Geopolitical tensions are also intensifying. Violent protests in Iran could presage the eventual, though not imminent, end of the regime — a shift that would transform the Middle East, with major implications for oil prices and the threat of state-sponsored extremism. Elsewhere in the region, Saudi Arabia and the United Arab Emirates, once the closest of friends, are now at loggerheads.
In the meantime, major equity indices have looked past these events and risen to new record highs. Moreover, economic data from the US, China and Europe have supported investor optimism. The big question for investors in 2026 is whether this schism between politics and economics remains, or whether the economy and markets eventually weaken.
The answer to that question will not come from assessing single variables such as “will the AI capital expenditure (capex) boom last?”, but from the net impact of all the big changes over the past year. For Asian businesses and policymakers, recent events suggest it may be better this year to err on the side of caution and to prepare buffers in case of further shocks.
Geopolitical risks hit harder this year
Big powers like the US believe, as Thucydides observed 2,000 years ago, that “the strong do what they can, the weak suffer what they must”. As a result, they tend to throw their weight around.
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However, had Thucydides lived a little longer and thought a little harder, he might have added that even the weak eventually find ways to hit back. Quite often, the big power itself overreaches and suffers for that excess. Think Russia and Ukraine, or President Lyndon Johnson and Vietnam, or President George W. Bush and his disastrous 2003 invasion of Iraq. So it will be with President Trump’s expansionist adventures in the Western Hemisphere.
There are always consequences that flow from shocks like this. We see a rising risk of convulsions of various kinds tripping up the US in the coming months:
Trump’s senior officials may say that the US “owns” the Western Hemisphere, but that also means that they will “own” any mess that erupts in Venezuela or elsewhere that follows. The American administration wants to avoid the mistakes the US made in Iraq by “running” the country indirectly through coercion of the government there. Maybe this version of hegemonism on the cheap might work, but given the dire state Venezuela is in, and the apparent lack of forward planning by the US, it is more likely that this will not end well.
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There could be further trouble in the Western Hemisphere. The rhetoric about the US taking over Greenland, which Denmark runs, has been bad enough, but the real prize the US is after is Cuba. Regime change there would achieve something every US president since Dwight Eisenhower has tried and failed to do. It would greatly embellish Trump’s standing and strengthen the American position in its backyard.
But, as we said earlier, actions have consequences. If the US is able to flout international law, why wouldn’t Russia or China not follow through with aggression in their own backyards? And, if the US is now a threat to even allies such as Denmark, wouldn’t small countries, including allies of the US, move away from the US and seek new forms of protection?
A new China is emerging, with consequences
While the US has hogged the headlines, what is happening in China could also be highly consequential for all of us. Recently released trade data show China’s trade surplus reaching a mammoth US$1.2 trillion ($1.5 trillion) in 2025. The drivers of China’s export surge — such as its technological advances — are likely to continue powering an increase in China’s share of global exports and ever-rising trade surpluses.
We believe China could stun the world with a few more unexpected advances in technology. It has been aggressively investing in R&D in key areas such as renewable energy, biomedical sciences, quantum computing and material sciences.
Just as we saw with its stunning success in AI with Deepseek, this long-term investment could produce more successes in areas outside AI. China’s strategy is already delivering impressive progress in pharmaceuticals and new medical therapies, so there are reasonable grounds for expecting potentially dramatic advances in other areas.
There will be major implications as a result:
Despite growing worries in the US and Europe about China’s growing technological prowess, a degree of complacency still prevails. This could be the year when such complacency ends and the Western powers move more vigorously to strengthen R&D and their innovation ecosystem.
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If China pulls off more technological advances, the result will be even greater export dominance in even more sectors. Growing concerns over this dominance will lead to more complaints about China’s excess capacity and expanding surpluses, resulting in further protectionism against China and demands that China allow its currency to appreciate.
The trouble is that China is still new to the game of being a big power. China’s size means that its impact on other countries is outsized — but it often underappreciates that reality. So far, Chinese policymakers have argued that its surging exports are a favour to the world’s consumers — high-quality products at a low price.
This is not going to wash anymore in 2026 as other countries reel from Chinese exports displacing local producers and worsening their trade deficits. China may have to offer voluntary export restraints and more investment in, and technology transfer to, other countries to forestall such pressures.
