Why Asia Stocks Could Outperform in 2026

A deep and persistent paradox is haunting global financial markets. While capital continues to pour into a richly valued US market, a powerful and increasingly undeniable growth story is unfolding across Asia, yet it remains remarkably "under-invested." According to DBS's chief investment office, a potent combination of high dividend yields, accelerating earnings growth, and deeply discounted valuations is creating "clear and present" opportunities right in our backyard. This isn't just a cyclical turn; it's a fundamental dislocation between perception and reality, where lingering caution from past underperformance is blinding investors to a structural shift in global economic momentum.

The Asian Value Proposition

The case for reallocating capital to Asia is built on a compelling triad of factors that are becoming too significant to ignore. The first pillar is income. In a world of moderating interest rates, the hunt for yield is paramount. Asian markets, particularly Singapore and China, are offering dividend yields in the 5% to 6% range. This stands in stark contrast to the S&P 500's dividend yield, which currently languishes around 1.5%. In Singapore, blue-chip banking stocks and real estate investment trusts (REITs) continue to provide yields around 6%, underpinned by the robust strength of the Singapore dollar.

The second pillar is growth, specifically within the technology sector. While Silicon Valley dominates headlines, the engine of innovation is shifting eastward. Early earnings estimates for Asian technology companies (excluding Japan) for FY2026 are pointing towards explosive growth in the mid-20% range. This is not speculative hype; it is supported by hard data. China alone now files for more international patents annually than the United States, a clear indicator of a surge in intellectual property generation that will fuel long-term growth in high-value industries.

This leads to the third pillar: valuation. US technology stocks are currently trading at a lofty price-to-earnings (P/E) ratio of about 36 times. Their Asian counterparts, despite projecting superior near-term growth, trade at less than 20 times earnings. This valuation gulf is stark when comparing direct counterparts: Tesla's P/E ratio of 277.5 times towers over the 20.8 times of its formidable competitor, BYD. Similarly, Google's 28.6 times P/E is significantly richer than Baidu's 17.8 times. The Hang Seng Tech Index, representing China's largest tech firms, often trades at a P/E ratio in the low teens, a massive discount for companies with comparable, if not larger, user bases than their Western peers.

The Macro Headwinds and the Micro Realities

While the on-the-ground fundamentals in Asia are compelling, it would be naive to ignore the powerful macro-level headwinds fueling investor caution. The persistent US-China geopolitical rivalry, regulatory uncertainties in China that peaked in 2021, and the threat of a global economic slowdown are very real risks. These concerns have acted as a powerful anchor, weighing down sentiment. Global fund manager surveys consistently show that institutional investors remain significantly underweight in Asian and emerging market equities, with many large funds holding less than 10% in Asia ex-Japan, despite the region accounting for nearly 40% of global GDP on a purchasing power parity basis.

However, this macro caution often overlooks the powerful micro-level realities. The long-term structural trends are undeniable. By 2030, Asia is projected to account for two-thirds of the global middle class, creating a consumer market of unprecedented scale. Furthermore, the "China plus one" strategy is a major tailwind for ASEAN nations like Vietnam and Indonesia, which are seeing a surge in foreign direct investment as companies diversify their supply chains. These deep-rooted domestic and regional growth drivers provide a level of resilience that is often underestimated by global investors focused on headline risks.

The Shifting Sands of Global Capital Flows

The current market structure is historically stretched. The US stock market now accounts for over 60% of the MSCI World Index, a level of concentration that is extremely high by historical standards. This is largely driven by a handful of technology mega-caps. This over-concentration creates a significant vulnerability. A downturn in this small group of stocks could trigger a broad market correction, prompting a desperate search for diversification and value—a search that will inevitably lead back to the discounted markets of Asia.

Furthermore, the long-term outlook for the US dollar is one of moderation after years of strength. A stabilizing or gradually weakening dollar acts as a powerful tailwind for emerging markets. It makes it cheaper for them to service their US dollar-denominated debt and makes their assets more attractive to foreign investors. As the US Federal Reserve eventually pivots towards a more accommodative policy stance, the stage will be set for a significant, multi-year rotation of capital out of overvalued US assets and into undervalued international markets, with Asia poised to be the primary beneficiary.

My View: A Cautious but Inevitable Rebalancing

In my opinion, the current "under-invested" status of Asia is a temporary, fear-driven anomaly that is destined to correct itself. The valuation gap has now stretched to a historical extreme and is, in the long run, unsustainable. The combination of mid-20% earnings growth at a sub-20 P/E ratio is a value proposition that is simply too powerful to be ignored indefinitely. The primary barrier has been psychological, a "recency bias" from the past few years where China's regulatory crackdowns and COVID-19 policies led to significant underperformance, burning many investors.

However, this rebalancing will not be a straight line. The path forward for a Singapore-based investor is not to abandon the stability of developed markets, but to begin a strategic and incremental reallocation of capital into their own backyard. This means diversifying away from an over-concentration in US equities and building a more balanced portfolio. The catalyst for a major shift will likely be a few consecutive quarters where Asian corporate earnings meet or exceed the strong growth forecasts, providing undeniable proof that the turnaround is real. This will force a major reassessment by global fund managers, triggering a significant flow of capital into the region. The opportunity is indeed "clear and present," but it will reward the patient and strategic investor.