Rebuilding diversification: China, Asia and the next opportunity set

One of the most telling signals, Castelli suggests, is that 2025 marked “the first year after many years…more than a decade of outperformance of US equity vs. non-US equities.” That shift does not automatically mean 'US exceptionalism' is over. But it does change the starting point for asset allocation. If the US can lag for a year without the world breaking, it becomes easier to argue that diversification is broadening again.

From a tactical perspective, Jade Fu, Portfolio Manager in UBS AM’s multi-asset investment team, says she remains “very constructive.” The rationale is not complicated: growth has stayed “pretty solid,” with a rising contribution from “AI related investment and productivity gains.”

There is also a familiar playbook at work. “When the Fed is in a cutting cycle and there is no recession,” Fu notes, “investors, generally speaking, get pretty positive returns.” That backdrop supports risk-taking, but it doesn’t require a one-country portfolio.

Her list of tactical preferences is intentionally plural. Fu says, “we are positive actually on US equities, still”, but is also “more positive on emerging markets equities, Japanese equities,” and constructive on “emerging market debt, Asia high yield and also gold.”

The subtext is that, while the US may still be a core return engine, it no longer needs to be the only car in the garage.

If markets are reopening beyond the US, reserve managers are adjusting something even more foundational: currency exposure.

In discussing reserve manager behaviour and survey results, Desmond Ng says that “over half” of respondents made strategic asset allocation changes in the prior year, with diversification being the “main driver.” But diversification here is “about assets…it’s about currencies…[and] how they approach investments overall.”

The catalyst is geopolitical risk, especially trade. Over 70% of respondents cite trade wars as being the biggest risk driver, notably above the usual macro concerns. This emphasis signals a shift from debating base-case inflation and growth to preparing for scenarios with global disruption.

Two allocation decisions stand out for Ng: gold and green bonds.

“Over 30% of the investors increased allocations” to gold, he says, and “over 50%…want to further increase the exposure.” Meanwhile, “over 70%…already have allocations to green bonds,” implying that the 'green' segment has become part of the standard reserve toolkit rather than a niche add-on.

But the more consequential change may be slow and structural: the US dollar’s share. “Over half…have trimmed their US dollar holdings over the last year,” says Ng, rebalancing toward the euro and the renminbi. From his perspective, the long-term target RMB exposure is about 6%.

This matters. Even modest shifts in reserve allocations can signal a broader willingness to diversify away from the default.

China’s equity rebound has been hard to ignore. But the more relevant question for 2026 is what drove the comeback, and what can sustain it.

Bin Shi argues that 2025 performance was not primarily about a booming economy. “Last year’s performance was not really because of a very robust Chinese economy,” he says. Instead, as Shi points out, it was a correction of extreme undervaluation following years where global investors had ‘given up’ on China and labelled it ‘uninvestable’.

This is an important distinction. A valuation snapback can be powerful, but it is also self-limiting. Once valuations are “back to so-called normal,” Shi argues, the next phase depends more on delivery: “economic and company fundamentals will become more important.”

His base case does not require heroic macro assumptions. Even if growth simply “move[s] along at a 5% GDP growth rate,” Shi believes Chinese corporate competitiveness has “improved tremendously.”

The opportunity is increasingly at the company level, and often in sectors where global investors still underappreciate China’s position.

Shi highlights healthcare and pharmaceuticals, where some firms are “leading the way with lab technology”. Battery technology is similar, with CATL “already number one in the world.” As more of these businesses list and deepen liquidity, he expects investors to compare them not to a generic 'China discount' but to global peers. This should support Hong Kong’s role as a listing venue.

Perhaps most importantly, he is sceptical of the idea that liquidity alone can keep lifting markets. “Liquidity cannot make a bad company into a good company,” Shi says. Ultimately, “company fundamentals” matter more.

A persistent worry for global allocators is that equities have become a one-theme market, especially when AI excitement dominates index performance. What happens if that enthusiasm cools?Shi acknowledges a near-term linkage: a US tech selloff could have “some negative impact.” But the deeper question is whether AI resembles the late-1990s bubble. His answer is cautious, but clear: “Personally, I don’t think it’s much of a bubble at this point…Most likely [it] will continue”. Applications in robotics, autonomous driving and medical technology that accelerates drug identification support his thesis.

Fu makes a related point from the other side of the allocation table. Compared with 2000, she argues that market returns have been driven more by “earnings growth” than “mere multiple expansions.”

