Fiscal-driven optimism has faded

Germany unveiled an ambitious fiscal package last year. It included a special €500 billion infrastructure and climate fund to be deployed over 12 years, alongside changes to the debt brake that effectively removed constraints on defense spending. Defense spending planned for 2025–30 totals €650 billion, roughly double the level of the prior five years. If fully implemented, federal debt could rise by €850 billion by 2029, or about 19% of 2025 GDP. That would exceed the €613 billion increase recorded over 2020–24, a period that included the COVID-19 pandemic.

In many advanced economies, a package of this scale would raise concerns about debt sustainability. In Germany, the response was more constructive, in part because the country starts from a stronger fiscal position. Gross debt-to-GDP stood at ‘only’ 63%, compared with many advanced economies where the ratio is closer to, or above, 100%.

Years of conservative fiscal policy have led to significant underinvestment in key strategic sectors – including digitalisation – a diminished competitive advantage in manufacturing and eroded infrastructure (Figure 2). Substantial bureaucratic and regulatory burdens, together with elevated energy prices following the Ukraine conflict, added further headwinds. At the same time, China shifted from a consumer of German exports to a direct manufacturing competitor. The automotive industry is particularly exposed to this structural shift, as German manufacturers were slow to adapt to rising electric vehicle (EV) demand, while sectors such as chemicals and machinery also lost ground.

As a result, growth in the euro area’s largest economy stagnated (GDP growth averaged 0.1% over the last four years), while industrial production contracted by 4.4% in 2024 and a further 1.1% in 2025. The hope was that aggressive public spending would revive growth, modernise infrastructure, and restore Germany’s leadership in manufacturing and innovation.

That initial optimism faded in the second half of 2025, and German equities underperformed global peers. Although German and euro area activity showed tentative signs of improvement – including composite PMIs moving back into expansionary territory – there was limited evidence that fiscal announcements had yet lifted industrial activity. Investor attention instead shifted to the euro area’s weaker growth outlook and limited exposure to AI-driven enthusiasm relative to the United States, as well as ongoing labour market softness, including job cuts in key sectors such as automotive and chemicals.

Data also revealed central government investment spending, including infrastructure, rose slower than initially planned in 2025, rising by only 0.2% of GDP. Just 65% of the Infrastructure and Climate Fund allocated for 2025 was actually disbursed. Some delay between policy announcement and project execution was always likely. But Chancellor Friedrich Merz’s coalition, despite holding a workable majority, also faces internal tension over the balance between social spending and investment, particularly ahead of state elections in 2026. German GDP growth expectations have subsequently fell, from 1.3% to 0.9% for 2026.

Recent events in the Middle East have increased near-term risks to the outlook. Europe, along with many Asian countries, is particularly vulnerable as events unfold, as a meaningful share of their energy consumption depends on imported oil and liquefied natural gas (LNG). A prolonged conflict and persistently high energy prices expose European countries to an upwards inflationary and downwards growth shock, increasing pressure on Chancellor Merz to redirect federal spending towards cost-of-living initiatives. ¹ Beyond the direct impact on consumer wallets, higher energy prices intensify balance sheet pressures on key manufacturing industries, complicating any recovery in activity.

The EU is nonetheless better positioned than it was at the onset of the Russia-Ukraine conflict in 2022 (Figure 3). The energy import base is more diversified: Russia accounted for more than 25% of EU petroleum oil and natural gas imports in fourth quarter 2021, compared with roughly 10% from Persian Gulf countries in 2025. As a result, the current shock is more likely to affect Europe through higher global energy prices than through a direct disruption to physical supply. The region also enters this period with inflation closer to target, which should help cushion some of the economic fallout as the conflict unfolds.

Despite recent developments, we see reasons to be constructive over the medium term

We expect sentiment to improve over the medium term as fiscal stimulus begins to feed through more clearly. Recent data suggest that process is already under way: total federal spending in January and February was approximately 19% higher than in the same period of 2025. This increased spending is beginning to show up in economic activity. Although monthly figures are volatile, the increase in defense spending was particularly visible in December (in part due to the passage of the 2025 budget), contributing to a material upside surprise in new industrial orders – a 7.8% increase compared to consensus expectations of -2.2%. A sustained rebound in sentiment, however, likely requires a reduction in uncertainty around the economic effects of the Iran War.

The conflict, which adds to a year of rising geopolitical tensions, should also strengthen resolve to follow through on spending plans. A marked change in the United States’ relationship with other NATO member states – including reduced coordination between the United States and NATO allies on Venezuela and Iran, as well as the United States’ attempts to annex Greenland, which is a territory of Denmark – has heightened public and political calls for increased defense spending across NATO countries. Combined with the growing share of military procurement by European countries sourced from intra-European suppliers, this should benefit German defense manufacturers on a relative basis. Crises in recent years (e.g., the COVID-19 pandemic and the onset of the Russia-Ukraine war) have also been met with renewed coordination across the EU and within its member states on infrastructure investment and energy self-sufficiency. While calls to redirect infrastructure investment towards cost-of-living initiatives have grown louder, Germany’s fiscal headroom should help protect investment spending relative to other European countries.

