DBS Bank’s Chief Investment Office ( CIO ) has released its 1Q2026 investment outlook, cautioning that the global economy is entering a structurally new phase, defined by fiscal dominance, sticky inflation, and unprecedented capital expenditure cycles in artificial intelligence ( AI ) and defence.

In what the bank calls “The Long Game”, DBS outlines a nuanced but assertive stance for investors, saying real assets, quality credit, and selective equity exposure are crucial as the investment landscape recalibrates to longer-term structural shifts.

At the heart of the bank’s view is a clear caution that the United States, with its persistently rising deficits and debt, is seeing fiscal concerns overshadow traditional monetary policy, challenging the Federal Reserve’s independence. The bank’s CIO highlights that the absence of a disciplined fiscal framework could rekindle inflation and force markets to reprice risk significantly.

“This is not a theoretical concern,” the report notes. “Real assets, like infrastructure, real estate, commodities, and precious metals, have historically delivered resilience during inflationary regimes. In 2026, they are not just a hedge, but a strategic imperative.”

Yet the inflation story is only one side of the coin. Despite rising cost pressures, DBS sees a robust capex super cycle unfolding, driven by AI infrastructure and defence commitments.

Dotcom bubble redux?

Hyperscale data centre investments alone are projected to reach US$1.4 trillion from 2025 to 2027, while NATO defence budgets are climbing towards 5% of GDP by 2035. These represent structural, not cyclical, tailwinds, redrawing global industrial and technological boundaries.

However, while AI continues to dominate investor sentiment, the bank flags familiar warning signs, namely stretched valuations, circular financing arrangements, and high-beta exuberance reminiscent of the late 1990s.

“We don’t believe this is another dotcom bubble. But we also don’t think you can afford to be complacent,” the report states.

The rise of companies funding each other’s growth demands scrutiny, as it introduces systemic risk reminiscent of past speculative cycles.

DBS also challenges the case for holding cash. With central banks easing liquidity taps and recession risks low, cash’s purchasing power is under threat. Instead, the CIO calls for a four-pronged tactical approach: ride the AI wave through efficiency-driven adapters; lean into real assets for inflation protection; unlock value in Asia ex-Japan; and stay in quality equities and investment-grade credit.

Gold for fiscal fragility

Asia ex-Japan equities are compelling. DBS says the region trades at a steep 32.4% discount to developed markets, while earnings growth is forecast at 18.9% in 2026. A softer US dollar, with the DXY expected to hit 94.8 by 4Q26, further enhances the case for capital flows into Asia.

On the fixed income side, the report maintains its preference for investment-grade credit, especially within the A/BBB five-seve-year segment, over high-yield debt. Spreads remain tight, but corporate balance sheets are healthy, and recession risk is subdued, favouring carry strategies without overstretching risk exposure.

In alternatives, commodities and gold remain in favour. Gold, in particular, is seen as a beneficiary of fiscal fragility, with demand supported by central banks and ETF flows.

Private credit, however, has been downgraded to neutral due to compressed spreads and diminishing liquidity premium. Hedge funds and beta-neutral strategies offer better positioning for the current environment.

In a closing note, DBS urges investors to differentiate between structural opportunities and speculative noise. “In extraordinary times like these, portfolio resilience is not built on prediction, but on positioning,” it stresses.