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Emerging market equities, led by Asia, are expected to outperform US markets in the second half of 2026 due to a weakening US dollar and an artificial intelligence-driven export boom, according to David Chao, global market strategist for Asia Pacific at Invesco.
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On monetary policy, Chao said markets are too hawkish in pricing rate hikes, adding that his base case is for the US Federal Reserve to remain on hold or deliver at most one rate cut this year.
Chao argued the US dollar remains overvalued and will likely depreciate as investors diversify capital away from American assets, while identifying the Japanese yen as the most mispriced major asset that could become the best-performing currency over the next six months.
The Chinese yuan is also undervalued and offers substantial cross-border purchasing power advantages, but Chao expects it to appreciate only gradually given China's reliance on export competitiveness.
Regionally, he observed that Asia has been more resilient than expected despite its reliance on Middle East energy, aided by policy support and strong demand for AI-related hardware.
Chao noted China's technology sector remains underappreciated, warning that investors waiting for a broad macroeconomic rebound risk missing attractive opportunities in Chinese technology, green tech, and biotech.
Furthermore, Chao estimates China controls roughly 80 percent of the global green transition supply chain. He argued that recent geopolitical shocks have turned clean energy into an economic security priority, providing a long-term runway for Chinese exports.
However, Chao cautioned that market concentration in US and Asian technology stocks remains a key risk, making asset diversification essential.
Effie Zhang