That fiscal spending should add momentum to a euro area economy that, prior to the onset of the war, had stabilised and shown early signs of recovery following years of restrictive monetary policy and above-target inflation. The front-loading of planned German federal spending in 2026 and 2027 should support that momentum shift. According to the IMF Fiscal Monitor, the German fiscal thrust is estimated at 1% of GDP for 2026 and 0.95% for 2027 – a significant departure from nearly two decades of fiscal drag. Goldman Sachs estimates that around half of 2026 growth will be driven by fiscal stimulus, underscoring the importance of government spending in the turnaround (the economy grew 0.2% in 2025, while consensus expectations prior to the Iran War were for 1.0% growth in 2026).

A common critique of defense and infrastructure spending is that it generates a smaller long-term growth dividend compared to technology or education. But with Germany operating below potential output after years of sluggish growth, underinvestment, and labour market weakness, every euro of public spending acts as a catalyst for dormant private capital. As the government de-risks large-scale projects, we expect a ‘crowding-in’ effect, where private firms invest alongside the state. Planned reforms – including the euro area–wide ‘Draghi report’ aimed at reducing red tape, regulatory harmonisation, and capital markets integration (via the Savings and Investment Union) – should further incentivise this public-private capex recovery.

A complication for the broader euro area outlook is that other EU nations are experiencing fiscal drag. Even so, strong growth in peripheral countries such as Spain – now increasingly important buyers of German exports – should complement Germany’s fiscal impulse. Recent industrial orders data also suggest a tentative demand pickup from euro area countries alongside stronger domestic demand (Figure 4).

While large orders consistent with increased government military investment – particularly machinery, equipment, and defense goods – led the recent strong manufacturing prints, growth in new orders was also broad based. This provides encouragement for a wider economic recovery. Upside surprises in euro area economic data and German ZEW survey results to start the year suggest that growth expectations may have been turning more positive prior to the onset of the Iran War. The dissipation of US tariff-related disruption should also reduce headwinds for the region’s recovery, while the tariffs themselves have incentivised European countries to strengthen trade partnerships elsewhere, providing growth opportunities.

A more structural challenge is China’s shift from a consumer of German exports to a manufacturing competitor. We expect this trend to persist. Nevertheless, German infrastructure investment will largely focus on modernising existing infrastructure, particularly in transport. Renewed EU-wide efforts to protect businesses from increased Chinese competition and oversupply should provide relative upside potential for German business prospects if the fiscal package is fulfilled. Small- and medium-sized firms with less global presence may be better insulated from these pressures, as well as from any euro appreciation that accompanies stronger German and euro area growth.

Market impact and investment takeaways

Dampened expectations in the euro area’s largest economy create the potential for positive surprises and act as a tailwind for a recovering German and euro area growth outlooks. The flow of fiscal spending through the economy is another tailwind for sentiment. These factors support our tactical preference for global equities excluding the United States, relative to US equities. Despite strong 2025 performance, Europe ex UK equities still trade near historically discounted valuations relative to US equities (Figure 5). Potential pension reforms, recently passed in parliament and commencing from January 2027, could provide additional capital injection into European equity and infrastructure investment in the medium term. ²

Developments in the Middle East are a clear risk to this outlook in the near term. However, if the Strait of Hormuz opens and Europe’s relative growth and inflation outlooks do not show further material deterioration, the trade will become even more compelling. While the situation remains fluid and uncertainty heightened, a sustained closure of the Strait of Hormuz would become increasingly economically and politically costly for all parties, intensifying pressures to restore the passage of ships in coming weeks. In that scenario, any equity market rebound is likely to be strongest in regions where valuations have been hit hardest, pointing to potential outperformance by global equities outside the United States versus US equities.

Heightened geopolitical tensions should also continue to support our view that the US dollar will remain in a downtrend over a multi-year horizon. Despite recent outperformance since the onset of the Iran War, due in part to the US status as a net oil exporter, the US dollar is down notably from its January 2025 level. US-centric geopolitical volatility adds to domestic economic policy uncertainty, overvalued assets, and concerns about fiscal sustainability, all of which dampen the attractiveness of US assets relative to elsewhere and, therefore, lower demand for the US dollar. This is an important aspect of our preference for global equities excluding the United States, relative to US equities.

Drew Boyer also contributed to this publication.

Footnotes

1. OECD forecasts for the 2026 German economic outlook show an inflation forecast change of +0.8 percentage points (to 2.9%) and GDP growth forecast change of -0.2 percentage points (to 0.8%).
2. Under the plan, private pensions will become increasingly important to supplement state pensions in retirement and allow improved flexibility to investors to allocate funds to higher yielding assets. An investor could theoretically allocate 100% of their funds to equities, for example.

The post Germany’s Fiscal Boost Remains a Tailwind Despite Near-Term Risks appeared first on Cambridge Associates.

Their conversation explores Europe’s “electrotech revolution,” highlighting both the region’s competitive strengths and one of its central challenges: persistently high electricity prices. They examine the drivers behind elevated power costs and discuss several of the investment themes raised during the event, including system efficiency, small modular technologies, and the resilience and independence of energy systems.

The discussion also turns to energy policy, where Antonella notes that the panel saw Europe as having made meaningful progress in establishing a strategic framework for electrification. Electrification was identified as a critical pathway for decarbonisation, energy security, and industrial competitiveness. At the same time, they consider potential solutions to high electricity prices, including shifting more of the tax burden away from electricity and onto gas.

Looking ahead, Simon and Antonella point to significant untapped potential across Europe’s existing grid infrastructure, as well as emerging innovations such as software modularity, which could lower costs, reduce risk, and improve the speed of deployment for technologies including electric vehicles and EV charging systems. While Europe continues to rely heavily on imports for solar panels and batteries, it retains important advantages in other parts of the electrification value chain, particularly grid infrastructure and consumer energy technologies such as heat pumps. They also note the longer-term potential of battery recycling to strengthen Europe’s internal energy ecosystem over time.

