The year 2025 will be remembered as a pivotal year where geopolitics, trade and growth collided, contributing to the beginning of an uncertain monetary policy easing cycle for many central banks. It was a year in which the US reasserted its geopolitical primacy even as its domestic politics produced a paralysing and prolonged government shutdown. The unilateral introduction of US reciprocal tariffs also marked a new trade era, upending multilateral free trade by shifting from rules-based systems to unilateral, transactional actions, disrupting supply chains, fostering uncertainty and intensifying global economic fragmentation through a focus on bilateral trade negotiations. 

It was also a year when China’s structural slowdown narrative, coupled with the onslaught of the initial tit-for-tat trade escalation with the US exacerbated concerns. Notwithstanding the tariff chaos, China still recorded a record US$1.2 trillion goods trade surplus, as softer Chinese exports to the US was offset by export growth to ASEAN markets. Persistent deflation due to softening domestic demand, accompanied by property market weakness, also brought back memories of Japan’s lost decades. China’s 4Q25 GDP growth expanded 4.5% YoY, the slowest pace since the re-opening from the global pandemic in late 2022. While full-year 2025 GDP growth reached the 5% target for the third straight year, the uneven growth pattern is likely to persist amid sluggish business investments and private consumption.  Fixed-asset investments had already contracted 3.8% in 2025, which is a warning sign for business confidence.

For 2026, we wrote in our 1H26 outlook that “the policy environment will be more predictable—central banks entering a gentle easing cycle—but geopolitics will not.” While our base case is for a soft-landing continuity scenario, this is more a case of “we don’t know what we don’t know”. Indeed, the year started with heightened geopolitical tensions in Venezuela, Iran and more recently the furor over Greenland. 

The US-Venezuela development raises prospects for sanctions relief and a revival of the Venezuelan oil sector. This could add to downside pressure to global oil prices in the medium-term. We maintain our forecast for Brent to bottom near USD59/bbl by year-end, pending clarity on Venezuela’s new government and resource policy. OPEC’s pause in quota hikes supports soft floor for Brent in high-USD50s. The US president has announced a 10% tariff on 8 European nations, including Denmark, Norway, Sweden, Germany, France, the Netherlands, Finland and the UK, from February 1, and to raise it to 25% in June unless a deal is reached for the “complete and total purchase of Greenland”. This latest move is using the IEEPA, of which a Supreme Court ruling is due soon, and is also likely to stalemate the US trade deal with the EU as well as face retaliatory action from the EU. The EU is considering tariffs on EUR93bn of US goods as well as other anti-coercive measures. 

Recent events continue to underscore risks to global order and reinforce the role of gold as a strategic hedge and portfolio diversifier. We maintain a constructive outlook on gold amid Fed still biased toward easing, persistent central-bank demand and geopolitical uncertainty. We project gold at USD4,800 for end-2026. 

The perceived threat to the independence of the US Federal Reserve with the investigation into Fed chairman Powell, as well as market speculation over who will be the next Fed chairman, may continue to drive market expectations of future rate decisions. Market pricing of anticipated Fed rate cuts remains more dovish than the one 25bp rate cut illustrated in the Fed’s median dot plot.  Whether the Fed will eventually deliver the aggressive rate cuts that the US president wants is also in question, pending data dependency on evolving inflation and labour market outcomes.  

The outlook for 2026 will be shaped by three macro anchor variables including the Fed’s policy trajectory, the durability of US–China trade truce or the lack thereof and political shifts namely pertaining to the US mid-term elections and European leadership transition. The key risks and potential blind spots for 2026 include first, an underpricing of political volatility considering EU political transitions, Taiwan Strait tensions and/or Middle East instability. These could trigger sudden repricing in energy markets, FX, and defensive assets such as bonds.  

Second, an underappreciation of China’s structural adjustment journey. Although not our base case, a deeper-than-expected slowdown in China remains a tail risk, especially if property sector deleveraging accelerates or consumption confidence fails to recover. The broad policy backdrop remains supportive and should continue to limit the descent speed for the Chinese economy. Our 2026 growth forecast stands at 4.7% YoY. Policymakers are guiding for the development of the capital markets as the next growth engine as well as a steady pace of RMB appreciation through the daily fixings. 

Third, fiscal sustainability concerns in advanced economies such as high US and European deficits, compounded by higher defense spending and ageing populations, could pressure long-term government bond yields high and potentially destabilise bond markets. Even Japan, with the current aggressive fiscal policy stance that prioritise growth over fiscal discipline, may see pressure in the form of higher term premiums, especially ahead of the snap elections due in February. 

Fourth, the risk of AI-driven market concentration, with the sustainability of equity market leadership by a narrow cluster of AI-linked mega-caps, is a question that weighs on some investors. Any earnings disappointment or regulatory scrutiny could force a broad repricing. The benefits from AI to productivity and efficiency will materialise in the medium term, but this is separate from stock valuations. Finally, potential commodity price shocks, especially given the strong rally in gold, silver, copper, aluminum, nickel and tin. Copper has rallied on supply shortfalls amid the AI-driven demand boom, while the debasement trade (where investors switch from traditional financial assets into the metals complex, led by China) has contributed to strong gains year-to-date.

