Asian equities 2H outlook: Opportunities shaped by policies, valuations and AI

Asian equities supported by AI boom, positive policies, strong earnings, appealing valuations
Taiwan, South Korea index weightings up on supply chain positioning, market pricing readjustment
Japan and South Korea corporate reforms, Singapore liquidity-boosting policy lift market sentiment

In the first half, Asian equities remained resilient against the backdrop of a fluctuating external market and heightened geopolitical risks. In the second half, Asia's stock market is expected to be supported by the confluence of persistent AI investment, favourable policies, improving corporate profitability, and compelling valuations in select markets.

Notably, Asia's investment focus is shifting, with opportunities becoming increasingly diverse. The weightings of both Taiwan and South Korea in the Asian index have been steadily climbing: Taiwan's has surpassed that of China, while South Korea's has nearly doubled over the last 12 months, reflecting the combined impact of corporate profitability, supply chain positioning, and a readjustment of capital market pricing.

AI: a key driver of market sentiment

Earnings of AI-related companies remain robust, while infrastructure investment also continues to boom. AI capex by just four major US tech giants is estimated to reach US$620 billion in 2026. This massive investment is translating into revenue for Asia's technology supply chain. Taiwan's exports to the US are now US$200 billion higher than in 2022. More than 90% of global high-end semiconductors are manufactured in Taiwan, which also leads the market in server assembly and downstream Outsourced Semiconductor Assembly Test (OSAT). South Korea dominates global memory supply. Its pricing power is underscored by the 200%-plus surge across DRAM and flash prices. On the other hand, Japan demonstrates competitiveness in the semiconductor manufacturing equipment and optics sectors. Building on these strengths, Asian companies continue to benefit from the spillover effects of AI capex. The momentum of upward earnings revisions across tech and certain cyclical sectors is likely to persist. The region's appeal is gradually shifting from being merely 'cheap' to offering both growth and attractive valuations.

Local policies: another driving force for Asian equities

South Korean equities have long been undervalued. To narrow the 'Korean Discount', the authorities implemented the Value Up corporate reform to enhance minority shareholder rights and corporate governance. Buoyed by government-led AI investment and defence budget initiatives, earnings and valuations of South Korean companies continue to be revised upward. The local stock market has surged more than 80% this year, yet the 12-month forward P/E remains at only about 7x.

Japan started its corporate reform years ago, with the unwinding of cross-shareholdings being one of the key measures. More recently, Japan is about to further amend the corporate governance code to encourage companies to invest for growth, while emphasising greater capital allocation efficiency and the oversight role of boards of directors. However, investors should be mindful of Japan's monetary policy trajectory. Weakness in the Japanese yen is driving up import costs. Should the Bank of Japan continue on its rate-hike path, a higher interest rate environment may dampen business confidence.

In mainland China, the authorities are boosting market liquidity through monetary and fiscal measures, with a focus on growing domestic demand across areas including consumption, investment, and the new economy. Although the structural economic transformation is still underway, with the traditional segments remaining lacklustre, the growth contribution from the new economy, including technology, renewables, and advanced manufacturing, has more than offset the drag from the old economy since 2024.

Turning to Southeast Asia, Singapore is also implementing policies to rejuvenate its capital market. Through asset managers, local monetary authorities are investing in the country's stock market to boost liquidity and foreign participation, in a move to address the market's long-standing undervaluation.

All in all, Asian equities are gradually coming together as an investment pool supported by AI, favourable policies, and attractive valuations. Asia's stock market is supported by a slew of positive factors. Despite short-term fluctuations, the overall trajectory remains positive. The market also has strong depth and breadth, offering investors a broad selection of opportunities to diversify risk.