered risk appetite and weighed on the US dollar against major currencies. The US Treasury curve bull-flattened, while UK Gilt yields headed for a weekly decline as investors digested the Autumn Budget. Credit markets rallied alongside, with high-yield spreads narrowing notably. US equities rebounded strongly in a holiday-shortened week, led by the rate-sensitive Russell 2000. The Euro Stoxx 50 and Japan’s Nikkei 225 moved higher. Most Asian equity markets rose as well, including Korea’s Kospi and Hong Kong’s Hang Seng. India’s Sensex refreshed record high, while ASEAN markets generally lagged regional peers. In commodities, gold extended its recent gains but remained below October’s all-time highs.
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