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China and Southeast Asian stock markets are poised to lead Asia in 2026, according to a new analysis from Deutsche Bank. The bank's strategists predict a "bull upcycle" for China, driven by a powerful combination of supportive liquidity, recovering corporate profits, and a decisive government policy pivot toward reform.

Three Core Catalysts for Chinese Equities

Deutsche Bank identifies three fundamental factors that could fuel sustained growth in China's market. These elements suggest a structural shift that could improve both investor sentiment and corporate performance.

A Reservoir of Household Cash

While the pace of global liquidity growth is slowing, China has a unique internal advantage: vast household bank deposits. Analysts believe this cash could increasingly flow into equities as the opportunity cost of holding savings in low-yield accounts diminishes.

A Focus on Corporate Profitability

A key driver for improved corporate health is the government's "anti-involution" policy, designed to curb the excessive competition and oversupply that have plagued many industries. Deutsche Bank notes that signs of greater investment discipline are already emerging, helping profits stabilize after years of pressure from overcapacity.

Additional support comes from industrial policies and directives for state-owned enterprises to speed up their payment cycles, which is expected to bolster corporate sentiment.

A Policy Pivot Toward Reform

A broader shift in Beijing's priorities is also expected to lift confidence through 2026. The government's work plans and the upcoming 15th Five-Year Plan show an increased emphasis on boosting consumption, investing in human capital, and easing regulatory pressures. This move toward reform and "opening up" signals a more market-friendly environment.

The Global Investor Factor

Deutsche Bank argues that global investors are currently underweight on Chinese assets. This positioning creates significant upside potential. The bank estimates that if major funds were to reallocate just one percentage point of their portfolios to China, it could trigger approximately $270 billion in capital inflows.

When combined with potential global fiscal easing and interest rate cuts, this influx of capital could propel Chinese and Hong Kong equities beyond their previous market peaks.

Deutsche Bank's Market Recommendations

Based on this outlook, the bank's strategy is clear:

• Favored Markets: China and select Southeast Asian markets.

• Favored Sectors: Industries benefiting from "anti-involution" policies that reduce over-competition.

• Areas of Caution: High-tech sectors that are facing renewed supply pressures.

Australian consumer confidence soured in January, with households growing increasingly concerned about their finances as the prospect of higher interest rates looms.

Westpac Survey Reveals Widespread Pessimism

A survey from Westpac Banking Corp. on Tuesday showed that overall sentiment fell by 1.7% to 92.9 points. With the index remaining below the neutral 100-point mark, pessimists continue to outnumber optimists.

"The main catalyst continues to be a sharp turn in interest rate expectations," said Matthew Hassan, Westpac's head of Australian macro-forecasting. He noted that nearly two-thirds of consumers now anticipate mortgage rates will climb over the next year, a figure that has more than doubled since September.

The survey's sub-indexes painted a uniformly bleak picture. "All sub-indexes were below 100, only the second time since October 2024 that pessimists have outnumbered optimists across every component," Hassan added.

RBA's Hawkish Stance Fuels Mortgage Worries

The growing anxiety among consumers reflects the messaging from the Reserve Bank of Australia (RBA). The central bank has held borrowing costs steady at 3.6% since August but has consistently warned about persistent inflation pressures in a tight job market.

RBA Governor Michele Bullock has indicated that further policy easing is unlikely in the near term, suggesting the next move is more likely to be a rate hike than a cut.

Mixed Signals: Spending Rises Amidst Growing Concern

This drop in sentiment contrasts with recent official data showing that Australian household spending grew faster than expected in November. The increase was driven by spending on services and strong pre-Christmas retail discounts.

The disconnect has left economists divided. Forecasters at Commonwealth Bank of Australia and National Australia Bank are predicting at least one more rate increase this year to combat inflation. In contrast, analysts at Bank of America expect the RBA to keep rates on hold. Meanwhile, money markets are pricing in a rate hike by mid-2024.

Key Data to Watch Ahead of RBA Meeting

The RBA's next policy decision at its February 2-3 meeting remains uncertain and will be heavily influenced by upcoming economic reports.

Policymakers will be closely watching December's employment figures to assess the labor market's tightness. The fourth-quarter inflation data, scheduled for release in late January, will also be a critical factor in shaping interest rate expectations.

