Three and a half months ago, the closure of the Strait of Hormuz was widely expected to trigger a profound shock to Asia, which heavily relies on the Middle East for energy imports. Instead, the region has proven resilient but also divided.
A new investment reality is emerging: Asia is increasingly a tale of divergence driven by energy security and the AI boom.
Portfolio manager George Efstathopoulos and Terrence Pang argue that at the heart of this divergence is a clear distinction between ‘haves’ and ‘have-nots.’ North Asia sits firmly in the ‘have’ camp, supported by stronger energy positioning and direct exposure to the global AI boom. South and Southeast Asia, by contrast, are more vulnerable due to higher dependence on energy imports, weaker participation in AI-driven growth, and more fragile economic conditions.
North Asia
China represents a distinct case within the ‘haves’. A decade of energy diversification has cushioned the Chinese economy from the energy shock of the Iran conflict, propping up both its currency and bond markets, says Efstathopoulos. At the same time, the country continues to move up the value chain, supporting an export boom. He adds that as a dominant player in green technology supply chains, China is well-positioned to benefit from increasing global demand for energy independence as part of the broader energy transition.
While consumption continues to lag, the robust export performance may support an improvement in employment and wage prospects, helping underpin a gradual recovery in domestic demand, says Peiqian Liu, Asia economist.
North Asia sits at the centre of the AI capex cycle. As Efstathopoulos observes, US hyperscalers have been redirecting capital they might of in the past used for share buybacks into Asia, as they fund infrastructure investment and drive demand for memory chips and advanced semiconductors in South Korea and Taiwan.
He believes that the trend has legs, fuelled by the AI capex supercycle. But the durability ultimately hinges on the strength of US consumption – the engine supporting the US tech giants’ corporate earnings and investment capacity.
“The important data point we need to be monitoring is US consumption; the resilience and strength of the US consumer,” he says. “Because without that, the hyperscalers won't be able to spend [...] And then this will have ramifications in the entire supply chain, including the semi companies in Taiwan and Korea.”
South and Southeast Asia
In contrast, many Southeast and South Asian economies face more acute challenges. High energy costs have intensified inflation pressures and strained current accounts. These economies are also less exposed to AI-driven investment, limiting their ability to offset growth challenges.
India, once a standout performer attracting significant capital inflows, is contending with restrictive energy dependence as well as questions around its services export growth model in an AI-driven world. Policymakers are responding with targeted measures to attract foreign capital and stabilise the currency, but pressures remain.
Bond markets
Still, Asia’s fixed income markets have held up better than expected.
In the dollar bond market, credit spreads – the yield premium investors demand for taking on more risk – have tightened despite ongoing geopolitical uncertainty, according to Pang. Increased demand from local investors has reduced reliance on foreign capital and contributed to lower volatility compared to previous crises. In addition, Asia’s limited exposure to private credit, which has become a growing concern in the US, has provided an additional layer of insulation, says Efstathopoulos.
Pang says Hong Kong dollar bonds have quietly emerged as a standout performer, delivering stronger absolute and risk-adjusted returns than the main EU and US bond markets over the past five years. Their resilience is underpinned by high credit quality, with a majority of issuers rated A or above. Structural demand from local banks and insurers, driven by balance sheet dynamics and growing asset pools, provides consistent support.
As for equities opportunities, Efstathopoulos likes Japanese banks as the steeper yield curve, and the economic recovery improve their profitability. He also favours the country’s domestically oriented midcaps that are in a better position to capture recovering domestic demand. They’re also less sensitive to currency volatility and are likely to catch up with their larger peers when it comes to improved shareholder returns and valuations.
Trip hazards
Risks remain elevated in the region. For example, additional inflationary pressures such as El Niño-related food price shocks could further strain vulnerable economies, says Pang. But in conclusion, the dispersion across Asia is creating opportunities for investors rather than diminishing them.
“When you see divergence, it's very often the biggest return driver for you in a more sustained manner,” says Pang. “What we are telling clients is to embrace what we have right now, because there are [less correlated] opportunities that will allow you to extract more value.”
