This article first appeared in Forum, The Edge Malaysia Weekly on December 8, 2025 - December 14, 2025

The general view of the prospects for the new year is a benign one. Forecasters acknowledge the downside risks but feel confident that these can be contained or offset by offsetting positives. The bias to the more upbeat view is understandable because the positive drivers, such as less uncertainty over tariffs; fiscal and monetary easing across the globe; and lower oil prices are visible, whereas it is not clear how imminent or likely or impactful the downside risks will be.

The more cautious view, which we agree with, thinks that the consensus is under-appreciating that it takes time for the big dislocations of this year — geopolitical frictions, the trade war, accelerating technological changes and financial market feverishness — to produce their full consequences. It is therefore quite possible that the coming year will see some of the pressures that are building up burst and crystallise ground-breaking changes.

In what follows, we describe the dislocating developments of this year and then explain how each of them will probably precipitate major consequences.

A quick run-through of what happened this year underlines how we have experienced a series of changes with profound implications.

First, we have had to deal with two major trade shocks, not just one. The first is US President Donald Trump’s trade war on virtually every other country in the world and the second is the big surge in Chinese exports to the rest of the world outside the US. Both these changes are causing dislocations. The trade war will raise costs, reduce efficiency, force changes in the location of production facilities and encourage countries to diversify their trade and increase self-sufficiency where possible, even at the expense of higher costs. China’s massive export growth may help consumers across the world with high quality goods at good prices but they are also displacing domestic producers and local jobs while also causing countries to suffer larger trade deficits.

Second, the world is in disorder. Once a stabilising force in global politics, the US is now a destabilising one. Beyond what it has unleashed on world trade, the Trump administration has disrupted alliance structures such as Nato and its security understandings with Japan, Taiwan and South Korea. It has pulled out of global collaboration in areas such as climate change and world health, ensuring that it will be more difficult to tackle potentially existential crises in coming years. It has also threatened military action against countries such as Venezuela and demanded rights over territories which other countries have sovereignty over such as Greenland and the Panama Canal.

Third, financial markets have been feverish. Equity market valuations have soared, especially in the US. There have been signs of the late-cycle financial shenanigans that frequently presages a big financial shock. Some analysts point to recent transactions among tech firms where one invests in another which then uses the funds to order massive amounts of items from the investor company — the kind of round-tripping seen before the dot-com bust. The Bank for International Settlements, which has a good track record in assessing such risks, has cautioned against what is going on in private credit and crypto markets — noting in particular that these relatively new financial mechanisms have reached a scale that could pose a risk to overall financial stability.

Fourth, technological change has shifted into overdrive. There are several dimensions of the shifts in technology:

These are not run-of-the-mill events but game-changing ones. They will make a difference and the coming year is when these differences will become more tangible. The implications will therefore be significant.

First, we should expect several unsettling political events in 2026. For instance, Trump’s ability to avoid political damage from the controversial actions since taking office is likely to diminish as the opposition to him becomes better organised and as the ill-effects of his policies hurt voters’ livelihoods. As court cases go against him, as more of his Republican allies push back against him, as protests grow and partisan divides deepen… we expect the US to enter a period of great dissension. The implications will not just be confined to the US. An America embroiled in political troubles will be seen by rivals as weaker, encouraging them to take provocative actions they might have otherwise avoided. Such a weakened America will also have implications for the US dollar.

As a result, there will be sweeping implications, most of them discomfiting. Some countries will exploit the vacuum of power to aggressively push their own agendas in their neighbourhoods. Not able to trust the US as a reliable security guarantor, America’s allies will ramp up defence spending, diverting resources away from productive areas. Over time, what was once unthinkable — such as more countries in Asia becoming nuclear powers — will become more likely.

Beyond the US, there is unfinished business in many hot spots around the world. North Korea is enjoying its best strategic moment in decades — it probably feels emboldened to push its agenda more forcefully. Ukraine is in a parlous position but Russia, too, is suffering — something may give there. The old equilibrium in the Middle East is broken with a likelihood of more instability.

Second, expect some upsets in financial markets. With financial markets priced to perfection, it will not take much in the way of earnings or revenue disappointments for a significant correction in equity and other markets. The sharp falls in the value of crypto assets in recent days and the big losses that have caused is a warning of more to come.

Third, the surprising resilience of the US and global economies is unlikely to last. Part of that resilience was due to the overheated levels of capital spending on AI-related infrastructure. A financial correction will be a reality check that will slow such spending. It will also undermine consumer and business confidence while potentially causing large losses.

Another reason for resilience was the delayed damage from the trade war. In 2026, the tariff-related cost increases will be more apparent, with consequences for consumers and the profit margins of companies. Another vulnerability that the consensus view possibly under-estimates is the American fiscal position — a weaker US government may not be able to persuade bond markets to absorb the huge increase in bond issuance to fund its much larger budget deficit. Thus, the optimists could be right that the US economy will be helped by tax rebates and changed depreciation rules in the early part of 2026 but as the year progresses, these supports could well prove wanting.

As a consequence, there could be more monetary easing by the US Federal Reserve and other central banks than currently expected.

Fourth, expect more backlashes against the US and China in global trade. Most of the trade deals that the American administration has struck are not rigorously documented while also imposing lopsided demands on partners. As the year progresses, these flaws will lead to more disagreements over interpretations and more recriminations. As China and Brazil have shown and as Indonesia is currently attempting to do, the realisation is dawning that countries can stare down Trump’s trade war threats and hold out against unreasonable concessions to the US.

As for the Chinese export shock, over time, the political ramifications of job losses and local producers being displaced will feed a much bigger protectionist backlash against China than we have seen so far. This might then feed into greater protectionism overall.

China will then be forced to adjust its policies. We could see some degree of appreciation of its currency, while the government may consider imposing voluntary export restrictions on its own exporters so as to contain the protectionist backlash. In the longer term, China will almost certainly offer more foreign investment and Belt and Road Initiative (BRI) spending to offset concerns among countries unsettled by its export surges

Fifth, expect an acceleration of innovations as technological progress surprises on the upside.

The way technology affects economies could change in 2026:

Sixth, as the global economy re-orientates, the allocation of capital and spending by companies and governments will change.

We are already seeing changes in the patterns of trade flows. Chinese exports are diversifying away from US, sharply reducing its dependence on the US to levels not seen in a decade. At the same time, many countries are seeing new trade alliances as a defensive reaction against American protectionism. In 2026, we could see talks between large trading blocs such as the EU and the Comprehensive and Progressive Trans-Pacific Partnership to collaborate more so as to gain more independence from the US.

On another level, as the quantum of tariff levels for each country is now clearer, and as it is also clear that geopolitical tensions between the US and China won’t go away, supply chain reconfiguration will pick up pace again. We think countries in Asean are well positioned to take advantage of this trend. Already data for the first half of the year shows that while uncertainty may have slowed corporate decisions on supply chain reconfiguration, foreign investment flows into several countries in Asean have continued.

Separately, while the US and Europe have cut foreign aid, China is stepping up BRI which is now in a new and improved phase.

What the above analysis shows is that, while there are some positive factors, there are enough potential dangers in the global environment that means that Southeast Asia cannot remain complacent. The early part of 2026 may well be benign but over the course of the year, more turbulence can be expected. In this context, the critical factor that will distinguish winners from losers will be the strength of policymaking.

So far, Vietnam, Malaysia and Singapore have demonstrated that they have what it takes to respond to these challenges. These are the countries that we think will emerge better from what is likely to be a very eventful year.

Manu Bhaskaran is CEO of Centennial Asia Advisors

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.