Watch the video below to hear Simon and Antonella’s insights on Europe’s energy transition and the investment implications of electrification.

Sustainable and impact investing at Cambridge Associates focuses on helping clients invest in ways that support positive social and environmental outcomes alongside financial returns. Sustainable Investing in Focus is designed to make these topics accessible to everyone by explaining key concepts in a clear and simple way. By sharing practical examples and expert insights, the series helps viewers understand how sustainable investing works, why it matters and how it’s changing.

Footnotes

1. OECD forecasts for the 2026 German economic outlook show an inflation forecast change of +0.8 percentage points (to 2.9%) and GDP growth forecast change of -0.2 percentage points (to 0.8%).
2. Under the plan, private pensions will become increasingly important to supplement state pensions in retirement and allow improved flexibility to investors to allocate funds to higher yielding assets. An investor could theoretically allocate 100% of their funds to equities, for example.

The post Sustainable Investing in Focus: Green Horizons or Gridlocked appeared first on Cambridge Associates.

Their conversation explores how established business models are being repurposed to address sustainability challenges. David and Liqian highlight the growing trend of applying Software-as-a-Service (SaaS) frameworks to sustainability, enabling scalable solutions for environmental and social issues. The discussion delves into the transformative role of biotechnology in agri-food technology, emphasizing innovations that are reshaping food production to be more resilient in the face of climate change. The episode also addresses the broader societal implications of these shifts, particularly the intersection of climate risks with persistent issues such as inequality and how economic resilience depends on tackling these interconnected challenges.

They discuss practical solutions, including workforce development programs, affordable housing initiatives, and efforts to promote health equity. These strategies are presented as essential for building communities that can adapt to and withstand the risks posed by climate change. The conversation highlights the importance of integrating sustainability into core business and investment strategies, not only to mitigate risks but also to unlock new opportunities for growth and positive impact. Watch the second episode in our video series below.

Sustainable and impact investing at Cambridge Associates focuses on helping clients invest in ways that support positive social and environmental outcomes alongside financial returns. Sustainable Investing in Focus is designed to make these topics accessible to everyone by explaining key concepts in a clear and simple way. By sharing practical examples and expert insights, the series helps viewers understand how sustainable investing works, why it matters and how it’s changing.

Footnotes

1. OECD forecasts for the 2026 German economic outlook show an inflation forecast change of +0.8 percentage points (to 2.9%) and GDP growth forecast change of -0.2 percentage points (to 0.8%).
2. Under the plan, private pensions will become increasingly important to supplement state pensions in retirement and allow improved flexibility to investors to allocate funds to higher yielding assets. An investor could theoretically allocate 100% of their funds to equities, for example.

The post Sustainable Investing in Focus: Innovating for Resilience appeared first on Cambridge Associates.

The election results represent a resounding win for Takaichi, with the LDP alone winning a two-thirds supermajority in the Lower House. Together with their coalition partner, the Japan Innovation Party (JIP), Takaichi now effectively controls 76% of Lower House seats. While the LDP does not have a majority in both houses, the Lower House supermajority enables the LDP/JIP coalition to override any opposition from the Upper House.

Takaichi secured the election by pledging decisive leadership and a vision for a more self-sufficient and assertive Japan, while also addressing the country’s cost of living crisis. Opinion polls consistently indicate that inflation is the most pressing concern among voters. With the electoral mandate, Takaichi will be able to press ahead with planned reductions in consumption taxes, expand household subsidies, and implement strategic investments and reforms in sectors such as semiconductors, shipbuilding, and AI. Additionally, increased defense spending looks likely. All in all, fiscal spending may increase by 2%–3% of GDP.

While fiscal stimulus may boost near-term growth, which has helped Japanese equities outperform global equities by 6 percentage points this year, increased government spending comes with its own risks. Notably, Japanese bond and currency markets were initially spooked in mid-January following the announcement of the snap election, reflecting concerns about debt burdens, political pressure on the Bank of Japan (BOJ), and the prospect of higher inflation.

Fiscal crisis concerns, while relevant, are overblown. Japan’s debt-to-GDP ratio has been declining in recent years, and interest expense as a percentage of GDP is lower than in other developed countries. Additionally, foreign ownership of JGBs is relatively low, reducing the likelihood of a sudden fiscal crisis or a “Liz Truss moment” similar to what the United Kingdom experienced in 2022. The recent rise in Japanese bond yields has been driven by rising inflation in Japan and reduced bond purchases by the BOJ, which has sought to shrink its balance sheet. With core inflation running close to 3%, real interest rates in Japan are still low, which is partly why the yen remains under pressure.

Tackling cost of living concerns ultimately requires a stronger yen, as a weak yen is partly to blame for inflation pressures. The Japanese government has made it clear that it will intervene if the USD/JPY exchange rate approaches the 160 level. But such a level will be hard to defend in the absence of higher interest rates. Given the election all but guarantees increased fiscal stimulus, the BOJ will need to continue hiking rates, otherwise, it risks a further rise in inflation.

Continued BOJ rate hikes, combined with modest rate cuts by the Federal Reserve, would further narrow the yield gap between Japan and the United States, providing support for the yen. Additionally, higher government bond yields in Japan could prompt the repatriation of some Japanese overseas bond holdings, exerting further upward pressure on the yen.

