Q4 2026 Equity Outlook: Balancing Volatility with Defensive Growth

Despite a challenging macroeconomic environment, credit fundamentals in Asia's dollar bond markets remain resilient. Coupled with compelling yields, these factors continue to provide a meaningful cushion against downside risks across the broader asset class. Nevertheless, elevated inflation expectations, rising interest rates, economic resilience, and record-high US federal debt have pushed the US 10-year Treasury yield above the 5% threshold. With consumer prices growing at a faster pace in August, the Federal Reserve raised interest rates in September. Subsequently, the evolving situation in the Middle East has further clouded the inflation outlook and the trajectory of global monetary policy. Overall, while credit fundamentals across Asia's bond markets remain broadly stable and yields attractive, market volatility is likely to intensify amid the crosscurrents of elevated sovereign yields across developed markets, including the US, Treasury market issuance and market intervention, as well as heightened geopolitical tensions. As such, investors should adopt a cautious and defensive allocation strategy.

Data source: https://fred.stlouisfed.org/, as at 18 September, 2026

Asian investment-grade bonds: policy transparency and financing dynamics

New issuance in Asia's investment-grade bond market is expected to pick up. This, alongside rate volatility, could put some pressure on spreads. However, still-high absolute bond yields could provide some support. Caught between competing forces, investment-grade bond spreads are expected to widen slightly but remain within a tight range, with total returns mainly coming from coupon income and US Treasury movements.

Chinese TMT bonds: pressured by high valuations and US peer debt issuance

Chinese technology, media and telecommunication (TMT) companies' second-quarter earnings largely met expectations, with overall credit fundamentals remaining stable. Most platforms and internet companies are operating with ample net cash and relatively low net debt. However, a sharp increase in AI-related capex by some firms has sparked market concerns about whether returns on investment in the near term can justify the scale of such spending. Moreover, valuations in the sector remain considerably lofty. Coupled with competition for capital arising from large-scale debt issuance by US peers, these factors have dampened market appetite for Chinese TMT bonds, potentially leading to further widening in credit spreads.

Indian banks dollar bond supply

The Reserve Bank of India (RBI) launched the USD-INR forex swap facility in June. Due to the overwhelming response, part of the scheme ended earlier than scheduled in August. To secure funding, Indian banks scurried to issue dollar bonds prior to the deadline. With the peak of debt issuance in the rear-view mirror, and given that financing costs are lower in the onshore market than offshore, the incentive for banks to issue dollar bonds is expected to diminish. A gradual retreat in issuance towards more stable levels will help stabilise credit spreads and improve market technical.

Indonesian policy transparency increases, bolstering investor confidence

The Indonesian government unveiled a prudent and measured policy direction, setting a deficit target of 2.4% of GDP and easing market concerns over a potential breach of the 3% ceiling. The newly appointed central bank governor raised the 2027 GDP growth forecast to a range of 5.2%-6%. In addition, market expectations are anchored on policy continuity and a constructive relationship between the new governor and the administration. Enhanced policy transparency is conducive to strengthening market confidence and stabilising credit spreads.

Asian high-yield bonds: supportive fundamentals and regional reform

The US-Iran war sent oil prices higher and, together with elevated rates, dealt a blow to bond markets. However, the fundamentals of Asian high-yield bonds remain stable. These factors, combined with limited new supply, continues to support the market. However, credits with relatively longer durations and highly leveraged issuers are more vulnerable to rate volatility. Demand for beta bonds has also shown signs of subsiding.

China property sales reform

Mainland China is drastically reforming its property presale policy. Projects are only eligible for presale when structurally topped out, while down payments and loans can only be released to developers after projects are completed. The new rules will increase the funding pressure on developers in the near term, but will reduce the risk of incomplete property projects and boost buyer confidence in the long run. Developers are expected to rein in land acquisition while adopting prudent cash flow management. Within the sector, state-owned developers have relatively ample liquidity and more financing channels. Given that the real estate sector has yet to fully recover, the market continues to adopt a prudent stance on mainland property bonds.

Pakistan's forex facility

Driven by exports, Pakistan's July current account deficit sharply narrowed to US$328 million, representing a drastic 60% month-on-month decline. The government has officially requested a US$10 billion exchange stabilisation support facility from the US, while actively working with global credit agencies to seek ways to improve sovereign credit rating. With attractive carry and the possibility of securing a swap facility with the US, Pakistan's belly bonds may attract investor interest.

Sri Lankan debt restructuring

Sri Lanka's economy exhibits resilience, with revenue continuing to increase against steadily declining debt servicing costs. The country has already completed 94% of its sovereign debt restructuring. Meanwhile, it is in talks with its advisory firm to buy back part of its foreign debt, aimed at further improving its overall debt structure and optimising its debt sustainability. However, the extent to which the debt structure will improve remains to be seen.

Conclusion

High oil prices, rising US Treasury yields, and Fed policy uncertainty are weighing on Asia's bond market to a certain extent. Yet, Asian investment-grade and high-yield dollar bond yields remain compelling alongside stable credit fundamentals. To navigate potential market volatility, funds are expected to stay nimble, prioritising issuers with resilient credit profiles.