Key Benchmarks Performance
Global equity markets delivered a highly divergent performance through the first three quarters of 2026, with the dominant theme remaining the continued expansion of the artificial intelligence investment cycle. While technology and semiconductor-related markets generated exceptional returns year-to-date, September and the third quarter revealed increasing signs of consolidation, profit-taking, and a gradual rotation into defensive and value-oriented sectors.
The U.S Philadelphia Semiconductor Index surged 9.5% during the month, recovering strongly from its sharp third-quarter correction and reinforcing investor confidence in the long-term demand outlook for AI infrastructure, advanced chips, data centers, and high-performance computing. Taiwan’s TAIEX gained 3.9%, supported by continued earnings optimism for semiconductor foundries, AI server manufacturers, advanced packaging providers, and related supply chain companies. The NASDAQ Composite Index also advanced 1.9%, reflecting resilience among large-cap technology leaders, although gains were more measured compared with semiconductor stocks. Brazil’s IBX Index was another notable outperformer, rising 4.9% as investors responded positively to improving domestic fundamentals and relatively attractive valuations.
In contrast, September weakness was concentrated in some other emerging markets and more cyclical economies. Indonesia’s Jakarta Composite declined 7.0%, making it the weakest major market during the month, while India’s Sensex fell 5.8% as investors took profits following several years of exceptional performance and increasingly questioned elevated valuations. The Philippine market lost 4.6%, while Malaysia’s KLCI fell 4.3%.
Looking at the third quarter as a whole, market leadership broadened beyond the technology sector. Singapore delivered the strongest quarterly performance with a gain of 9.8%, benefiting from strength in financials, real estate investment trusts, and dividend-oriented sectors. Brazil gained 8.2%, while Hong Kong and Indonesia both advanced 7.6%. In the United States, the S&P 500 Healthcare Index rose 6.5%, outperforming the broader S&P 500 and highlighting a shift towards defensive positioning as investors became more selective following the strong gains registered earlier in the year.
The most notable feature of the third quarter was the sharp correction in several AI-related markets. The Philadelphia Semiconductor Index fell 11.4%, while South Korea’s KOSPI declined 19.3%, making it one of the weakest performers globally. These declines were largely driven by profit-taking after extraordinary gains during the first half of the year rather than a fundamental deterioration in earnings prospects. Investors increasingly debated whether the pace of AI-related capital expenditure could be sustained indefinitely and whether semiconductor valuations adequately reflected future growth expectations. Nevertheless, the strong rebound in semiconductor shares during September suggests that the market continues to view AI as a structural rather than cyclical investment theme.
China-related markets presented a mixed picture. Hong Kong recovered 7.6% during the third quarter, yet remained negative year-to-date. Meanwhile, China Shanghai Composite Index declined 6.2% over the quarter and 3.2% year-to-date, indicating that investor confidence in a sustainable Chinese economic recovery remains limited. Ongoing concerns surrounding property market weakness, subdued domestic demand, and sluggish business sentiment continued to weigh on mainland equities despite periodic policy support measures.
Year-to-date performance provides the clearest illustration of the dominant investment trends of 2026. Semiconductor and AI-related assets remained the undisputed winners. The Philadelphia Semiconductor Index generated a remarkable return of 78.3%, making it the strongest-performing major benchmark in the dataset. Taiwan followed closely with a gain of 65.5%, reflecting its pivotal role within the global AI supply chain. South Korea advanced 62.3%, driven primarily by the recovery in memory chip manufacturers and broader technology exports. These performances highlight how global capital has become increasingly concentrated in markets directly exposed to AI infrastructure spending and next-generation computing technologies.
The NASDAQ Composite Index advanced 15.6% year-to-date while the S&P 500 gained 11.8%, suggesting that returns have become increasingly concentrated within a relatively small group of technology leaders rather than being broadly distributed across all sectors.
Across Asia, while Taiwan and South Korea ranked among the world’s strongest performers, India, Malaysia, the Philippines, Hong Kong, and China all remained in negative territory. Indonesia was the weakest major market globally with a year-to-date decline of 29.8%, reflecting softer commodity demand, foreign capital outflows, and concerns over economic growth. India’s 14.9% decline marked a significant reversal from its strong performance in recent years and suggested that investors increasingly rotated toward markets offering greater exposure to AI-related growth themes.