Overall, we see the election outcome as positive for the Japanese economy and, by extension, the yen. To capitalize on this outlook, we favor strategies that are less sensitive to JPY appreciation. Specifically, we like Japanese small-cap equities, which are a significant component of our current tactical recommendation to overweight developed markets small caps, as well as private equity buyouts and activist strategies. These strategies are well-positioned to benefit from stronger domestic growth and the ongoing momentum in corporate governance reforms and merger & acquisition activity within Japan’s market.

Footnotes

1. OECD forecasts for the 2026 German economic outlook show an inflation forecast change of +0.8 percentage points (to 2.9%) and GDP growth forecast change of -0.2 percentage points (to 0.8%).
2. Under the plan, private pensions will become increasingly important to supplement state pensions in retirement and allow improved flexibility to investors to allocate funds to higher yielding assets. An investor could theoretically allocate 100% of their funds to equities, for example.

The post Japanese Election Result Should Boost the Economy and Ultimately the Japanese Yen appeared first on Cambridge Associates.

Here’s a recap of some of the topics we discussed:

Prioritize Open Communication and Family Engagement

Managing wealth is not just a technical endeavor. It’s deeply personal and often intertwined with family dynamics. But it’s imperative to initiate open, honest conversations about wealth, values, and legacy within families. While these discussions can be challenging, they are critical for building trust, setting shared goals, and preparing future generations for stewardship. Next generation investors should work with family members to create an environment where questions are welcomed, and where each family member’s voice is heard and respected.

Invest with Purpose and a Long-Term Mindset

There’s power in aligning investments with personal values and a broader sense of purpose. Whether through impact investing, philanthropy, or supporting causes like women’s sports and entrepreneurship, next generation investors have the opportunity, and responsibility, to use their capital to drive meaningful change. This requires clarity about one’s goals, a willingness to think beyond short-term returns, and the courage to pursue opportunities that reflect both financial and societal ambitions. Legacy is built not just through wealth accumulation, but through the positive impact one creates for future generations.

Embrace Lifelong Learning and Peer Collaboration

Next-generation investors are encouraged to seek out educational opportunities—not just in technical investment skills, but also in areas like family governance, philanthropy, and responsible investing. Engaging with peers who share similar challenges and ambitions can provide invaluable perspective, foster accountability, and help build a supportive network. The willingness to ask questions, share experiences, and learn from both successes and setbacks is a hallmark of effective leadership and stewardship.

Build a Trusted Network of Advisors and Mentors

Personal success is bolstered by advisors and mentors who offer both expertise and integrity. Next generation investors should be proactive in identifying professionals who are not only technically skilled but also aligned with their values and long-term vision. These relationships can help navigate complex decisions, provide objective guidance, and serve as sounding boards for new ideas. Building this network early and nurturing it over time is essential for making informed choices and maintaining confidence in one’s investment journey.

Download the report for the full list of takeaways, or explore our collection of resources to dive deeper into how future family leaders can shape legacies and generate success.

Footnotes

1. OECD forecasts for the 2026 German economic outlook show an inflation forecast change of +0.8 percentage points (to 2.9%) and GDP growth forecast change of -0.2 percentage points (to 0.8%).
2. Under the plan, private pensions will become increasingly important to supplement state pensions in retirement and allow improved flexibility to investors to allocate funds to higher yielding assets. An investor could theoretically allocate 100% of their funds to equities, for example.

The post Advice for Next Generation Investors appeared first on Cambridge Associates.

This edition of VantagePoint offers a practical update on recent developments and highlights the most compelling opportunities for investors. We begin with a summary of the key shifts that have shaped Asian markets over the past two years, then outline our current views and how our thinking has evolved in response. We continue with outlooks for China, India, Southeast Asia, and Japan followed by cross-market themes: the spread of shareholder value and Asia’s role in the global artificial intelligence (AI) buildout. We conclude that while Asia has demonstrated resilience to economic and geopolitical challenges, risks remain, and we expect economic growth and equity beta prospects to moderate as the region faces headwinds from slowing export growth and cooling consumption. The most compelling opportunities lie in alpha generation rather than broad market exposure. The evolving opportunity set, and the potential for active managers to generate alpha are more favorable than they have been in years.

Evolution of key investment views on Asian public and private markets

Asia has weathered the US tariff shock better than feared, with China’s exports remaining resilient and regional growth holding up. The Trump administration’s stance on China has softened, with the October 2025 “trade truce” signaling a shift from abrupt decoupling to strategic de-risking. Meanwhile, the rise of AI has reshaped market leadership, creating new winners and losers across the region, while the push for greater shareholder value is creating new sources of alpha potential. Persistent US equity outperformance and dollar strength have given way to Asian market outperformance and USD weakness. A continuation of last year’s rotation away from US assets could create a positive cycle of Asian asset outperformance and currency appreciation. Nevertheless, these positive developments come as regional growth momentum is expected to moderate, with both China and India facing cooling growth, while export-dependent economies remain vulnerable to slower US consumption.

These developments have prompted us to recalibrate our positioning. We are now neutral on China public equities, reflecting a more balanced assessment of risk and reward, and remain neutral on Asian public equities overall. However, we have become more constructive on active management themes as the focus on shareholder value and corporate governance—initiated in Japan and now spreading to Korea and beyond—has broadened and deepened. This shift is creating fertile ground for active managers, especially those pursuing activist, event-driven, and small-cap strategies. While valuations are elevated relative to their own history, Asian equities still trade at a discount to global peers, particularly the United States, and value stocks offer active managers more reasonable valuations. Undervalued currencies add another layer of potential return for USD investors on an unhedged basis.

