Q3 2026 Equity Outlook: Twin Engines of Growth: How AI and Local Policy are Fueling Asian Equities

Amid oil supply shock, market resilience is stronger than expected; world economic outlook remains positive
Persistently robust AI investment boosts Asian equities; South Korea, Taiwan top beneficiaries
Favourable policies from China, South Korea, Japan, and Singapore also support the market
Indian equities unattractive: Lack of AI exposure, lofty valuations

While geopolitical tensions initially sparked grave concerns over oil supplies, the global market has adapted much better than expected. The conflict has dampened world economic growth, though the extent is limited. Following the signing of an interim memorandum, near-term developments remain fluid, but all parties have very little incentive to escalate further. While volatility is inevitable, the broader macro outlook remains optimistic.

Among the major economies, the US economy demonstrates the greatest resilience. While Asia's dependence on oil imports leaves it more exposed at the macro level, the war has not derailed the performance of the region's risk assets. Driven by robust AI demand and market-supporting policies across China, South Korea, Japan and Singapore, global investors maintain a constructive stance towards Asian equities.

South Korean and Taiwanese equities benefited from AI technology

The 2026 AI capex for just four US tech giants are projected to be US$620 billion, representing a 75% increase year-on-year. This massive investment - funded primarily through debt and internal cash flow - translates into revenue for Asia's technology supply chain. The lion's share of related hardware, including GPUs, memory, servers, networking, and cooling equipment, is produced or assembled in Asia, driving business growth. Despite already having notched sharp gains, Asian technology stocks are supported by robust earnings growth. Their average valuations sit roughly 40% below those of their US peers, while maintaining a clear uptrend.

Within Asia, Taiwan and South Korea are the top beneficiaries due to their tight connections with hyperscaler data centres. Taiwan's exports to the US have skyrocketed by US$200 billion compared to 2022. The island not only supplies more than 90% of global high-end chips but also leads the market in server assembly and downstream Outsourced Semiconductor Assembly Test (OSAT). This technological edge has propelled Taiwan's weighting in the MSCI Emerging Markets Index from 19% in 2024 to today's 25%, making it the index's largest component.

South Korea is the global leader in memory semiconductors, where red-hot demand has driven DRAM and flash memory prices surging over 200% this year, underscoring strong company pricing power. Technological momentum has boosted South Korea's weighting in the index to 21%, doubling within a year. Beyond the AI investment theme, rising global defense budgets have also fuelled South Korea's defence industry. Concurrently, government-led corporate reform is narrowing the 'Korean discount' by enhancing minority shareholder rights and corporate governance. Collectively, these factors are driving sustained foreign inflows. Even as the market is hitting new highs, a Forward P/E ratio of just 7x means valuations remain compelling.

Source: Bloomberg, as at 6 June 2026

Contributions from China's new economy offset drag from old economy

Mainland China continues to navigate a structural economic shift. Although central and local governments have repeatedly introduced policies to prop up the property market, home sales and prices remain lacklustre. While real estate and traditional consumption from the old economy lose momentum, the new economy is gaining traction. Since 2024, growth contributions from emerging industries of technology, renewables, advanced manufacturing, electric vehicles, batteries, and chips, have more than offset the drag from the old economy. While macroeconomic data remain mixed, ample market liquidity and supportive domestic policies are giving global investors a reason to stay invested in the mainland market. Additionally, even though China's energy sector is closely tied to the Middle East, the economy remains considerably insulated from oil supply shortage.

Japan likely to maintain its rate hike trajectory

Among Asia's key economies, Japan exhibits the highest sensitivity to energy shocks due to its near-95% reliance on oil imports from the Middle East. To help tackle the energy crisis, the Japanese government has approved a US$19 billion supplementary budget. Elevated oil prices and a persistently weak yen have increased import costs and inflationary pressures. In May, Japan's Producer Price Index rose 6.3% year-on-year, sharply exceeding market expectation's 5.5%. While this trend reinforces the Bank of Japan's rate hike trajectory, real interest rates remain relatively low, meaning that the impact on corporate interest expenses will remain limited.

Much like South Korea, Japan is capitalising on the AI boom through its supply chain that encompasses critical areas including semiconductor manufacturing equipment, optics, and high-speed transmission cables. Furthermore, Japan's corporate reform began well ahead of South Korea. By raising dividends and maintaining share buybacks, Japanese companies continue to enhance shareholder returns and improve capital efficiency.

Singapore's policy drives liquidity

Singapore's listed companies have long been undervalued due to liquidity shortage and low foreign participation. Beyond large-scale banks and select REITs, many small- and mid-cap stocks remain largely overlooked. To rejuvenate and deepen the capital market, local authorities launched the SGD5 billion Equity Market Development Programme. Under the initiative, the Monetary Authority of Singapore allocates capital to the local stock market via major asset managers, a move that aims to enhance market liquidity and encourage foreign participation.

Indian equities: high valuation, lack of AI exposure

Across major emerging markets, India commands the highest valuation, with a 12-month forward P/E ratio of nearly 22x, while lacking earnings growth engines. Furthermore, the lack of representative AI exposure has dimmed India's allure amid the current technology frenzy, sapping foreign inflows. Although first-quarter economic growth reached 7.8%, it has yet to reflect the full impact from elevated oil prices. With India relying on imports for roughly 90% of its crude supply, domestic oil companies have repeatedly raised prices since May to pass through these higher costs. This led to a 3.93% year-on-year rise in May inflation, accelerating from April's pace. Early on, India has already reduced the GDP growth forecast for the fiscal year ending March to 6.6% from 6.9%, while upwardly revising the inflation outlook by 50 basis points. The market is maintaining a close watch on the underlying challenges facing India's macroeconomic and consumption outlook.

Conclusion

Looking ahead, although world geopolitics remain characterised by uncertainties, the market is demonstrating immense resilience. Global economic growth has only been mildly affected, leaving the broader macroeconomic profile intact. Driven by the twin engines of the AI boom and favourable domestic policies, the fundamentals of Asia's risk assets remain solid, and this positive momentum is likely to extend further.