Hong Kong MPF Performance by LGC Analysis
In September, Equity Korea was the strongest-performing LGC, gaining 1.4%, supported by renewed optimism toward semiconductor earnings and AI-related hardware demand following the sharp correction seen earlier in the quarter. Equity Japan (+0.1%) also remained resilient, while Equity US (-0.3%) outperformed most global equity categories as strength in mega-cap technology and AI beneficiaries helped cushion broader market weakness. Equity Asia Pacific ex-Japan (-0.6%) similarly benefited from the resilience of Taiwan and regional technology-related sectors.
Most China-related equity categories of Hong Kong MPF were underperforming, with Equity China (-3.9%), Equity Hong Kong (-3.4%), and Equity Greater China (-2.2%) all posting significant losses. Investor sentiment remained subdued amid ongoing concerns surrounding weak consumer spending, property market challenges, and an uneven economic recovery. European equities also struggled, with Equity Europe declining 3.6%, as slowing economic activity and relatively limited exposure to the global AI investment theme continued to weigh on market performance.
Fixed income markets were similarly challenged. Bond Global LC and Bond Asia Pacific HC both declined 2.2%, while Bond HKD fell 1.7%. The broad weakness across bond sectors suggests that fixed income markets continued to face headwinds from interest rate uncertainty and yield volatility, limiting their traditional role as a defensive offset to equity weakness. Mixed asset strategies also posted negative returns, with Mixed Asset HKD Aggressive (-1.7%) and Mixed Asset Other Flexible (-0.8%) reflecting the combined drag from both equity and bond market declines.
The positive returns delivered by Money Market CNY (+0.2%), Money Market Other (+0.2%), and Money Market HKD (+0.1%) highlight investors’ growing preference for liquidity and capital preservation during the month. The fact that money market funds outperformed most bond and equity sectors underscores the defensive positioning adopted by investors amid heightened market uncertainty.
The year-to-date LGC performance landscape has been overwhelmingly dominated by equity markets, particularly those with strong exposure to the global artificial intelligence and semiconductor investment cycle. The dispersion between the best and worst-performing classifications has been exceptionally wide, highlighting one of the most polarized market environments in recent years. While technology-oriented Asian equity markets generated substantial gains, China-focused equities and most fixed income categories lagged significantly.
The standout performer was Equity Korea, which surged 74.0% YTD, making it the strongest-performing classification by a considerable margin. Korea’s exceptional performance was driven by the recovery in memory semiconductor pricing, robust AI-related demand, and strong earnings growth from major technology exporters. Despite experiencing a sharp correction during the third quarter, Korean equities remained among the largest beneficiaries of the AI infrastructure buildout, particularly through exposure to memory chips, advanced electronics, and data center components.
Asia remained the clear regional leader. Equity Asia Pacific gained 35.4%, while Equity Asia Pacific ex-Japan advanced 25.5%, reflecting the powerful performance of technology-heavy markets such as Taiwan and Korea. Investor capital continued to gravitate toward markets deeply integrated into global semiconductor and AI supply chains, benefiting not only chip manufacturers but also companies involved in AI servers, advanced packaging, networking equipment, and high-performance computing infrastructure.
Equity Japan delivered a strong 19.9% return, supported by corporate governance reforms, improving profitability, and growing participation in the global technology supply chain. Japanese companies benefitted from both domestic restructuring efforts and increasing demand for industrial automation, electronic components, and semiconductor-related equipment. The strong performance also reflects continued international investor interest in Japan as a diversified alternative within Asia.
Global developed markets posted more moderate but still respectable gains. Equity Global rose 12.5%, while Equity US gained 11.6%. Although U.S. technology giants remained key earnings drivers, returns were relatively concentrated within a limited number of large-cap AI beneficiaries. The broader U.S. market experienced slower growth as investors became increasingly selective, favoring companies with clear exposure to artificial intelligence, cloud computing, and digital infrastructure spending. The gap between technology leaders and traditional sectors widened throughout the year, reflecting the market’s strong preference for structural growth opportunities.