President Lai Ching-te is escalating a power struggle with Taiwan's opposition-controlled legislature, with a record-breaking defense budget at the center of the conflict. His ability to pass this monumental spending package has become a critical test of his young presidency.

In a sharp break from tradition, Lai's premier recently refused to sign tax legislation that threatened the central government's funding, a move opponents decried as unconstitutional. His administration followed this with a legal victory, successfully challenging a court revamp that would have weakened his power to contest laws passed by parliament.

These maneuvers represent a significant advance for a leader who took office in early 2024 with the slimmest victory margin in over two decades. However, they have also deepened political polarization. Lai's opponents are now threatening a long-shot impeachment and labeling his administration a "green dictatorship," accusing him of eroding legislative authority.

This sets the stage for his next major challenge: passing a special budget to bolster Taiwan's defenses by an extra $40 billion in the coming years without inflaming the already tense political climate.

The High Stakes of Military Spending

Failure to pass the defense budget could have serious international consequences, particularly with the United States. The proposed spending aligns with US President Donald Trump's public calls for Taiwan to significantly increase its own military investment.

"Such an outcome would be detrimental to Taiwan's relationship with the US and the Trump administration," said William Yang, a senior analyst at the International Crisis Group.

The Lai government is also in the final stages of negotiating a tariff agreement as part of a broader trade deal with the US. According to the New York Times, this deal could pave the way for Taiwan Semiconductor Manufacturing Co. (TSMC) to build five new chip facilities in Arizona.

President Lai’s Democratic Progressive Party (DPP) is scheduled to make its seventh attempt on Tuesday to advance the budget-related legislation for a reading. The president's office did not respond to a request for comment.

Rising Threats from Beijing

The budget standoff is unfolding amid escalating military aggression from China. In the final days of 2025, President Xi Jinping ordered military drills around Taiwan to protest an $11 billion US weapons package for the self-governed island, which Beijing claims as its own territory.

During these exercises, the People’s Liberation Army fired long-range projectiles into the Taiwan Strait for the first time since 2022, disrupting one of the world's most vital shipping lanes. This pressure has reinforced Lai's pledge to accelerate the development of the T-Dome, a sophisticated and costly system for intercepting aerial threats.

Chieh Chung, an assistant professor at Tamkang University, emphasized that the special budget, which helps fund the T-Dome, is "extremely important for Taiwan's future combat capability."

Lai first detailed the plan in a Washington Post commentary last November, stating the funds would be used for "significant new arms acquisitions from the United States" and to "vastly enhance Taiwan's asymmetrical capabilities." His cabinet has suggested financing the budget through previous fiscal surpluses or government borrowing.

A Deepening Political Deadlock

Despite the clear external threats, the opposition, led by the Kuomintang (KMT) party which advocates for closer relations with Beijing, has blocked the budget legislation from its first reading on six separate occasions.

Opposition parties have also delayed the review of the annual general budget, which includes standard defense spending. While Taiwan's general budget is usually passed by February, delays are not unprecedented. In 2007, another minority DPP government saw its budget held up until June.

While the opposition agrees on the need for increased defense spending, they disagree on the priorities and demand more transparency.

Niu Hsu-ting, a lawmaker who frequently represents the KMT's positions, argued that "improving the treatment of military personnel is the most important issue." She suggested the annual budget should first incorporate opposition-backed legislation mandating pay raises for soldiers.

Opponents have also criticized the special military budget for its lack of specifics and have asked Lai to submit to questioning by legislators. The president has offered to deliver a "state of the nation" address but only "in a manner that fits the constitution," implying he would not take questions.

"The continued stalling of the special military budget by opposition parties is an indicator the political stalemate is far from being resolved," noted Yen Wei-ting, an assistant research fellow at Academia Sinica's Institute of Political Science.

Can US Influence Break the Stalemate?

Ultimately, pressure from the United States, Taiwan’s most crucial military ally, might be the key to breaking the legislative gridlock.

On January 7, representatives from the American Institute in Taiwan (AIT) met with the speaker of Taiwan's legislature and his deputy. According to an AIT Facebook post, the meeting aimed to "strengthen US-Taiwan cooperation" on security and economic matters.

