Discipline required: PIMCO's 2026 outlook on Australia, China and Japan
Investors can find enduring opportunities amidst diverging policy across the APAC region.
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Against a fluid macro backdrop that has already thrown up surprises this early into the new year, global fixed income leader PIMCO has released its APAC Market Outlook for 2026, making the case for "disciplined, relative value investing across markets".
While it expects growth across key markets Australia, China and Japan, the bottom line is that divergent policy responses across the region will mean not all opportunities will be created equal.
"Against this backdrop, investors will need to be selective – focusing on relative value opportunities as policy paths diverge and remaining alert to shifts in interest rates, currencies, and credit conditions."
On Australia
Government spending has fuelled most of Australia's growth in recent years, but the country is slowly transitioning to private-led growth.
But PIMCO is sceptical about current policy settings delivering consumer-led above-trend growth.
One key limitation is that tax and interest payments remain elevated against household income, restricting spending.
PIMCO also believes the current cash rate (3.6%) is restrictive enough to bring inflation back to the RBA's target band of 2-3% this year, and forecasts a longer-term neutral cash rate of around 3%.
Investment opportunities
A nuanced macro environment has, however, created a "compelling" outlook for Australian fixed income, according to PIMCO:
"With the market now pricing in rate hikes for 2026 and 10-year Australian Commonwealth Government bond yields around 50 basis points higher than 10-year U.S. Treasuries, these bonds offer attractive income, diversification, and the potential for capital appreciation."
"Corporate spreads remain tight, but AA-rated Australian state government bonds, and AAA-rated residential mortgage-backed securities (RMBS)/ asset-backed securities (ABS) are trading at the wider end of historical ranges, offering scalable, high-quality spread alternatives."
On China
China is expected to maintain 4-5% growth in 2026, according to PIMCO, and should continue to expand its share of global exports.
Domestic demand should remain low, with retail sales "losing momentum" and infrastructure activity slowing. Inflation should stay subdued, with China's anti-involution policy having deflationary effects across the domestic economy.
But China will continue to have a marked impact on the APAC region, with soft export prices limiting inflation but its "slow progress on consumption rebalancing and its focus on domestic technology development will continue to shape regional dynamics."
Investment opportunities
Given China's monetary loosening and subdued inflation, PIMCO suggests the near-term outlook for Chinese bonds is positive, especially on longer-dated government securities, amid subdued inflation and continued monetary easing.
Another upshot could be a strengthening renminbi, which would have implications across the Chinese economy.
"A strong current account and return of capital flows should support a gradual rise in the renminbi (RMB) against the U.S. dollar and other key trading partners, with the PBOC likely to manage the pace to maintain broader stability."
"While a stronger RMB may increase consumers’ purchasing power, it is unlikely to drive a meaningful rise in consumption, and its side effects could squeeze corporate margins and exacerbate employment challenges."
It means a conditional outlook for risk assets, contingent on economic growth and macro pressures.
"If efforts to stimulate domestic demand gain traction, conditions for a rally in credit and equities can be sustained. Conversely, a renewed property downturn and tariff pressures would weigh on risk assets."
On Japan
10-year Japanese Government Bonds (JGBs) are now above 2% for the first time in 30 years, with inflation also stabilising around the 1.5-2% range.
PIMCO expects yields to stay around these levels provided economic growth is modestly above-trend and inflation stays below 2%.
The Bank of Japan could raise the policy rate by 25-50 basis points, but a weaker yen or pick up in inflation could lead to prompter policy rate hikes.
On the other side, the Takaichi administration's fiscal expansion presents another risk to JGB yields, as would a global equities correction.
Investment opportunities
After years of low yields, attractive opportunities in Japanese fixed income are emerging.
"We can construct portfolios which now provide the potential for total income return of above 3% in yen terms by selecting maturities, sectors, and securities, while maintaining duration risk and credit quality comparable to broad Japanese bond benchmarks. Such portfolios should become increasingly appealing to local investors, even with inflation near 2%."
"Higher yields also offer potential for capital gains if interest rates fall and can serve as a hedge against economic shocks, stock market volatility, or a sharp yen appreciation."
For global investors, currency-hedging costs can also offer additional yield compared with global peers, with PIMCO favouring longer-term government bonds.
"We maintain a preference for the long end of the curve, such as 30-year JGBs. While concerns about fiscal risks persist, the steepness of the yield curve and incentives for the Ministry of Finance to limit long-end issuance support this positioning."
"By contrast, intermediate maturities appear more vulnerable, particularly in scenarios of yen weakness or accelerating inflation."
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Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance.
He has previously worked at Finder, FourFourTwo and Man Of Many covering everything from film to football.
He has a Masters in Media Production and a Bachelor's in Journalism.
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Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance. He has previously worked at Finder, FourFourTwo and Man Of Many covering...
Expertise
Tom is a Senior Investment Writer and Presenter at Livewire Markets, having worked as a writer and editor for 10 years, specialising in investing and personal finance. He has previously worked at Finder, FourFourTwo and Man Of Many covering...
Expertise
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