Rediscovering the allure of Asia
2025 was a banner year for Asian stock exposure particularly Chinese technology, Taiwanese semiconductors, Japan and South Korea. Despite strong performance from each of these Asian stock segments, foreign investors remain underexposed to Asian stock markets in favour of the US. In addition, Asian equities have shown large underperformance to US equities since 2009.
Corporate governance reforms with a consequent improvement in profitability and shareholder returns have been very evident in Japan and latterly in South Korea, while the heavy technology hardware and e-commerce exposure to the Asian technology and industrial sectors has begun to profit from the broadening investment in AI-related beneficiaries.
Broad domestic retail and institutional investor participation is a new feature of the 2025 Asian stock market rally, underlined by huge southbound investor flows from Mainland China into Hong Kong-listed technology stocks. We expect further positive momentum both in terms of profitability and retail investor sentiment and we focus on key areas of technology including semiconductors, industrial automation and robotics, plus batteries and critical metals.
Our recommendations
A theme focused on increasing allocations to the Asia region.
- Improving corporate governance in Japan, China and South Korea
- Asia is a technology innovation hub, and moreover, the bifurcation of technology supply chains (strategic reorganisation of procurement processes) is creating opportunities throughout the region: China, Japan, South Korea and Taiwan.
- Asia, led by China, is a manufacturing powerhouse with green energy, EV, batteries and factory automation. Asian ex-China countries also benefit from the regionalisation of the supply chains.
- Ageing populations in North Asia are driving demand for healthcare and pharmaceutical development.
- Rising middle class: growing consumption and young populations in South Asia, with India leading the region as growth shifts southwards. In addition, domestic brands are proliferating in Asia.
Key risks
- Policy uncertainty in China as stimulus is not enough and the property market relapses into a downturn which impacts consumption. This would increase the risk of persistent deflation and rising loan defaults.
- The return of the bond vigilantes as Japan loses control of the long-end of the curve, creating volatility in the yen and long-term bond yields.
- A trade war re-emerges between the US and China
- A major downturn in the technology Capex cycle in the event of an AI bubble, and if Northern Asia is geared to this spending.
- A stronger US dollar leading to tightening financial conditions in Asia. Rate cuts become much more difficult as Asian countries need to support their currencies.
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