Asia's Market Landscape Diverges Amid AI Boom and Geopolitical Tensions

Asia's Markets Diverge as Energy Prices and AI Boom Create Two Different Worlds

Asia's markets are behaving as though two distinct worlds exist at once. In South and Southeast Asia, higher oil prices are straining trade balances and sending stocks tumbling in India, Indonesia, and the Philippines. In contrast, enthusiasm for chipmakers and artificial intelligence (AI) companies is driving equity benchmarks in South Korea and Taiwan to repeated record highs with little regard for the war in the Middle East.

The divergence highlights two competing narratives in global markets, with investors punishing economies exposed to higher energy costs while looking past near-term geopolitical risks if they can gain exposure to industries seen as critical to future growth. With the US and Iran making little progress toward talks and control of the Strait of Hormuz unresolved, the risk of prolonged energy disruption is paving the way for further divergence in Asia's markets.

Comparison of Major Market Performance

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North Asia's resilience rests in the fact that its markets are dominated by companies embedded in the global semiconductor supply chain, the backbone of the AI boom. Firms such as Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co., and SK Hynix Inc. are benefiting from a surge in demand that - for now - appears relatively insulated from geopolitical risks. In contrast, South and Southeast Asia are grappling with higher crude prices feeding into inflation, eroding current-account balances, and weakening currencies.

Those pressures leave policymakers with less room to respond. Without a comparable technology-driven story to attract inflows, markets in those regions have lagged. Currencies largely tell a similar story, with the Chinese yuan and Taiwan dollar being relatively stable, while those in India and parts of Southeast Asia have come under pressure.

Three factors are driving the divergence: greater exposure to the energy shock in India and Southeast Asia, which have fewer buffers than North Asia; stronger fiscal positions in the north; and the AI boom, which is supporting growth and markets in North Asia but offering little lift to India and Southeast Asia, said Sonal Varma, Asia ex-Japan chief economist at Nomura Holdings Inc.

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There are, however, some nuances. In Southeast Asia, Malaysia has been partially shielded by its status as a net exporter of oil, helping its currency hold up better than its neighbors. Singapore bonds, currency, and stocks have also weathered the Iran war better than peers, thanks to haven flows. South Korea, despite strong equity performance, has seen weaker bond and currency trends because of its vulnerability to the energy shock.

Seoul has already rolled out emergency measures, including a fuel price cap - the first in almost three decades - along with expanded fuel tax cuts and financial support programs to curb inflationary pressures. Nomura's Varma said some of the brokerage's favorite trades on the divergence include going long the euro against the rupee, long the Singapore dollar versus the Indonesian rupiah, and taking receive positions in Thailand and Korea.

China also stands out for its resilience to the Iran shock despite being the world's biggest oil importer. The country's dominance in renewable energy and its push toward electric vehicles should help cushion the impact of higher fuel prices. Chinese bonds have outperformed regional peers, while the yuan is now trading close to its strongest level since early 2023.

The next test for the AI trade will come from hyperscalers' earnings such as Meta Platforms Inc. and Microsoft Corp. starting next week. Investors will watch their capital expenditure plans, as questions grow over how long the spending can be sustained relative to cash flow, Christopher Wood, the global head of equity strategy at Jefferies Financial Group Inc., wrote in a note.