Lin Ying-yu, an associate professor at Tamkang University, believes the US is likely already engaging in quiet diplomacy with the opposition.

"The US will likely engage with members of opposition parties and take advantage of year-end or New Year events to communicate with them on a wide range of issues, including arms sales," Lin said.

President Donald Trump's pledge to deliver affordable energy to Americans has created a fundamental conflict with the U.S. oil industry, which has been struggling with low prices. As the prospect of cheap Venezuelan crude enters the market, this rift is deepening, leaving geopolitical instability as the main force supporting prices—a positive for producers but a negative for consumers.

A Bearish Consensus Was Forming

At the start of the year, most market forecasters anticipated that oil prices would fall even further than they did in 2025, when benchmarks lost about a fifth of their value. The consensus view put Brent crude at an average below $60 per barrel, with West Texas Intermediate expected to hover closer to $50 and possibly dip lower.

This forecast was built on a solid argument: sustained low prices would compel a production response from non-OPEC nations, particularly the United States. At $50 or less, American shale drillers—who drive the majority of U.S. output—would struggle to remain profitable and would eventually curb production. While this historical logic holds, any resulting price increase would directly contradict President Trump’s campaign promise.

The Strain on the U.S. Oil Industry

From the beginning, Trump's cheap oil pledge was a risky proposition for independent oil companies. While major integrated firms, or "Big Oil," can withstand prolonged periods of low prices, smaller independents in the shale patch face greater pressure.

The Trump administration has made efforts to support the industry by easing regulations and opening new areas for exploration. However, the simultaneous promise of cheap oil has made it difficult for producers to capitalize on these changes.

This pressure isn't limited to the U.S. The sustained price decline last year drove down global capital expenditure on exploration and production below 2024 levels. According to Wood Mackenzie, upstream capex is projected to fall again in 2026. The energy consultancy noted that spending declines are expected in North America and Europe, while investment is set to rise in Latin America, the Middle East, and Africa.

The bearish sentiment has been fueled by perceptions of a global oversupply, supported by:

• Record amounts of oil in transit on the water.

• A gap between China's oil import volumes and its processing rates.

• Forecasts from the International Energy Agency (IEA) and the U.S. Energy Information Administration (EIA) predicting that crude supply will exceed demand by six figures this year.

Geopolitical Tensions Reshape the Outlook

Despite the bearish fundamentals, oil prices are climbing again as geopolitical risks take center stage. Intensifying protests in Iran have sparked trader concerns over the security of OPEC supply, which is exported almost exclusively to China.

This anxiety appears significant enough to overshadow the bearish news of the U.S. beginning to sell Venezuelan oil. Adding to the complexity, reports indicate that not all major oil companies are eager to help rebuild Venezuela's oil sector. Exxon, for instance, called the country "uninvestable," which prompted President Trump to threaten to block the supermajor from operating there.

Meanwhile, trouble in Iran raises the risk of disruptions to oil transport through the Strait of Hormuz, the world's most critical chokepoint for oil markets. Given the Trump administration's surprise incursion into Venezuela, markets are now on edge for potential military actions beyond South America.

However, market analysts suggest that expectations alone won't be enough to drive prices substantially higher. "The market is saying show me the disruption to supply before materially responding," Saul Kavonic, head of energy research at MST Marquee, told Reuters.

That disruption could be imminent. ANZ energy analysts noted in a report that "there have also been calls for workers in the oil industry to down tools amid the protests." They added, "The situation puts at least 1.9 million barrels per day of oil exports at risk of disruption."

Trump's Policy Dilemma

This turn of events places President Trump in a complicated position. Higher oil prices would benefit the domestic energy industry, a priority in his second term. Yet, they would break his promise of affordable energy for consumers.

Adding another layer of uncertainty, OPEC could reverse its production policy and decide to cut output once again. With these conflicting pressures, the oil market is set for another interesting year.

U.S. President Donald Trump said on Monday that any country that does business with Iran will be subjected to a tariff rate of 25% on any business conducted with the United States.

"Effective immediately, any Country doing business with the Islamic Republic of Iran will pay a Tariff of 25% on any and all business being done with the United States of America," Trump said in a post on Truth Social.

"This Order is final and conclusive," he said.

Source: Reuters

Source: Reuters