With this in mind, the investment exam question is more about how best to express the theme. Put simply, AI is not a single trade. In China, Fu says, it comes with “a lot of nuances and sub themes,” such as localization and software applications to supply-chain exposures, robotics and adjacent industrial upgrades. Some years, she notes, the opportunity is “all about global AI supply chain;” in others, it shifts. “That’s why we like this concept,” because it can be captured in multiple, differentiated ways.

The implication is that diversification is no longer just about having a “tech allocation.” It is about diversifying within AI: by geography, by position in the value chain and by sensitivity to different macro outcomes.

Outside China, Fu argues that Asia’s appeal is partly statistical. The region is not one market; it is a set of economies with genuinely different drivers.

At an index level, Fu notes that China and India can show “low correlation…or sometimes even negative,” and that country allocation has “been adding value.” She also points to a widening set of investable themes across the region: Asian nuclear, Korean corporate reforms, Japan corporate reforms and China-specific sub-themes such as AI and high dividend – although the latter has been somewhat tested now.

This is an important counterweight to the idea that Asia is a single risk bucket. For allocators looking to rebuild breadth, the region offers a way to diversify away from the US, and also from a single macro narrative.

Guo Qingkun argues that alternatives are no longer a 'nice to have' as they were “15-20 years ago,” but have “become a must have” in institutional portfolios, and increasingly among family offices and high net worth investors as well. Even the label ‘alternative’ is becoming less accurate because the allocation has become so mainstream.

Guo frames the driving factors in two words: “diversification” and “alpha.” Public markets, he argues, have become more concentrated “in terms of the themes and geography and…the underlying investment logic,” which increases the value of uncorrelated asset classes, or less correlated asset classes. However, he does stress that diversification should not be the end goal: “The purpose of a diversification is really to achieve alpha over the long term for your portfolio.”

That long-term emphasis shapes his view of how to measure performance. “One year, three year are never time horizons that we focus on,” says Guo, pointing instead to longer-dated comparisons. He cites 20-year global private equity returns “on average…14% annual IRR,” vs. “around 10%, 11%” for the S&P 500. This is a meaningful ‘alpha gap'.

His metaphor is deliberately physical in nature: portfolio construction is like choosing an engine. A “one cylinder tractor” and a “V12 sports car” both move, but their performance is “drastically different.” Through this lens, alternatives diversify not only what you own but how returns are generated – through income, operational value creation, and different exit pathways.

When asked where demand is strongest, Guo points to infrastructure, particularly assets “backed by the long-term cash flows,” with a mix of income through dividends and an equity component where managers can drive operational improvements and growth. He also highlights renewable and energy transition investments, noting the rise of dedicated platforms focused on the theme.

Guo offers a private-markets angle on why improving public equity conditions matter, too: exits. A more functional IPO market can recycle capital, support valuations and improve fund outcomes. He describes a healthcare holding that listed during a difficult window yet still delivered strong results as an innovation-led segment took off after the listing, boosting fund-level returns.

Fu describes 2025 as “a year of many surprises,” including episodes where investors expected market damage that wasn’t as bad as feared and where rebounds came much faster than expected. Her summary is that investors are learning to operate in a world that’s full of geopolitical noise, and must focus on longer-term structural changes. AI is the most obvious example of a theme likely to matter over the medium to long term more than daily volatility.

Ng’s client lens reinforces that coping mechanism: rather than attempting to trade every twist, many institutions are hardening portfolios structurally – i.e., diversifying currencies, adding gold, expanding exposure to instruments like green bonds and revisiting their toolkit for navigating disruption. And Shi’s discipline check is simple: flows and narratives may lift prices but, over time, company fundamentals decide whether an allocation deserves a permanent place in the portfolio.

The easy version of diversification is simply to hold more assets in a portfolio. The harder version is to really understand how those line items behave together in different regimes: when geopolitics bleeds into currency markets; when AI is both a productivity driver and a concentration risk; when China’s equity story shifts from valuation repair to corporate delivery; and when alternatives must justify their place not by fashion, but by sustained alpha and differentiated return engines.

Fu summarizes the practical implication as a discipline rather than a slogan: investors can be constructive, she argues, “but you need to be in the right place … you need to be selective, need to be dynamic, and need to diversify.” Diversification is becoming broader again, but also more demanding.