Investment Weekly: Where are the anti-bubbles?
27 July 2026
Key takeaways
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New UK Prime Minister Andy Burnham’s first week in the job has put UK public finances back in the spotlight. He has announced a “cost-of-living government” that aims to support households, alongside ambitions to invest more in infrastructure, housing and defence.
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In an uncertain global environment characterised by fragmented geopolitics and less predictable rate cycles, investors are placing a higher premium on durable cash returns. Asian equities are becoming increasingly relevant in this context.
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Carry trades — where investors borrow in a low-yielding currency to buy a high-yielding one —have performed exceptionally well over the past year, especially for EM FX. This has come amid persistently high EM policy rates and yields that have absorbed bouts of EM FX depreciation.
Chart of the week – Where are the anti-bubbles?
Many investors are worried about valuation bubbles. Depending on your perspective, these are either justified – based on supernormal profits and strong productivity – or a red flag for low future returns. But if you’re worried, what do you do? It’s a tougher question than usual because some traditional diversifiers have lost hedging power. Neither gold nor G7 bonds were reliable portfolio protectors during the market volatility in H1. There are three choices:
#1 Look beyond traditional bonds, but don’t abandon them. Many investors have been turning to “bond substitutes”, such as hedge funds. That makes sense – but there is still a case for G7 bonds too. After all, UK gilts outperformed the Magnificent Seven stocks in H1. But investors need to be careful; term premia are rising, and fiscal risks are top of mind. Shorter duration bonds could be a better way to take advantage of higher-for-longer rates.
#2 Income is back. There are income opportunities across emerging markets, credit and global stocks that can provide ballast to portfolios – even if they don’t hedge perfectly. Think real assets (like infrastructure), selective parts of private credit, or dividend-focused equity strategies.
#3 Consider the “anti-bubbles”. These are parts of the market with the opposite characteristics of frothy bubbles: limited investor interest, relatively low valuations, and more sensitivity to potential rate cuts. By being less crowded – and more ignored – they may hold up better in a sell off. Examples include Europe and Asia, especially, China. This could be the most intriguing way to help protect a portfolio this summer.
Market Spotlight
Screen time
Using stock screens to filter out unwanted parts of an index is a common way of managing portfolios. In sustainable investment, it can be used to avoid climate risks, align portfolios to clients’ sustainability goals, and meet regulatory demands. One trade-off is that screening can cause portfolios to drift from the index – so it’s important to assess the impact on returns.
Small, focused exclusions – like stripping out coal producers – tend to leave returns and risk almost unchanged. But broad “zero tolerance” screens – for example, excluding oil & gas – can make portfolios behave meaningfully differently from the benchmark. That can cause noticeable relative under- or out-performance.
The impact of screens also depends on factors like the baseline year, market environment, and investment time horizon. For example, at the 10-year mark, the impact tends to be neutral or even positive. The direction of energy prices is also important, with EM indices more affected given their bigger weight in commodity names.
Overall, climate screens can be an important tool – but investors need to find a level of strictness that balances their objectives and tolerance for diverging from the benchmark.
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. 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, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 24 July 2026.
Lens on…
Burnham versus the bond market
New UK Prime Minister Andy Burnham’s first week in the job has put UK public finances back in the spotlight. He has announced a “cost-of-living government” that aims to support households, alongside ambitions to invest more in infrastructure, housing and defence. But he is up against a bond market that has been increasingly sensitive to any significant deviation from the government’s fiscal rules, which include reducing public debt as a share of GDP. The tug of war between governments and the bond market isn’t new, and isn’t specific to the UK. In many Western economies, the legacy of Covid and Russia’s invasion of Ukraine in 2022 has left public finances stretched, just as weak GDP and productivity growth have meant that tax revenues are struggling to keep up with spending priorities in the “multi-polar” world. These include boosting defence outlays as geopolitical threats rise, tackling climate change and energy security (with the closure of Hormuz sharpening policymakers’ attention), and addressing the cost of living amid rising anti-establishment sentiment. |
It is an environment where developed market bond yields are likely to remain high and more volatile than in the past.
Beyond growth
In an uncertain global environment characterised by fragmented geopolitics and less predictable rate cycles, investors are placing a higher premium on durable cash returns. Asian equities are becoming increasingly relevant in this context. Although often perceived as a play on the region’s stellar GDP growth, rising middle class and tech innovation, the reality is that income has been a significant driver of returns. Many Asian corporates hold stronger net cash positions than their Western peers, leaving room for high payout ratios, special dividends and buybacks as governance and capital-allocation discipline improve. Policy nudges matter too: South Korea’s Corporate Value-Up programme is encouraging clearer disclosure and stronger shareholder distribution, while measures in China promoting dividends and repurchases should support total returns. |
Active management remains central. The goal is not to maximise headline yield, but to scrutinise it — assessing leverage, free cash flow coverage and reinvestment needs, and diversifying across defensive, cyclical and growth names, while avoiding dividend traps built on fragile balance sheets.
Keep calm and carry on
Carry trades — where investors borrow in a low-yielding currency to buy a high-yielding one —have performed exceptionally well over the past year, especially for EM FX. This has come amid persistently high EM policy rates and yields that have absorbed bouts of EM FX depreciation. And for traders borrowing in yen to invest in EM assets, sustained yen depreciation has meant the underlying funding currency has become cheaper to repay, padding overall returns. But this is not just a story of yield gaps. A backdrop of low volatility in EM assets has reduced the risk of forced sales to cover losses. This points to a new regime of EM resilience in the face of external shocks – for example, dollar and commodity price volatility – that reflects stronger central bank credibility and improving fiscal fundamentals. |
Of course, there are risks to monitor. The yen could appreciate suddenly, or global volatility could spike if the AI trade wobbles. But for the time being, calmer markets and a cheap yen are likely to keep this trade in fashion.
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 24 July 2026.
Key Events and Data Releases
Last week
This week ahead
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 24 July 2026.
Market review
Persistent Middle East tensions lifted energy prices and core sovereign bond yields, weighing on sentiment. The US Treasury curve bear-flattened ahead of this week’s FOMC meeting as higher oil prices reinforced market expectations of Fed tightening. European yields also rose, as ECB President Lagarde signalled a near-term wait-and-see stance, citing potential second-round inflation effects. In equities, major US stock indices weakened on renewed doubts over AI investment returns as investors digested Q2 earnings from tech heavyweights, despite a rebound in the Philadelphia semiconductor index. European bourses edged lower, while the FTSE 100 moved higher. Asian stocks were mixed. The Nikkei 225 rebounded slightly, while the Kospi reversed gains, extending weekly losses. The Hang Seng and the Shanghai Composite rose, whereas the Sensex declined on rising trade concerns. In FX, the US dollar generally strengthened against major peers, with the JPY refreshing a multi-decade low.
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