Rising budget deficits are changing expectations regarding US monetary policy: investors are increasingly convinced that ‘fiscal dominance’ — the pressure on central banks to keep interest rates low in order to ease the burden of public debt — will shape the next phase of global markets.
At the Swiss Chamber of Commerce in Hong Kong’s Economic Outlook – Special Edition 2026, speakers warned that the Federal Reserve’s credibility depends on how it manages inflation, energy shocks and political pressures.
Martin Hennecke, Head of Asia Investment Advisory at St. James’s Place Wealth Management, echoed the warning issued by former Fed Chair Janet Yellen: the conditions for fiscal dominance are clearly becoming more pronounced. He explained that deficits are now so large that the Fed might prioritise reducing debt servicing costs over fighting inflation, risking negative real interest rates and an erosion of purchasing power.
Antony Creighton, director and head of Strategy (Asia excluding Japan) at Lazard Asset Management, echoed this concern. Whilst acknowledging that geopolitics dominates the headlines, he noted: “If we filter out the background noise, the strongest signals we are receiving relate to budget deficits.”
Bassam Salem, moderator and chairman of SwissChamHK’s Finance and Banking Council, joked that “three is the new two”, referring to the fact that the Fed seems comfortable with inflation at 3 per cent rather than its traditional 2 per cent target — a sign of greater tolerance in monetary policy.
However, Dong Chen, Chief Investment Officer for Asia at Bank J. Safra Sarasin, believes it is unlikely that Fed Chair Kevin Walsh will bow to political pressure at the expense of credibility. In his view, Walsh’s stance against fiscal dominance suggests he will remain focused on inflation, even if further rate rises are not imminent.
Bonds, shares and alternative assets
The panel agreed that equity markets still offer selective value, whilst bond markets face structural headwinds. Creighton highlighted Lazard’s strategy of “staying close to companies and away from governments”, reflecting scepticism about the sustainability of sovereign debt. Hennecke warned that deficits in the US and the eurozone could take precedence over traditional anti-inflation mandates, making government bonds less attractive despite yields of 45 per cent.
Gold has emerged as a safe-haven alternative. Chen pointed out how the confiscation of Russian assets in 2022 triggered a decoupling between gold prices and US real interest rates, prompting emerging markets to repatriate reserves for fear of US financial sanctions. Creighton described the move as ‘behavioural’, reflecting reduced trust in Western custodians rather than an economic necessity. Bitcoin was also cited as part of diversification, albeit with warnings about its volatility.
Shares remain more attractive than bonds thanks to their greater resilience in inflationary environments, but the risks of bubbles in AI and technology call for caution. The enthusiasm surrounding technology and artificial intelligence — SpaceX’s record-breaking IPO, which briefly made Elon Musk a ‘trillionaire’, has been cited as an example of inflated valuations.
Salem noted that SpaceX is trading at nearly 100 times its revenue, well ahead of Apple (10) and Nvidia (14). Eva Lee, Head of Greater China Equities at UBS Global Wealth Management CIO, warned that investors are now demanding monetisation from AI model developers, rather than growth at any cost, shifting their focus to semiconductor supply chains and equipment manufacturers with tangible demand.
Lee added that Chinese hyperscalers such as Alibaba are struggling because their core businesses face intense competition and slim margins, preventing them from matching the profitability of their American rivals.
Creighton warned against claiming that “this time is different”, but acknowledged that, whilst AI model developers may be in bubble territory, established companies with profits remain sound. Hennecke highlighted China’s rapid progress in high-tech exports as a competitive threat to South Korea and Taiwan, suggesting that US IPO valuations could be vulnerable to global competition.
Opportunities for diversification
Despite weak consumption, Chen argued that Chinese consumer staples offer diversification benefits, with a correlation of just 0.15 against the S&P 500 over the last 15 years. Hennecke added that household savings in China remain substantial, which could lead to an unexpected rebound in spending.
Both saw value in sectors long dismissed as ‘dead’, such as property and consumer goods, which could offer contrarian opportunities. Lee pointed out that Chinese exports of semiconductor equipment are underpinning GDP growth despite weak domestic demand, highlighting the ‘K-shaped’ nature of the economy.
The speakers also touched on private markets and capital controls. Lee noted that the restrictions on outbound investment imposed by Beijing are holding back Chinese insurers and property buyers in Hong Kong, thereby reducing liquidity in the property market.
Salem noted that investors from mainland China are struggling to move funds abroad due to the annual cap of 50,000 US dollars, creating opportunities for local buyers. Chen suggested that private markets could benefit from diversification, particularly in Asia, where consumer and biotech sectors could re-emerge after years of neglect.
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