Can financial markets really keep rising?
The other development to watch so far this year is the inexorable rise in equity markets, even as rising prices of gold and other safe haven assets suggest that risks are increasing.
The trouble is that financial investors and regulators, especially in the US, do not learn enough lessons from the past. Errors are repeated, and crises erupt now and then. The signs are worrying and do not seem adequately priced into market valuations:
The current US administration has watered down or abolished many of the reforms brought in after the 2001 market crash and following the 2008 financial crisis.
Investors are rushing to deploy capital on a grand scale. Some of this is driven by sound analysis of who the winners are from the AI boom. But in too many cases, it appears driven by the fear of missing out (Fomo).
Companies are moving aggressively to deploy capital and increasingly shifting the financing of this investment through debt, with some of this debt taking risky forms such as private credit.
We have seen this movie before. When the overheated US financial market will correct is anyone’s guess, but it is only a matter of time.
What it means for Asian economies
Many of us were wary of being too pessimistic entering 2025, and in the end, the economy and markets performed spectacularly well. That misjudgement should not lead us to be too optimistic this year.
Our main concern is the economy. For now, the global economy is poised to do well in the early months of 2026. The strong momentum in economic growth in the US and many parts of Asia in the final months of 2025 will help drive growth in early 2026. The latest purchasing manager surveys for the US and China, the two big engines of global growth, showed activity improving ahead of expectations.
In the US, core capital goods orders have kept rising through the final months of 2025. A good part of capital spending in the US is already locked in as the big tech companies race ahead to match their competitors’ ambitious efforts to dominate the AI space. New rules on accelerated depreciation have kicked in as well, another reason for robust capital spending in the coming months. In the US and globally, financial conditions remain supportive of economic activity and financial asset valuations.
However, there are several reasons why the global economy is likely to lose momentum as we get into the latter part of the new year:
Average US tariffs are now at their highest level in 90 years, running roughly at a level that is five times what prevailed before Trump returned as president. This sharp increase is bound to lead to cost inefficiencies and pressures on supply chains. The Supreme Court’s review of the legality of many of Trump’s tariffs will also inject a high degree of uncertainty.
America’s growth in 2025 and much of Asia’s unexpectedly strong export growth had a lot to do with AI-related capital spending. That AI spending has to keep increasing from currently high levels to produce the same effect on growth rates, which we think is unlikely. If, as we expect, there is a financial market correction, then we could see this important determinant of Asian export growth suffer a big hit.
The global economy also benefited from falling oil prices, which reduced energy costs for consumers and businesses. This factor is not likely to be as supportive this year. With the rising tensions in Iran, the risk premium in oil prices has begun to rise. Our assessment is that there is a strong likelihood of US and Israeli military action against the faltering regime in Tehran, which would lead to further increases in oil prices despite the rising supply.
We also believe that there will be more policy and geopolitical dislocations — certainly, rising protectionism as more countries jump on Trump’s protectionist bandwagon, especially to contain China’s growing export dominance. In geopolitics, whether it is US adventurism in the Western Hemisphere or other countries being emboldened to act against their weaker neighbours, businesses everywhere will be increasingly wary.
Resilience is Asia’s best strategy
Asian policymakers and businesses must therefore not be lulled into complacency if the economy performs well in the first few months of this year.
In particular, policymakers will need to stand ready to act quickly and flexibly:
First, they need to preserve their monetary and fiscal space. Now is not the time to be testing financial markets’ trust in policy making by, for instance, encouraging rapid credit growth to achieve super-ambitious economic goals — as Vietnam seems to be doing.
Second, supply-side reforms to encourage growth should be considered. India, for example, has launched a number of reforms which have enabled it to grow strongly even in the face of hostile American trade policy.
Third, it is clear that the global environment will be troubled. Regional integration in Asia could help offset these headwinds. We need to strengthen the political will to overcome obstacles which have caused regional integration to stall in recent years. At the very least, existing and well-functioning regional initiatives such as the Asean + 3 Macroeconomic Research Office and the related Chiang Mai Initiative should be expanded.
Our region cannot change the world, but the right strategies can help it remain resilient to inevitable stresses and flexible enough to adapt to major global shifts, whether positive or negative.
Manu Bhaskaran is CEO of Centennial Asia Advisors
