Breaking
In 2025, major central banks officially exited the post-pandemic tightening cycle and entered a rate-cutting phase. The Federal Reserve lowered the federal funds rate target range by a total of 75 basis points to 3.50%—3.75% for the year; the European Central Bank, the Bank of England and other developed-market central banks followed suit, shifting global liquidity from tight to accommodative. Moving into 2026, geopolitical conflicts and a temporary inflation rebound briefly raised concerns that the easing process could be interrupted. However, as the second-round effects of the oil shock fade and core inflation gradually declines, the window for global central bank rate cuts is likely to reopen in the second half of the year. For investors, understanding the underlying logic of this liquidity restructuring and adjusting asset allocation accordingly will be the key to determining full-year returns.
I. Global Monetary Policy: From Divergence Back to Easing
Global monetary policy is currently characterized by "divergent timing but a common easing direction." Since its first rate cut in September 2025, the Fed has chosen to "hold steady" in the first half of 2026, mainly out of caution regarding inflation resilience and the balance of the labor market. Fed Chair Jerome Powell has repeatedly stated that the current policy stance is appropriate and that the Fed will reconsider the rate-cut path only after seeing clear evidence of a sustained decline in core inflation. The market generally expects that if energy prices stabilize and services inflation cools in the second half of the year, the Fed may resume rate cuts of 25—50 basis points in the fourth quarter.
The European Central Bank has moved further and faster. To address weak euro-area economic growth, the ECB has cut the deposit facility rate four consecutive times since early 2026, from 3.00% to 2.00%, and hinted at further easing room if inflation continues to fall. The Bank of Japan is the main exception: after decades of ultra-loose policy, the BOJ has gradually exited negative interest rates since 2024, raising the policy rate to 0.75% in 2025, the highest level in nearly 30 years, and its monetary policy normalization continues.
In China, the central bank maintains a "moderately loose" monetary policy stance, using reserve requirement ratio cuts, interest rate reductions, and structural tools to keep liquidity reasonably ample. Against the backdrop of the global rate-cutting trend, China-U.S. yield differentials are expected to ease, providing more favorable conditions for the RMB exchange rate and cross-border capital flows.
II. Asset-Pricing Logic in a Rate-Cut Cycle
The impact of a rate-cut cycle on asset prices is not linear; it depends on the "reason" and "pace" of the cuts. If rate cuts are driven by falling inflation and a soft economic landing, risk assets usually benefit; if they stem from recession fears, safe-haven assets may outperform. The market currently leans toward the former scenario: global growth has slowed but not collapsed, corporate earnings remain resilient, and this provides fundamental support for equities.
From a capital-flow perspective, a weaker U.S. dollar typically benefits non-dollar assets. In 2025, the dollar index fell by around 9%, and global capital shifted from "unipolar suction" toward the United States to a more multipolar distribution. Europe, Japan, and China have all seen rising appeal, with capital inflows increasing. For emerging markets, lower dollar funding costs and improving risk appetite help ease external debt pressures and support stock and bond performance.
At the same time, non-interest-bearing assets such as gold are highly negatively correlated with real interest rates. When rate-cut expectations rise and real rates fall, the opportunity cost of holding gold declines. Combined with geopolitical risks and the "de-dollarization" trend, precious metals retain medium- to long-term allocation value.
III. Asset-Allocation Recommendations
Based on the above analysis, second-half allocation should follow the principle of "balancing offense and defense while respecting structure and timing."
Equities: Chinese stocks remain a relatively attractive direction. A-shares and Hong Kong stocks trade at reasonable valuations, with clear themes including AI, advanced manufacturing, and new energy. Resident deposits moving into the market and the return of foreign capital also support the medium-term outlook. For U.S. equities, high valuations and slowing growth are constraints; a market-weight rather than overweight position is advisable, focusing on large-cap tech stocks with robust free cash flow.
Fixed income: U.S. Treasuries offer allocation value as rate-cut expectations build in the second half, but investors should still wait for confirmation that inflation has peaked. Chinese government bond yields are already near historic lows, with limited coupon protection, making them more suitable as a portfolio stabilizer. Investors can modestly increase exposure to high-grade credit bonds and convertible bonds to improve portfolio yield elasticity.
Commodities and alternatives: After a phase of correction, gold has entered a medium-term accumulation zone and can be added on dips. Crude oil and industrial metals are heavily influenced by geopolitical and supply-demand disruptions, making them more suitable as tactical allocations. REITs and dividend-yielding assets can also provide stable cash flows in a low-rate environment.
IV. Risks and Outlook
Key risks to watch include: an escalation of geopolitical conflicts pushing up oil prices and inflation, delaying central bank rate cuts; widening U.S. fiscal deficits and debt expansion undermining dollar confidence; and renewed global trade frictions disrupting supply chains and corporate earnings.
Overall, global liquidity is expected to gradually emerge from the fog in the second half of 2026, and the resumption of the rate-cut cycle will create a new opportunity window for risk assets. Investors should maintain strategic discipline, optimize portfolio structure amid volatility, focus on Chinese equities, gold, and high-dividend assets as core themes, while retaining adequate liquidity to respond to unexpected risks.
