Investment Weekly: Bonds hedging again?
26 October 2026
Key takeaways
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The recent AI-induced tech sell-off was a sharp reminder that relentless outperformance breeds fragility. Since 2011, the cap-weighted S&P 500 has trounced its equal-weighted cousin by nearly 225%, with just ten stocks commanding close to 40% of the index. Despite a modest de-rating this year, mega-cap tech remains hypersensitive to shifts in AI sentiment.
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UK Chancellor Healey heads into this week’s Budget buoyed by IMF praise for a commitment to fiscal discipline. The numbers look good: the Fund sees the budget balance stripping out cyclical effects and interest payments (the so-called “structural primary” balance) moving into surplus in 2028 for the first time since 2001.
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The big market stories of 2026 have centred on the relentless AI boom and the sell-off in Western government bonds. Yet, flying under the radar is just how well-behaved hard-currency emerging market debt (EMD) spreads have been.
Chart of the week – Bonds hedging again?
For those worried about the AI boom turning to bust, the recent market action offered a glimpse of how things could unfold. As investors dumped assets perceived as vulnerable to the AI story souring, there were some obvious underperformers: namely, chip-heavy indices in South Korea and Taiwan, and the Nasdaq. But it’s how other assets moved that provides some useful signals on how investors can protect themselves. Three things stand out:
#1 There was a rotation to old-economy, value, or domestically focused indices such as those in the UK, the eurozone, and India. Having lagged during the AI boom, these low-tech markets may provide natural shelters during a tech pullback (see Market Spotlight below).
#2 Elsewhere, a fall in the US dollar lends weight to the idea that the currency has lost some of its shine as a haven asset. It also implies that the issue of dollar hedging in portfolios needs to be taken seriously.
#3 But it was action in the bond market that provided the most important signal of all. After years of investors questioning the ability of bonds to hedge portfolios during stock market sell-offs, Treasuries came to the rescue this time around, with yields across the curve falling sharply.
With starting yields now higher, bonds offer enticing income opportunities. And their ability to hedge against a big tech sell-off or growth scare is a major bonus. But the world is complex, and inflation shocks are still likely. This means we can’t over-rely on a single diversifier – high-quality credit, commodities, emerging markets, real assets, and alternative assets all have a role to play.
Market Spotlight
Sensex appeal
Sitting out the AI boom has made 2026 a bruising year for Indian equities. Because AI themes make up just 14.5% of the market – versus over 80% in Taiwan and nearly three-quarters in South Korea – foreign investors have ditched India for chip-heavy hubs, inflicting the market’s longest relative losing streak in 25 years.
Yet, amid the recent tech rout, India’s economy is thriving. GDP grew 7.8% year-on-year in Q2, while corporate profits jumped by 11.4%. Firms have slashed debt, growth is less oil-intensive, and households sit on USD 3.9trn of gold – double its value two years ago – which they are increasingly borrowing against to fund spending.
This year’s sell-off has also stripped away India's usual valuation premium. Price-to-book multiples now sit below their 10-year average, and at a 20-year low relative to emerging-market peers.
The value of investments and any income from them can go down as well as up and investors may not get back the amount originally invested. The level of yield is not guaranteed and may rise or fall in the future. Past performance does not predict future returns. For informational purposes only and should not be construed as a recommendation to invest in the specific company, country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management, Factset, Bloomberg, Macrobond. Data as at 7.30am UK time 23 October 2026.