On the private side, we believe there are opportunities in China’s technology-focused venture capital (VC) and healthcare. However, we recognize that the geopolitical and regulatory risks may be too much to tolerate for some, especially US-based investors, and may be more available for global investors less sensitive to these risks. Our outlook for Indian private equity (PE) has grown more constructive as generational ownership transitions create new opportunities in traditional sectors, while we remain enthusiastic about Japanese buyouts, where corporate reform and a growing emphasis on shareholder value continue to unlock value. Across the region, local expertise and rigorous due diligence are essential to identifying and capturing the most promising investments.

Country and regional outlooks

China: Coming in from the cold

China has weathered the US tariff storm by redirecting exports through other markets and using stimulus judiciously to support the economy. As we noted two years ago, the depressed equity market was poised to respond sharply to increased stimulus, and the government’s clear shift toward a more pro-business stance in September 2024 set the stage for strong returns in 2025. China’s “DeepSeek moment” in early 2025 further reinforced its position at the forefront of tech innovation.

Following a roughly 60% rally from 2024 lows, Chinese equities are no longer depressed or cheap, but they remain under-owned, particularly by non-Asian investors. Most inflows to Hong Kong–listed Chinese equities have come from onshore investors via the South-Bound Stock Connect program. While emerging markets (EM) and Asia-dedicated funds have narrowed their underweights to China, they remain, on average, below benchmark weight, leaving scope for further inflows. However, earnings have not kept pace, as persistent deflationary pressure has hurt margins. Easing deflation is critical for sustained earnings growth and outperformance, but this may not materialize in 2026. The government continues to prioritize export and tech-driven growth over boosting domestic consumption. We remain neutral as the balance of risks do not justify avoiding or explicitly underweighting the market, especially given the Trump administration’s less hawkish stance.

Turning to Chinese private markets, we are more constructive on China VC and healthcare-focused funds than China buyouts and growth equity. Fundraising is showing tentative signs of recovery, supported by robust IPO activity in Hong Kong. In 2025, China’s approval for companies to list abroad helped Hong Kong lead the world in IPOs, with over 100 companies raising more than $35 billion and another 300 in the pipeline. Healthcare IPOs reached 14 in 2025 (up from 4 in 2024), with 73 biotech and medtech companies in the pipeline, and multinational pharmaceutical companies have been making acquisitions and in-licensing deals with Chinese drug producers. While China VC fundraising remains tepid due to concerns about US restrictions on investing in AI, semiconductors, and quantum computing, managers raising new funds are highlighting broader opportunities in robotics, advanced manufacturing, clean energy/electric vehicles, and companies applying AI, rather than developing it. Additionally, funds seeking international capital have developed structures to comply with US investment restrictions, keeping the asset class actionable.

Traditional China PE fundraising and deal activity, however, remain depressed despite low valuations and interest rates. China PE funds have lagged returns in other regions, while Pan-Asia PE funds are investing less in China, favoring opportunities elsewhere with less geopolitical baggage. Although there are opportunities for domestic funds to acquire the China operations of multinationals exiting the market, the overall opportunity set for China PE seems limited, and few managers appear to be returning to market in 2026.

India: Disappointing the bulls and the bears

India’s growth has moderated from 8% to around 6% over the past two years, as government spending and business investment cooled. Despite still-solid growth, Indian equities have underperformed broader emerging markets, with high valuations remaining a persistent headwind. The positive macro story was already priced in, and valuations remain disconnected from economic reality.

A major surprise has been the United States’ abrupt shift from pro-India policies to imposing a 50% tariff, among the highest in Asia, threatening India’s manufacturing ambitions and contributing to stagnation in foreign direct investment (FDI) since 2021. While these tariffs may be negotiated lower, especially in the event of an end to the war in Ukraine and ban on Russian oil imports, the impact on sentiment and capital flows is clear. The successful IT outsourcing sector faces new risks from AI, though it may also find ways to harness the technology.

Slower growth and cooling inflation have allowed the Reserve Bank of India to cut rates to support growth, but this has helped drive the rupee to new lows, making it the worst-performing Asian currency in 2025. The weak currency risks stoking inflation pressure and may limit further rate cuts, complicating the monetary policy outlook.

Foreign investors remain net sellers of Indian public equities, especially as they seek to close China underweights, but domestic capital now drives the market—a structural shift unlikely to reverse. Regional managers remain bullish long term but are selective, given challenging valuations. Most managers, both public and private, focus on domestic demand themes rather than export plays and cite a deepening opportunity set in India.

Said differently, India is experiencing a soft patch, not a reversal and thus continues to disappoint both bulls and bears. We remain neutral on public equities due to elevated valuations and slowing earnings growth but see more attractive opportunities in private markets (PE and VC), particularly in traditional sectors undergoing generational ownership changes.

