Q4 2026 Equity Outlook: Balancing Volatility with Defensive Growth

Clouded by rate and geopolitical uncertainties, stocks display resilience alongside volatility

In a widely expected move, the Fed raised interest rates by 25 bps in September. However, the US-Iran conflict stretches on, sending oil prices higher. The monetary policy outlook remains uncertain amid elevated inflationary pressures. The 10-year US Treasury yield breached 5% for the first time since 2023, while US tech giants have proposed pacing AI development. Together, these disruptive external factors are weighing on the market.

Despite the emergence of undercurrents, global economies continue to exhibit resilience, while companies have delivered earnings that were largely in line with expectations. Investors are upholding their constructive stance on equities, particularly those related to technology and AI. However, due to external factors, the stock market will inevitably experience greater fluctuations. In light of increasing volatility, funds are expected to gradually diversify away from growth stocks, such as technology, into more defensive areas like industrials, banks, healthcare, energy, and materials. Related quality stocks are accessible across various markets, including mainland China, South Korea, Taiwan, India, and Singapore. Against the backdrop of elevated interest rate expectations and potentially higher corporate borrowing costs, investors will likely prefer market leaders with ample free cash flow and robust balance sheets over highly leveraged companies.

Source: https://www.macrotrends.net/, as at 18 September 2026

Mainland China: supportive policy and ample liquidity; defensive materials in focus

Mainland China's supply-demand balance remains uneven. August retail sales and fixed-asset investment remained sluggish, but industrial productivity was bolstered by advanced technology manufacturing. In early September, the Ministry of Finance announced plans to inject RMB300 billion into state-owned banks and insurance companies to strengthen capital across the financial system. The authorities are expected to roll out further fiscal measures to prop up domestic demand.

Mainland China's economy is undergoing restructuring, yet ample market liquidity and favourable measures are fuelling investor sentiment. Against a macro backdrop of elevated oil prices, rising inflation expectations, higher US Treasury yields, and a strong dollar, the materials sector has taken centre stage. This includes copper, which faces supply shortages, and gold, which serves as a hedging tool and as a safe haven. The materials sector remains appealing due to rising demand, higher spot prices, and China holds a lion's share of global critical and precious metals production. However, commodity prices could experience greater volatility driven by external factors.

Taiwan's tech and AI long-term trends unchanged, benefiting peripheral areas across the supply chain

US tech majors proposed pacing the development of AI, sparking market volatility. However, market analysis shows AI's growth trajectory and capex trends remain robust. If a firm slows down its growth, it risks losing out to competitors. In July, elevated tech valuations and concerns over overheating AI investment sparked a market sell-off, but robust forward-looking guidance from tech firms highlighted that structural AI demand remains intact.

Taiwan's tech-related sector encompasses a wide range of areas across the AI supply chain, including semiconductor manufacturing, outsourced semiconductor assembly and test (OSAT), printed circuit board design, AI infrastructure, and electronics materials. As investors broaden their AI allocations to peripheral areas along the supply chain, Taiwan's tech-related stocks will likely remain in focus.

South Korea's unwinding of positions ends; tech and heavy industries serve as twin engines

The massive unwinding of equity hedge funds and leveraged ETFs in South Korea that took place in July looks set to have run its course. South Korea maintains its leading global position in the technology and industrials sectors, which continue to attract investor interest due to a confluence of factors: memory manufacturers have successively announced generous shareholder return plans, market-beating second-quarter results, and some companies are persistently trading at compelling valuations while offering attractive dividend yields.

Amid sector rotation, a portion of funds is shifting to non-tech sectors. South Korea leads in heavy industries, including aerospace, defence, shipbuilding, energy equipment, and power infrastructure. Order win announcements will likely be concentrated in the second half of the year, potentially serving as a market catalyst.

Watch for yen appreciation and carry trade unwind amid BOJ hawkish rate hike

Japan's macroeconomic performance remains stable, with the August manufacturing PMI rising to 54.9, firmly in expansionary territory. However, local monetary policy is the reason that keeps investors awake at night. In a widely anticipated move, the Japanese central bank hiked interest rates at its September meeting, raising policy rates to 1.25% from 1%, while reiterating that authorities stand ready to normalise interest rates.

This is Japan's third rate hike in 10 months. The central bank's hawkish stance has sparked market concerns: an overly aggressive rate hike could not only send Japan spiralling into deflation once again and suppress economic growth, but also push up the Japanese yen. Since the US-Japan joint market intervention in July, the JPY has strengthened by approximately 5-6% against the USD, the largest appreciation among G10 currencies. Markets fear that an excessively strong yen could trigger an unwinding of carry trades, setting off a domino effect that could subsequently roil the market. Hence, comments and actions from the Bank of Japan are closely monitored by investors.

India's robust macroeconomic growth attracts return of global funds into defensive sectors

Previously, Indian equities experienced persistent global fund outflows, primarily due to their relatively high valuations and the lack of prominent AI stocks. While investor confidence has yet to fully recover, there are signs that global funds are gradually returning to the Indian stock market as diversification takes place.

Despite the US-Iran war pushing energy prices higher, India's second-quarter GDP growth sharply exceeded market expectations, surging 7.8% year-on-year, buoyed by the financials, retail, manufacturing, property, and consumer sectors. India's structural growth remains intact. Coupled with a rotation away from tech stocks towards more defensive areas, sectors such as healthcare and metal are in focus.

Singapore's economy stays resilient; banks posted robust earnings with attractive dividend yields

Singapore's economy remains stable, with second-quarter GDP expanding 5.7% year-on-year. Technology-related exports and rising productivity are spurring economic growth, while inflation remains moderate. A robust macroeconomic backdrop and a bullish wealth management outlook contributed to better-than-expected second-quarter bank earnings, driving the broader Singaporean stock market. Singaporean banks are also benefiting from sector rotation. Those that offer compelling dividend yields and deliver stable earnings are attracting fund inflows.

Conclusion

All in all, the global economy remains resilient, while the fundamentals of Asian equity markets and corporate earnings continue to trend positively. Nonetheless, macro uncertainties, including higher oil prices, persistently elevated interest rates, and diverging global policies, will inevitably trigger greater market volatility in the near term. While maintaining a constructive stance, investors should consider adopting a diversified asset allocation strategy with defensive characteristics. They should manage risks associated with excessive leverage or overconcentration in a single-asset class, and gradually diversify into leaders across the materials, banking, healthcare, and heavy industrial sectors that offer ample free cash flow, appealing dividend yields, and exposure to strong structural demand. This approach would allow investors to navigate a volatile macro environment with flexibility and capture opportunities arising from sector rotation.