Multi-asset strategies generally produced positive results. Mixed Asset HKD Aggressive returned 8.3%, while Mixed Asset HKD Balanced and Conservative gained 6.6% and 1.6%, respectively. Performance largely reflected the extent of equity exposure, with more aggressive allocations benefiting from the strong rise in global equity markets. Similarly, Target Maturity Other delivered 7.0%, supported by income generation and relatively stable market conditions through much of the year.
Fixed income performance was considerably weaker. Bond Asia Pacific LC gained only 1.7%, while Bond CNY was essentially flat at 0.0%. More global and higher-yield-oriented bond strategies remained under pressure, with Bond Asia Pacific HC declining 2.3% and Bond Global LC losing 2.5%. Bond markets faced persistent challenges from interest rate uncertainty, elevated government borrowing needs, and fluctuating inflation expectations. As a result, fixed income failed to provide the level of returns achieved by equity markets and, in some cases, struggled to serve as an effective diversification tool.
The weakest-performing equity classifications were concentrated in China-related markets. Equity China declined 6.5%, making it the poorest-performing equity category, while Equity Hong Kong fell 3.2%. Investor sentiment remained constrained by concerns over economic growth, weak consumer confidence, property-sector challenges, and limited earnings momentum. Although policy stimulus measures helped prevent deeper declines, they were insufficient to generate sustained investor confidence or attract significant foreign capital inflows.
Outlook
Hong Kong’s economic outlook has improved noticeably during 2026, supported by a recovery in external trade, stronger financial market activity, improving tourism flows, and a gradual rebound in domestic demand. Following stronger-than-expected growth in the first half of the year, the Hong Kong Government upgraded its 2026 GDP growth forecast to 3.5%-4.5%, supported by robust exports, resilient consumption, and improving investment activity. Real GDP expanded 4.3% year-on-year in Q2 2026, while merchandise exports surged significantly on the back of strong demand for AI-related products and electronics.
A key driver of Hong Kong’s recovery has been its role as a regional trade and financial hub benefiting from the global AI investment cycle. Export growth has been exceptionally strong, particularly in electrical machinery, semiconductors, telecommunications equipment, and other technology-related products. Hong Kong’s trade sector has benefited from rising global demand for AI infrastructure and electronics, while deep integration with Mainland China’s manufacturing supply chain continues to support re-export activity. Government projections suggest external trade will remain a major growth engine into 2027 as global demand for AI-related products remains robust.
The financial sector has also re-emerged as an important growth pillar. Hong Kong remains one of the world’s leading financial centres, ranking among the top global destinations for IPO fundraising and cross-border wealth management. Strong southbound investment flows from Mainland China, increasing capital market activity, and continued development of Stock Connect and Wealth Management Connect programmes have enhanced Hong Kong’s position as the preferred gateway between China and international investors. Improved market sentiment and lower interest rates have also contributed to a recovery in equity market activity and fundraising demand.
Tourism and services exports are expected to provide additional support. Visitor arrivals have continued to recover, supported by improved cross-border mobility, major events, and government initiatives designed to boost tourism and consumption. Tourism-related industries, including retail, hospitality, transportation, and food services, have all shown signs of improvement, helping offset weaknesses seen in previous years. Further expansion in visitor arrivals from Mainland China and other regional markets is expected to support service-sector growth into 2027.
Nevertheless, several structural challenges remain. Consumer spending recovery has been uneven as residents continue to shift spending towards Mainland China and overseas destinations. Retail sales have improved but remain below pre-pandemic trends in certain segments. In addition, Hong Kong’s labour market has softened slightly, with unemployment rising close to 4%, reflecting ongoing structural adjustments as traditional sectors face pressure while new economy sectors continue expanding.
The property market remains another area of concern. Although lower interest rates and improved financial market sentiment have helped stabilize housing conditions, substantial residential and commercial property supply continues to dampen price recovery. The office market also faces challenges from elevated vacancy rates despite stronger demand from financial institutions and Mainland Chinese enterprises. Most analysts expect a gradual rather than rapid recovery in real estate activity.
Looking ahead, Hong Kong is well positioned to benefit from several long-term structural themes, including AI-driven trade growth, deeper integration within the Greater Bay Area, growing offshore RMB business, wealth management expansion, and increased connectivity between Mainland and international capital markets. However, risks remain from global economic uncertainty, geopolitical tensions, slower growth in Mainland China, and the possibility that global technology investment moderates after its recent surge.