Southeast Asia: Politics getting in the way

Two years ago, we highlighted Southeast Asia’s rare combination of rising FDI, trade flows from China decoupling, and attractive equity and currency valuations. Yet, small market size and illiquidity led us to maintain a neutral stance and favor exposure through regional funds, both public and private. This view remains unchanged. The region has continued to underperform, hampered by limited tech/AI exposure and political instability in Indonesia, the Philippines, and Thailand. These concerns have driven foreign investors to pull back, resulting in valuation de-ratings and capital outflows. Singapore stands out as a beacon of stability, attracting the bulk of FDI and capital, while Vietnam remains a bright spot, though its market is still small. ³

The region was caught off guard by the 2025 US tariffs, which initially targeted rerouted Chinese exports. Although the tariffs were painful, especially after prior US encouragement to shift production from China, subsequent negotiations have eased the burden, and Southeast Asia has weathered the shock relatively well.

Managers remain disappointed with the region’s overall performance but continue to find idiosyncratic and company-specific opportunities. Low valuations in select markets and sectors keep managers engaged, though they remain highly selective in both public and private markets. Additional Federal Reserve rate cuts and resumed USD weakness should provide some relief by enabling domestic rate cuts and currency stability, but a sustained re-rating will require greater political stability and pro-growth policies.

Japan: Corporate reform, market opportunity, and the activism advantage

Japan appears to be emerging from decades of deflation. Expectations of further fiscal easing under new Prime Minister Sanae Takaichi—who has called for snap elections on February 8 to strengthen her legislative support—has seen Japanese equities rally amid renewed yen weakness. For foreign investors, yen weakness has eroded unhedged returns, offsetting otherwise strong local currency performance in recent years. We anticipate that continued growth and inflation will exert pressure on the Bank of Japan to normalize policy and raise rates, which should support the yen, now at depressed valuations. While a stronger yen would benefit foreign investors through positive currency translation, it has historically been associated with weaker returns for large-cap Japanese equities, which tend to be negatively correlated with the currency. This dynamic is particularly relevant now, as large-cap valuations are starting to look expensive relative to their own history. By contrast, small-cap Japanese equities have more attractive valuations and are less sensitive to movements in the currency given their domestic focus.

Japan continues to stand out in Asia for expanding alpha opportunities tied to its corporate governance revolution. Public and private regional managers are committing more capital, citing rising mergers & acquisitions (M&A), buybacks, payout ratios, and improved capital management. Investor engagement and activism are becoming mainstream, benefiting activist, event-driven, and small-cap public equity strategies, as well as buyout managers.

Japanese PE returns have improved over the last decade, closing the gap with US and European peers despite pronounced yen weakness. M&A activity accelerated in fourth quarter 2023 after new guidelines required boards to consider credible offers and engage independent committees. While global M&A also improved, it remained relatively soft.

Challenges persist, such as slow progress on board diversity and uneven corporate governance enforcement, but the trajectory is positive. Japan’s experience is now a reference point for the region, and Pan-Asia PE managers are committing more capital, confident that ongoing improvements in governance, macro fundamentals, and shareholder returns will continue to drive opportunity across the market-cap spectrum.

New Asia themes

Beyond the individual country outlooks, several structural themes are reshaping the investment landscape across Asia. Chief among these is the region’s accelerating focus on shareholder value and its evolving role in the global AI ecosystem. These cross-cutting themes are creating new opportunities and risks for investors.

Korea and the spread of shareholder value

Korea’s transformation was remarkable in 2025. After years of skepticism and persistent valuation discounts, investor sentiment has shifted decisively with the equity market returning an eye-catching 100% in USD terms—driven by AI enthusiasm, especially in Samsung Electronics and SK hynix. However, the market’s inflection point arguably began in April, as foreign investors poured in following the impeachment of President Yoon Suk Yeol, ending the constitutional crisis that followed the failed attempt to declare martial law in late 2024. Fresh elections allowed investors to refocus on Korea’s strategic position in the global tech supply chain and meaningful corporate governance reforms.

The South Korean Corporate Value-Up Program, launched in 2024, followed by legislative changes to the Commercial Code in July 2025 have been central to this shift. These initiatives, backed by all major regulators, aim to boost shareholder returns, strengthen board independence, enhance transparency, and increase minority shareholders’ voting power. The South Korean Corporate Value-Up Program was fully voluntary, while more recent legislative changes have real consequences for non-compliance, making directors legally accountable for protecting shareholder value and treating all shareholders equally.

While these changes alone won’t fully align chaebol ⁴ interests with minority shareholders, progress is evident. Activist campaigns have surged, and board independence and transparency are improving. Further reforms, such as tax changes and stewardship code updates, will be needed to sustain momentum. Skepticism remains about the depth and durability of reforms, but the market’s response has been overwhelmingly positive.

The focus on shareholder value is spreading, though unevenly, across Asia. In China, the government’s February 2024 “9 rules” policy signaled intent to improve governance and shareholder returns, especially among state-owned enterprises and large listed companies. There are isolated cases of increased dividends, buybacks, and responsiveness to investors, but these are not yet widespread or market-defining. Activism remains rare, and most engagement is “soft” and behind the scenes.

Elsewhere, especially in Southeast Asia, the shift is more subtle. Managers report that companies are more receptive to investor suggestions on how to improve efficiency and returns, often through collaborative engagement rather than hardline activism. This is most evident in markets with deepening capital markets and a growing institutional investor base.

Overall, the shareholder value “playbook” is most advanced in Japan and Korea, with China showing selective progress and Southeast Asia demonstrating increased openness to investor input. For investors, this means alpha opportunities from governance reform and event-driven strategies are expanding but remain concentrated in North Asia.

