Investment Weekly: Zooming out on expected returns
19 October 2026
Key takeaways
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For investors, macro “resilience” to a barrage of shocks in recent years has been critical in providing markets with the opportunity to perform. The IMF highlights two key drivers of this resilience: the AI boom, and a flexible global energy market.
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EM equities are having a stellar year so far, following a blistering 2025. While last year saw a broad-based acceleration in EM performance, helped by Fed cuts and a weaker dollar, this year’s gains have been concentrated in the semiconductor heavyweights of South Korea and Taiwan. It also makes sense to look at Frontier markets.
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Gold’s spectacular bull run, which saw prices climb to well above USD 5,000 per ounce earlier this year, has recently lost some momentum. Prices are down and volatility is up. There is still a compelling strategic rationale for the metal in portfolios as geopolitical fragmentation and central bank reserve diversification keep demand supported.
Chart of the week – Zooming out on expected returns
If investors could only know one thing about markets, what would they choose? Next quarter’s earnings? Next month’s CPI? The next Fed move? Somewhere at the top of the list should probably be expected returns. Carefully calibrated, they tell us where medium‑term asset class returns are heading. They’re the single most important piece of information for long‑term investors — the foundation of strategic asset allocation.
So, what do expected returns tell us today? Three conclusions stand out:
First, we’re in a world of shocks and a boom. That means a higher‑for‑longer interest rate environment. Expected returns for cash and many fixed income assets have risen meaningfully.
Second, higher rates are squeezing equity valuations. Concerns about US concentration and tech dominance are well known, but expected returns point to a potentially preferable approach: rotate towards international and emerging markets, where valuations and risk premia are also attractive.
Third, supply‑driven volatility forces us to rethink “safe assets.” G7 bonds now offer higher carry and can rally sharply if there is a recession scare. But when risks span both disinflation and sticky inflation, there’s no longer a single portfolio hedge. In this new age of uncertainty, investors need to diversify their diversifiers. Think real assets, commodities and hedge funds.
Market Spotlight
Silent treatment
Michael Woodford’s joint 2026 Nobel Prize in economics with Robert E Hall recognised their work on the “microeconomic foundations of macroeconomic stabilisation”. Woodford’s contribution was to show that monetary policy operates not only through today’s interest rate, but also through expectations of future policy. Credible signals about borrowing costs can therefore influence spending, investment and prices immediately, making forward guidance a stabilisation tool.
That logic sits uneasily with Kevin Warsh’s approach as Federal Reserve chair. Warsh argues that detailed guidance can make policy inflexible, encourage investors to trade the Fed’s words rather than economic data and weaken price discovery. He has removed guidance from FOMC statements, shortened them and declined to submit a personal dot plot. While Woodford and some FOMC members, such as Christopher Waller, see forward guidance as an instrument, Warsh sees it as a constraint.
With markets accustomed to consistent doses of forward guidance, Warsh’s “figure it out yourself” approach is the monetary equivalent of going cold turkey. Expect an uncomfortable time in markets – with potentially higher volatility and risk premia – as investors navigate the withdrawal.
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 company, 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 16 October 2026.
Lens on…
Taking the strain
The IMF’s latest World Economic Outlook is called “Resilience Under Strain, Urgent Choices”. For investors, macro “resilience” to a barrage of shocks in recent years has been critical in providing markets with the opportunity to perform. The IMF highlights two key drivers of this resilience: the AI boom, and a flexible global energy market. World GDP growth is now expected to be around 3% this year, while the 2027 forecast has been upgraded by 0.5 percentage points from the April projection to 3.5%. There are also some positive takeaways from the latest inflation forecasts. Unsurprisingly, headline inflation projections for the US and Europe have been revised upwards for 2026 and 2027. But the longer-term inflation trajectory for the US has been downgraded and remains anchored at around 2%. This is the bull case for beaten-up fixed income markets despite lingering concerns over bond supply. |
But it’s clear that the IMF is worried. It identifies key “strains” such as higher borrowing costs, AI concentration risks, and dwindling energy inventories that need to be tackled via “urgent choices”. So, the global economy is tougher than you might think, but there’s still plenty out there that can still deliver a nasty surprise to markets.
When the chips are up
EM equities are having a stellar year so far, following a blistering 2025. While last year saw a broad-based acceleration in EM performance, helped by Fed cuts and a weaker dollar, this year’s gains have been concentrated in the semiconductor heavyweights of South Korea and Taiwan. With major uncertainty over the durability of the AI and semiconductor boom, it’s important to think about diversification right now. One option is to do nothing: other parts of the EM basket that have lagged in 2026 may provide a hedge in case the AI trade falters. |
It also makes sense to look at Frontier markets. Encompassing both energy winners and losers, they continue to offer investors a diversified opportunity set with lower sensitivity to the fortunes of AI and strong local ownership. This helps keep volatility relatively subdued. And although Frontier markets have underperformed EM this year, they have a better longer-term track record, helped by exposure to some of the world’s fastest growing economies. Indeed, the latest IMF numbers have upgraded the 2026 growth forecast for Vietnam, the largest index constituent, by 1.3 percentage points to 8.4%.
Gold is no silver bullet
Gold’s spectacular bull run, which saw prices climb to well above USD 5,000 per ounce earlier this year, has recently lost some momentum. Prices are down and volatility is up. There is still a compelling strategic rationale for the metal in portfolios as geopolitical fragmentation and central bank reserve diversification keep demand supported. The “debasement trade” of shifting capital into “hard assets” such as gold can continue as concerns over debt and inflation linger. And although volatility has spiked, it doesn’t look that bad compared to history. |
However, recent market action has shown that gold has failed to hedge against equity drawdowns. With leveraged capital crowded into gold, tumbling stocks can trigger margin calls that force investors to unwind positions to raise cash. So, although gold appears to be a robust hedge against systemic risks in a “multi-polar” world, it’s not guaranteed to work as a short-term volatility dampener. It’s a reminder that no single asset can weather every type of market stress, and that diversifying the diversifiers remains a crucial strategy for investors right now.
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. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 16 October 2026.
Key Events and Data Releases
Last week
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 16 October 2026.
Market review
Renewed concerns over elevated AI valuations and financing conditions, together with upbeat US inflation prints, weighed on market sentiment. Demand for safe-haven assets supported major sovereign bonds. The US Treasury yield curve bull-flattened, while longer-dated European yields also broadly declined. In the US, the S&P 500, Nasdaq and Philadelphia Semiconductor Index fell as investors rotated out of AI-related stocks and into defensive sectors such as Healthcare and Consumer Staples. Weakness extended across Asian markets, led by a double-digit decline in the Kospi, while the Nikkei 225 also slid. The Shanghai Composite slipped ahead of the release of Q3 GDP data, whereas the Sensex gained. European bourses remained resilient, however. In FX markets, major currencies drifted higher against the dollar. EM currencies traded mixed, while the Indian Rupee rebounded following the RBI’s latest measures.
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