Key takeaways:
- AI will remain a dominant theme in Asia, further boosting the appeal of tech names in South Korea, Taiwan, and mainland China.
- Japanese mid-cap stocks are appealing, benefitting from recovering domestic demand and corporate governance reforms.
- We are positive about commodities as a hedge against inflation and a portfolio diversifier.
- The increasing focus on commodities, coupled with Australia’s solid domestic economy and a hawkish Reserve Bank of Australia, is likely to support the value of the Australian dollar.
Asia, a region heavily dependent on the Middle East for energy, has been acutely affected by the fallout from the Gulf conflict. But the impact has been uneven, with energy importing nations facing supply shortages and higher costs and exporting nations benefitting from rising commodity prices. The ability of different countries to cushion the shock has also varied widely. At the same time, surging AI capital expenditure (capex) is generating significant prospects for the region’s chip hubs and tech giants. These two powerful forces will drive investment themes across Asia in the second half of 2026.
North vs South
Around 80 per cent of oil travelling through the Strait of Hormuz typically heads to Asia. The blockade has led to a considerable energy shock in the region, one that’s being mitigated by a combination of fiscal and administrative measures with varying levels of demand destruction.
The important divide lies between wealthier North Asia economies such as China, South Korea, and Taiwan, which are better able to weather the spillovers of the conflict, and those in the south and southeast such as India, Thailand, and the Philippines.
China has largely shielded itself from the shock with sizeable reserves and a diverse energy mix. As higher input prices are increasingly passed on to consumers, the impact of cost-push inflation may gradually become more visible and entrenched, easing deflationary pressures. The property market, which has grappled with a slump since 2021, is also showing early signs of stabilisation, reducing the need for any urgent, broad-based policy easing.
Targeted stimulus remains the main policy lever to dispel headwinds from the energy shock. There probably won’t be a sustained uptick in consumer sentiment until there’s been further improvement in the property outlook. With domestic demand subdued, the economy will depend on exports and investment as sources of growth this year.
Japan’s economic recovery remains intact, underpinned by an expansionary fiscal policy and recovering domestic demand. Given the country’s reliance on imported energy, high oil prices are likely to weigh on real incomes and corporate margins, increasing downside risks to growth.
But Prime Minister Sanae Takaichi’s landslide election victory in February raised the probability of more fiscal support. We expect the Bank of Japan (BOJ) to normalise interest rates at a gradual pace, helping anchor inflation expectations without choking off growth.
We are underweight those countries or sectors that are vulnerable to energy shortages, preferring instead to lean into more idiosyncratic structural themes.
Korea and Taiwan’s chip boom
South Korea and Taiwan are dominating the global AI capex story, driven by intense demand for memory chips and semiconductors more broadly. Taiwan controls around 90 per cent of the most advanced chip manufacturing worldwide, while South Korea leads in the production of the specialised memory needed for AI.
AI infrastructure spending continues to accelerate, with no peak in sight. And this spend has been converted into astronomical earnings growth for certain companies in Asia.
The pace of improvement in large language models has been astonishing, and AI is increasingly being adopted across applications and industries. Compared to past cycles where demand was driven by consumer electronics, the current ‘supercycle’ is being driven by a capex race between some of the largest companies in the world all competing for leadership in this space.
Still, with the stocks hitting new highs, there are growing concerns about the duration of the rally. With elevated earnings and market concentration, the sector is vulnerable to swings should AI demand soften or capital expenditure slow down. There is likely to be further upside but watch out for volatility in the near term.
China’s growing tech prowess
We are starting to see better value in Chinese hardware firms, which have risen as a dominant force in the physical AI trade. Innovation is thriving, supported by rising R&D investment and China’s vast pool of talent.
Domestic giants, such as industrial robot makers and semiconductor manufacturers, have increasingly gained local market share from foreign rivals, helped by the government’s push for self-reliance in technology and supply chains.
We favour mainland listed tech stocks which have a concentration of hardware makers. They have clearer earnings visibility than the Chinese internet names listed in Hong Kong, which depend more on China’s consumption recovery and whether the fierce competition that’s characterised the sector will abate.
China is also a major part of the global basket that we invest in to capture the energy transition theme across the world.
Exports of batteries, solar panels, and electric cars from China have risen quickly – even before the Iran conflict. The crisis in the Strait of Hormuz is forcing governments to accelerate the transition to renewables in the medium term.
China’s structurally resilient green exports will do well from rising demand across the world. We are positive on China’s electric-vehicle battery makers and manufacturers of power transmission equipment.
Japan mid-caps: Capitalising on domestic demand
Japan’s smaller companies, which are less known to foreign investors than bigger peers such as automakers, are starting to outperform the broader market. Midcaps should do well: they are more domestically orientated so less affected by geopolitical noise and in a better position to capture recovering local demand. While the growth potential in profits is higher, their valuations are cheaper than the overall market average, increasing the stocks’ appeal.
The smaller listed firms are also facing pressure from policymakers to bolster their stock valuations and improve shareholder returns. As Japan’s corporate governance reforms deepen, we expect to see change across more companies, especially smaller ones.
There are still challenges. Elevated oil prices add to uncertainty in the timing and scope of the interest-rate hikes. For example, there are festering concerns over Japan’s debt sustainability and the Bank of Japan’s willingness to get in front of inflation, which could push up yields on Japan’s government bonds.
A sustained rise in yields could lift the equity discount rate, compress valuation multiples, and tighten financial conditions.
Commodities and the Aussie dollar
Commodities are able to serve as a useful portfolio diversifier while the correlation between equities and bonds is high and the macro outlook more uncertain. They also remain a crucial hedge against inflation.
Investors’ increased focus on commodities will support the Australian dollar given the country is a significant net exporter of coal, liquefied natural gas, and other raw materials. The Australian dollar has been the best-performing G10 currency in the past six months.1
The currency may also draw support from the solid domestic economy, the Reserve Bank of Australia’s hawkish stance, and its policy difference with the US Federal Reserve (Fed). Even so, we remain wary of rising risks to economic growth or softer-than-expected inflation, which could temper the rally.
Policy pathways
The road towards a resolution in the Gulf is likely to be long and bumpy. The biggest risk for Asia is a prolonged closure of Hormuz, which would fuel broad inflation in Asia and strain economies.
There is also uncertainty around the Fed’s monetary policy. If the Fed hikes, it could complicate the picture for Asian central banks, which are already caught in a dilemma between cutting interest rates to support growth, and keeping them high to defend against currency depreciation and combat imported inflation.
In short, the divergent macro picture will continue in 2026, which creates distinct risks but also offers intriguing opportunities for investors in the region and beyond.
Source 1: Bloomberg data, as of May 27, 2026