Asia’s role in the AI tech stack

Asia has become indispensable to the global AI ecosystem. While the United States and China dominate the headlines and the development of foundational AI models, the rest of Asia plays an important role. Taiwan and Korea anchor advanced chip and memory production, with TSMC, Samsung, and SK hynix critical players. Japan is a leader in robotics and “physical AI,” as well as industrial applications. Singapore, Malaysia, and Indonesia are rapidly scaling data center infrastructure, while India’s AI opportunity is primarily in applied AI, especially in data-rich sectors like fintech, health tech, logistics, and SaaS.

For investors, an allocation to Asia now brings considerable exposure to AI. In fact, some Asian markets, especially Taiwan and Korea, are even more concentrated in AI-related names than the US market, which is home to the Magnificent 7. While Asian AI equities are somewhat less expensive than their US peers, they are not immune to the risks: if the AI trade falters, Asian AI stocks will also be vulnerable.

We are not recommending an overweight to Asian AI themes but highlight that investing in Asia provides meaningful exposure to the global AI buildout. For most investors, Asia offers a way to round out AI exposure, diversify beyond US-centric portfolios, and access the hardware, infrastructure, and applied innovations that underpin the sector’s growth.

Conclusion: Alpha and activism are alive and well

Asia is surviving the tariff storm better than expected. With the Trump administration striking a “trade truce” with China and shifting focus away from Asia, the outperformance of most Asian markets in 2025 was well supported. Still, economic growth will likely face headwinds in 2026 as export growth slows after front-running tariffs, and US consumption growth moderates. China and India are both likely to see growth cool further, while Taiwan and Korea remain leveraged to the AI spending cycle. Japan is both exposed to exports and is the odd man out facing rising interest rate pressures, albeit from a low base. Growth in Southeast Asia remains constrained by political headwinds.

After a strong year, Asian valuations are higher than two years ago, but outside of pockets like India and AI-related sectors, they are not excessive. The impact of a weaker US dollar on capital flows to Asia remains uncertain, but managers consistently reference increased investor interest in the region. While Asia is not immune to a US slowdown or a deflating AI bubble, the region is well positioned to weather volatility and may benefit if US AI enthusiasm fades and capital rotates to less expensive markets.

Even as growth and equity beta prospects moderate, alpha opportunities have improved, driven by rising activism and a stronger focus on shareholder value.

We reiterate the following investment views:

• China is not “uninvestable.” While we are neutral on Chinese equities, we would not shun this market, especially as part of regional Asia or EM funds. While China PE faces increased headwinds, China VC and healthcare merits closer attention for those willing to bear the geopolitical/regulatory uncertainty.
• India public markets remain expensive as earnings growth expectations still seem too high, leaving us neutral on public equities, but private market opportunities (both PE and VC) focused on domestic demand and business succession are attractive for long-term investors.
• Asia overall, particularly India, Taiwan, Japan, and Korea, look expensive. As such, Asia value strategies, which are more fairly valued in absolute terms, can tilt exposure toward less expensive, less tech-centric segments.
• Pan-Asia PE may be more effective than single country or regional approaches for China and Southeast Asia, and most Pan-Asia managers are also increasing their exposure to India and Japan.
• Japanese large-cap public equities are expensive and vulnerable to yen strength. We believe buyouts, activist strategies, and small- to mid-cap equities are better ways to access Japan’s ongoing governance and M&A themes.
• Asia event-driven strategies offer exposure to the activist/shareholder value trend, while renewed capital markets activity in Hong Kong has created opportunities for Asia hedge funds, which outperformed regional peers in 2025.
• Asia provides meaningful AI exposure, rounding out global portfolios and providing differentiated opportunities beyond US-centric AI plays. However, investors should not expect this diversification to provide much ballast during an AI downturn, as Asian AI equities are likely to be affected alongside their global peers.
• Asian currencies are cheap and could boost returns for Asia assets if USD weakness persists. Leaning into non-USD assets, including Asian equities, may be a way to benefit.

Justin Hopfer and Graham Landrith also contributed to this publication.

Footnotes

1. OECD forecasts for the 2026 German economic outlook show an inflation forecast change of +0.8 percentage points (to 2.9%) and GDP growth forecast change of -0.2 percentage points (to 0.8%).
2. Under the plan, private pensions will become increasingly important to supplement state pensions in retirement and allow improved flexibility to investors to allocate funds to higher yielding assets. An investor could theoretically allocate 100% of their funds to equities, for example.
3. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
4. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post VantagePoint: Asian Equities Revisited appeared first on Cambridge Associates.

Their conversation covers the evolving regulatory landscape, the ongoing challenges and opportunities presented by climate change, and the contrasting approaches to sustainable investing in the United States and the United Kingdom. As they look ahead to 2026, Liqian and Annachiara identify key trends and areas of growth that are shaping the industry.

Together, they examine how new regulations increase data availability, enhance transparency, and enable more informed decision-making for investors and stakeholders. Liqian and Annachiara also cover the rapid advancements in renewable energy technologies and the critical need for continued investment in grid infrastructure to support this growth.

Sustainable and impact investing at Cambridge Associates focuses on helping clients invest in ways that support positive social and environmental outcomes alongside financial returns. Sustainable Investing in Focus is designed to make these topics accessible to everyone by explaining key concepts in a clear and simple way. By sharing practical examples and expert insights, the series helps viewers understand how sustainable investing works, why it matters and how it’s changing. Watch the first episode in our video series below.