Ultimately, 2026 will test whether the global economy can navigate this new equilibrium: one in which GDP growth is uneven but benign, inflation manageable but tilted modestly higher, and risks increasingly geopolitical rather than macroeconomic. The balance of probabilities favours stability but with air-pockets of volatility. Nonetheless, the blind spots are significant enough to demand humility and constant vigilance from markets. 

For the US, we maintain our base-case for one 25bp Fed funds rate cut in 2026, and we have pencilled in this expected cut for 1H26. Continued cooling in the labour market justifies interest rates at less restrictive levels as long as there is no strong rebound in inflation. After Fed funds rate is cut to a 3.25-3.50% range, arguably near a neutral level, any additional Fed funds rate cut will probably require inflation to move nearer to the 2% target.  There are two sided risks to our base case. There may be a longer pause and hence a potential delay to the next rate cut. Conversely, if inflation trends lower towards the latter part of 2026, that will open room for additional rate cuts.

We expect 2Y UST yield to mostly trade in the range of 3.45-3.65% during 1H 2026. The supply outlook is benign for the next couple of quarters, with the help from the cessation of Quantitative Tightening (QT) and the start of Reserve Management Purchases (RMP). We see the range for 10Y UST yield around 4.00-4.30% for 1H26. 

For the DXY index, the year will begin with three pivotal US decisions including President Trump’s nomination for the next Federal Reserve Chair, the Supreme Court rulings on the legality of Trump’s tariffs and whether Fed Governor Cook remains in office amid a mortgage probe. These outcomes could prolong concerns over a more dovish Fed and weigh on the USD early in the year. Tariff revenue risks and potential upward revisions to the fiscal deficit could add to downside USD pressure. Still, the scale of USD weakness should be far smaller compared to the 9.4% slide in the USD in 2025.

For equities, relatively less attractive risk reward with the sharp run-up in global equities, particularly with the US market hovering near all-time highs. There is a possibility of a short-term consolidation. Global risk assets would remain largely supported by the fact that the US Fed remains in a broad easing cycle against a non-recessionary backdrop. We maintain a constructive stance on equities in 2026 with an Overweight on Singapore given the region’s more favourable risk-reward relative to global peers. We favour sectors such as S-REITs, IT & Communication Services, Defence and Infrastructure-related sectors.

Asian exports were surprisingly resilient in 2025 despite the lingering threats of higher tariffs. The ASEAN region specifically negotiated similar tariff rates of 19-20% implying limited inter-regional competition with regard to US exports. But the standout last year was the resilience in electronics exports across the region that particularly benefited Korea, Taiwan but also Singapore and Malaysia. The question now is whether this upcycle will sustain into 2026. Our baseline is for some resilience in electronics exports as the fundamental drivers of the AI boom, including data centers proliferation and digitalisation trends remain strong. However, we do expect some moderation from the rapid growth seen in recent years. 

For Malaysia, we maintain our conservative 2026 GDP growth forecast of 3.8% YoY compared to 4.8% in 2025. Our GDP growth profile suggests that the weakness in growth will be gradual to 3.9% YoY in 1H26 and 3.8% in 2H26. That said, the AI- and data-centre boom has turbo-charged growth in 2025 and if that sustains this year, there may be upside risk to growth.

We see slower economic growth being driven by mainly payback from front loading exports to the US through 2025 as well as modestly slower investment spending. The tariff impact in 2025 has been hard to discern with export growth to the US resilient in 2H25. That said, we do see export growth particularly to the US remaining volatile in 2026. With exemptions to tariffs largely clarified, the need to frontload exports to the US is minimised into 2026. We forecast slower goods export growth of 2.2% YoY in 2026 compared to 6.5% in 2025. 

More fundamentally, structural reforms will push growth to 4.0 -4.5% in 2027-28 namely through continued progress on economic masterplans. This will also be reflected in resilient foreign direct investment flows into Malaysia. Regions such as Johor will continue to benefit from initiatives such as the Johor-Singapore Special Economic Zone, which remain a strong hold for data center flows. 

We expect the government will remain steadfast in its adoption of fiscal consolidation. To that end, we expect fiscal policy support to remain targeted in 2026, leaving monetary policy some room to maneuver. We remain comfortable with our call for a 25bp rate cut from Bank Negara Malaysia in 1H26. The risk to our call is that economic growth remains resilient, reducing the need for BNM to lower its policy rate this year. 

The outperformance in MYR versus USD seen in 2025 is likely to spill over to 2026, though the magnitude of gains may be milder. MYR’s continued outperformance in recent sessions was due to a conducive external environment brought about by Fed’s easing cycle, a more benign USD environment, relatively steady RMB and risk-on sentiment owing to renewed optimism on AI. 

Domestically, Malaysia’s fundamentals remain encouraging, supported by quality FDI inflows, upbeat growth, a wider trade surplus and clear commitment to fiscal consolidation.  These factors can help to enhance foreign investor confidence and improve prospects for portfolio inflows.  
Policymakers’ constructive messaging, including earlier comments that USDMYR could trade “just below 4” by mid-2026, has also contributed to the more positive sentiment. This has already played out, and external conditions remain supportive. A more resilient RMB continues to anchor stability in MYR, while the Fed in the midst of its easing cycle should continue to provide a constructive backdrop.