Lens on…
Heavy lies the crown
The recent AI-induced tech sell-off was a sharp reminder that relentless outperformance breeds fragility. Since 2011, the cap-weighted S&P 500 has trounced its equal-weighted cousin by nearly 225%, with just ten stocks commanding close to 40% of the index. Despite a modest de-rating this year, mega-cap tech remains hypersensitive to shifts in AI sentiment. The equal-weighted index’s steep relative slump during the AI boom echoes the late-1990s dot-com mania. If AI hits a genuine roadblock further down the line, history favours the underdogs: in the five years after the 2000 bubble burst, the equal-weighted index outperformed its cap-weighted counterpart by around 50%. Yet investors need not bet on an AI bust to look elsewhere. Even if the tech story holds, AI spillovers—alongside broadening capex—should lift left-behind sectors and smaller-cap names across Industrials and Financials. Nasdaq earnings growth is forecast to more than halve in 2027, while equal-weight valuations sit at an enticing 15x. |
The most compelling opportunities now lie beyond the mega-caps—leaving globally diversified portfolios across sectors, regions, and market caps well positioned for the coming years.
2001: A fiscal odyssey
UK Chancellor Healey heads into this week’s Budget buoyed by IMF praise for a commitment to fiscal discipline. The numbers look good: the Fund sees the budget balance stripping out cyclical effects and interest payments (the so-called “structural primary” balance) moving into surplus in 2028 for the first time since 2001. But the journey back to the fiscal health of 2001 will be arduous. The UK has previously delivered prolonged fiscal tightening, notably during the mid-to-late 1990s and following the Global Financial Crisis. However, the 1990s journey was propelled by average growth of more than 3% – over twice the pace projected by the IMF for the coming years. And the post-crisis austerity period was politically challenging and uneven. |
Having failed to restrain spending in 2024, the government has left tax rises to carry the load. Yet, with the tax burden already near multi-decade highs, further increases risk diminishing returns. Gilts provide decent income opportunities right now, but difficulties in reaching firmer fiscal ground imply sticky yields and limited scope for capital gains outside of a major downturn.
Spread the word
The big market stories of 2026 have centred on the relentless AI boom and the sell-off in Western government bonds. Yet, flying under the radar is just how well-behaved hard-currency emerging market debt (EMD) spreads have been. Historically, riskier European sovereigns like Italy moved in lockstep with emerging markets. Recently, however, a striking disconnect has opened up: the yield gap between Italian government bonds and German Bunds has widened sharply, whereas EMD has traded more like a relative haven. What explains this divergence? While Western governments grapple with poor fiscal dynamics, weak growth, and higher interest rates, some EMs are reaping the rewards of broad structural improvements. Robust institutions, deeper local capital markets, and better crisis management have fortified fundamentals. |
Prudent monetary policy has provided a further buffer. By acting early to tame inflation, some EM central banks have fostered currency stability, making it easier to service external debt.
Past performance does not predict future returns. The level of yield is not guaranteed and may rise or fall in the future. For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector, or security. Diversification does not ensure a profit or protect against loss. Any views expressed were held at the time of preparation and are subject to change without notice. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Source: HSBC Asset Management. Macrobond, Bloomberg, Refinitiv, FactSet. Data as at 7.30am UK time 23 October 2026.
Key Events and Data Releases
Last week
This week
For informational purposes only and should not be construed as a recommendation to invest in the specific country, product, strategy, sector or security. Any views expressed were held at the time of preparation and are subject to change without notice. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. Index returns assume reinvestment of all distributions and do not reflect fees or expenses. You cannot invest directly in an index. Source: HSBC Asset Management. Data as at 7.30am UK time 23 October 2026.
Market review
Global equity markets struggled to make headway amid rising AI growth concerns and higher oil prices. US equities were mixed as investors digested Q3 tech earnings. The S&P 500 and small-cap Russell 2000 posted modest gains. The Nasdaq traded sideways, with investors rotating from AI stocks towards value and defensive sectors, including Consumer Staples. The Euro Stoxx 50 fell on rising growth concerns. Asian bourses saw widespread losses due to lower tech stocks. The Hang Seng and Kospi indices weakened in choppy trading. The Shanghai Composite retreated on fading optimism about fiscal stimulus. The Nikkei 225 index fell. Frontier markets were resilient. In rates, 10yr Treasury yields fell ahead of the Federal Reserve meeting. Ongoing fiscal and political concerns raised 10yr French OAT yields. The US dollar softened against most of its major peers.
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