The United States vs The United Kingdom

Regulation

Climate Change

Opportunities in SII

SII 2026 and Beyond

Footnotes

1. OECD forecasts for the 2026 German economic outlook show an inflation forecast change of +0.8 percentage points (to 2.9%) and GDP growth forecast change of -0.2 percentage points (to 0.8%).
2. Under the plan, private pensions will become increasingly important to supplement state pensions in retirement and allow improved flexibility to investors to allocate funds to higher yielding assets. An investor could theoretically allocate 100% of their funds to equities, for example.
3. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
4. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post Sustainable Investing in Focus: The Road Ahead appeared first on Cambridge Associates.

Turning first to the sources of upside risks to growth, greater US government support is one potential driver. This comes despite an already elevated and expanding budget deficit, with the fiscal impulse expected to swing from a drag to a boost in the first half of 2026 because of the One Big Beautiful Bill Act. In this context, US President Trump has proposed increasing the military budget by approximately 50%, to $1.5 trillion. If this proposal finds support, which is not certain, it may not materially affect the economy until 2027. However, at more than 1.5 percentage points of GDP, it would nonetheless be sure to have a more immediate financial market impact.

To boost growth more immediately, ostensibly influenced by low approval ratings ahead of the mid-term elections, the Trump administration has taken several actions. A presidential directive instructed Fannie Mae and Freddie Mac to purchase $200 billion in mortgage-backed securities, which has helped bring 30-year mortgage rates down toward 6% and aims to stimulate homebuyer activity. Lower mortgage rates could also support discretionary spending, a goal further targeted by the proposed 10% cap on credit card rates. This proposal follows the Federal Reserve’s Senior Loan Officer Survey showing that banks are now tending to ease lending standards for consumer loans after a prolonged period of tightening.

Furthermore, political pressure on the Fed to deliver easier monetary policy has intensified to a degree not seen in recent decades, with President Trump and other administration officials advocating for rate cuts. Our base case is that the Fed will remain independent, with economic data remaining the primary driver of monetary policy decision. Nonetheless, the chances of political considerations influencing policy assessments have increased at the margin. Even without these various policy initiatives and interventions, financial conditions in the United States have been steadily easing in recent months. This broad-based easing, inclusive of appreciating risk assets, falling yields, and a weakening dollar, was already shaping up to be an activity tailwind.

Despite recent positive developments, left-tail risks persist, as the US economy remains distinctly “K-shaped.” This term refers to a scenario in which high-net-worth households continue to benefit from asset appreciation and strong wage growth in knowledge sectors, while low- and middle-income earners face increasing pressures. Indicators such as extremely low consumer sentiment and personal savings rates highlight this divide, as does the fact that wage growth for the lowest quartile of earners has lagged all other groups for the past 15 months. Aggregate data can mask this underlying fragility. While headline consumption and growth figures remain positive, the widening gap between the “upper” and “lower” arms of the economy creates a brittle foundation. As a result, overall growth may obscure systemic vulnerabilities.

Several labor market indicators highlight these underlying vulnerabilities. Over the past three months, nonfarm payrolls have declined by an average of 22,000 jobs. While private payrolls have increased by 29,000 jobs, only slightly below most estimates of the new break-even level, much of this growth is concentrated in the education and healthcare sectors. Although the recent rise in the unemployment rate has been modest, there are signs that the gig economy may be concealing deeper weaknesses. This is evidenced by increases in the number of people working part-time for economic reasons, the unincorporated self-employed, and those holding multiple jobs. Though layoffs remain relatively subdued, there has been a modest uptick. The ongoing decline in job openings, hires, and quits also suggests a lack of confidence among both employees and employers. The key concern is that if layoffs begin to accelerate, downside risks could quickly become more pronounced.

Recent developments have shown that geopolitics also remains a significant concern, contrary to hopes for a more stable outlook. On the trade front, the threat of new tariffs has resurfaced, even if some have since been revoked, underscoring persistent policy uncertainty that continues to weigh on hiring and investment. Immigration policy also contributes to this uncertainty, creating insecurity for lower-income earners and their employers. Additionally, the proposed cap on credit card rates, though intended to support consumers, could lead banks to restrict credit. This would pose further challenges for those most vulnerable in the economy. Indeed, even if other policy measures succeed in boosting growth in the short term, their impacts on markets are not guaranteed to be positive. For example, investors may push yields higher in response to renewed inflation pressures and a growing deficit, potentially dampening the benefits of these policies.

Taken together, both upside and downside risks to the US economy have become more pronounced in our view. Given the increase in tail risks, diversification should continue to serve as a guiding principle for investors, a point we emphasized in our 2026 Outlook. In this context, we continue to recommend maintaining a modest underweight to US equities and USD exposure.

Footnotes

1. OECD forecasts for the 2026 German economic outlook show an inflation forecast change of +0.8 percentage points (to 2.9%) and GDP growth forecast change of -0.2 percentage points (to 0.8%).
2. Under the plan, private pensions will become increasingly important to supplement state pensions in retirement and allow improved flexibility to investors to allocate funds to higher yielding assets. An investor could theoretically allocate 100% of their funds to equities, for example.
3. Vietnam is still considered a frontier market by MSCI. If the MSCI Vietnam Index market cap of $58.5B were included in the MSCI ASEAN Index, Vietnam would only account for 7.4% of the index.
4. Large, family controlled conglomerates that dominate South Korea’s economy, often characterized by complex cross-shareholdings among affiliated companies.

The post Have Tail Risks to the US Economy Increased? appeared first on Cambridge Associates.