Q2 2026 Investment Outlook: Capital Rebalancing and Currency Regime Shift

Sun Mar 01 2026

Dear readers,

Over the past few quarters, we highlighted the importance of diversifying beyond US-centric portfolios. That thesis has continued to play out.

Global equities outside the US have broadened their participation, real assets have remained resilient, and even previously lagging domestic markets — such as the Stock Exchange of Thailand — have rallied meaningfully following political clarity.

What is increasingly clear is that this is no longer a short-term rotation driven by valuation. It reflects a deeper structural shift in global capital allocation. The following segments outline some of my key observations.

The Reallocation Away from US Concentration.

For over a decade, global capital disproportionately flowed into US assets — reinforcing USD strength, US equity outperformance, and valuation expansion.

Today, sovereign institutions, pension funds and family offices are reassessing concentration risk:

Currency risk from USD overexposure
Policy and geopolitical concentration
Valuation dispersion between US and non-US markets
The strategic benefit of supporting domestic capital markets

Governments increasingly recognize that supporting local equity markets:

Improves capital formation
Strengthens economic resilience
Enhances consumer confidence via wealth effects
Stabilizes domestic financial systems

While this may not trigger outflows from US assets, indeed we still see net inflows into US, this policy awareness creates a structural tailwind for non-US markets and the marginal invested dollar will flow to non-US markets. We expect this capital rebalancing to continue over the next several years rather than quarters.

Japan: Currency Regime Shift Underway.

A key macro inflection point sits in Japan.

The Bank of Japan has entered a gradual normalization process after decades of ultra-loose policy. While the pace is cautious, the direction is unmistakable.

This has implications far beyond Japan.

For years, the JPY served as the global funding currency:

Borrow cheaply in yen
Deploy into higher-yielding USD or EM assets
Reinforce the carry trade

As Japanese rates normalize, funding economics shift. The carry trade becomes less attractive, hedging costs rise, and repatriation pressure builds.

At the same time, domestic political alignment under the Liberal Democratic Party increasingly favors currency stability to protect consumers from imported inflation. A structurally weak yen is no longer politically neutral.

We see several potential tailwinds for JPY strength into Q2 and beyond:

Ongoing normalization
Corporate balance sheet neutralization of FX exposure
Year-end repatriation dynamics
Risk-off positioning during volatility episodes

A stronger or more stable JPY would represent a material shift in global liquidity conditions.

Emerging Markets: From Asset-Light to HALO Leadership.

A significant feature of the modern economy had been the migration of developed market – particularly US – corporates toward asset-light, service-oriented models. Manufacturing intensity declined, supply chains were globalized, and capital efficiency became the dominant metric. Production shifted toward emerging markets, while developed markets captured higher-margin intellectual property and platform economics. That equilibrium is now being tested.

The acceleration of AI is disrupting not only traditional manufacturing but also segments of the knowledge economy. As AI capabilities expand into coding, design, analytics, and other white-collar domains, scarcity is shifting away from software abstraction and toward physical bottlenecks:

Semiconductor fabrication capacity
Advanced memory supply
Power availability
Data center infrastructure
High-performance packaging

In this new regime, the market has begun rewarding what JPM/GS/MS collectively call HALO companies — Heavy Assets, Low Obsolescence.

These are firms with:

Large installed physical infrastructure
High barriers to entry
Strategic supply chain positioning
Structural demand visibility from hyperscaler capex

Companies such as TSMC, SK Hynix, and Samsung Electronics exemplify this shift. They sit at the center of AI compute and memory supply chains, directly benefiting from hyperscaler spending cycles.

Importantly, these firms feature prominently in emerging market indices.

As hyperscalers race to build AI infrastructure, capital expenditure is flowing disproportionately toward:

Advanced logic nodes
High-bandwidth memory
Chip packaging and testing
Energy and cooling systems

This has created a powerful earnings impulse for selected emerging market heavy-asset champions — contributing meaningfully to EM outperformance year-to-date.

In contrast to the prior decade — when emerging markets were often viewed as lower-margin manufacturing hubs — today’s leaders are strategic choke-point owners in the global AI ecosystem. Emerging markets are no longer just leveraged beta to global growth. In selected segments, they are the core infrastructure layer of the AI arms race.

We expect this divergence between asset-light disruption and asset-heavy scarcity to remain a defining market feature over the next several years.

Demographics: The Silver Spending Wave

Another interesting observation I had in the last quarter when travelling was the silver spending wave. Demographic transition is an underappreciated driver of the changing global consumption. Individuals in their 50s and 60s are increasingly:

Financially secure
Asset-rich
Less constrained by child-rearing obligations

In many economies, lower birth rates mean reduced intergenerational savings burdens. As a result, this cohort is spending more on:

Travel and experiences
Healthcare and longevity
Lifestyle upgrades
Premium goods and services

This creates structural support for select consumer, healthcare and services sectors globally.

Sovereign Security Has Expanded

National security is no longer confined to defense budgets. It now encompasses:

Semiconductor sovereignty
Energy security
Rare earth supply chains
Data and compute infrastructure

Governments increasingly treat silicon and energy as strategic assets.

This drives multi-year capital expenditure cycles in:

Semiconductor manufacturing
Grid resilience and storage
Energy infrastructure (ie nuclear, natural gas, renewables)

These trends are policy-supported and less sensitive to short-term economic fluctuations.

Tactical Risks vs Structural Tailwinds

Putting all the above observations together, while the structural themes we have outlined remain firmly in place, we anticipate that Q2 could introduce periods of volatility. Seasonality effects, together with the run-up to the World Cup and the US mid-term elections campaigning, can lead to reduced market liquidity. Currency markets may experience adjustments driven by ongoing JPY normalization dynamics, particularly if policy expectations shift or repatriation flows accelerate. At the same time, episodic risk-off positioning cannot be ruled out, especially if macro data softens or geopolitical tensions resurface. A phase of USD consolidation is also plausible after extended positioning extremes, and equity markets may rotate toward more defensive sectors as investors recalibrate risk exposure mid-year.

That said, these tactical fluctuations do not alter the broader trajectory. We continue to see a gradual but persistent reduction in global USD concentration, accompanied by strengthening participation in non-US equity markets. Capital flows toward emerging markets remain supported by relative growth differentials and strategic positioning within AI and supply chain ecosystems. Structural capital expenditure cycles linked to semiconductor capacity, energy security, and infrastructure resilience are ongoing, and currency regimes — particularly in Japan — are undergoing meaningful realignment.

Against this backdrop, we remain constructive on select non-US equities where valuation and structural earnings drivers remain favorable. We continue to favor emerging market exposures tied to growth, industrial upgrading, and AI-linked supply chains. Real assets connected to sovereign security themes — including energy, infrastructure, and strategic materials — retain strong multi-year support. Currency diversification strategies remain increasingly relevant in a transitioning regime, and Japan-related opportunities tied to policy normalization and potential JPY strength warrant close attention.

The world is not de-globalizing; it is re-balancing. This transition may generate intermittent volatility, but it also creates multi-year allocation opportunities for investors prepared to broaden their framework beyond traditional US-centric positioning.

Danny Toe

Chairman