Investors Favour Asian Markets as Global Stock Rally Extends

Asia's Rise: Equities in South Korea and Taiwan Surge Amid AI Euphoria

As the focus shifts away from the Iran war, investors and strategists are looking for the next leg up in equities, with many turning to Asia. The region's markets, particularly those in South Korea and Taiwan, have rallied significantly this month, with the Kospi index surging 78% for the year.

The two markets have been key beneficiaries of the growing dominance of artificial intelligence, thanks to the presence of giants such as Samsung Electronics Co., SK Hynix Inc., and Taiwan Semiconductor Manufacturing Co.. As a result, equity-derivatives strategists are increasingly recommending trades to bet on further gains, which has pushed up the cost of options. Implied volatility for stocks in Taiwan and Korea is rising, hovering around peak levels compared to the S&P 500 Index for both the Taiex and the Kospi 200 Index. In contrast, the Cboe Volatility Index has sunk back below its one-year average.

Read also: Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

The strength of the move has produced extreme reversals from prior trends, creating a "vol up, spot up" pattern that could last for some time until a period of consolidation emerges. This has led to a surge in assets under management for leveraged exchange-traded funds, which are likely to grow further as authorities have approved the local listing of those for single stocks.

Korean shares have been so in demand that Interactive Brokers Group Inc. has started giving US retail investors direct access to the market. Meanwhile, strategists at Societe Generale SA have noted that the 12-month variance spread between the Kospi 200 and S&P 500 has reached extreme levels. However, they do not see a meaningful reversal happening in an orderly manner, as it would require a more benign oil and geopolitical environment and a pause in the tech rally.

In contrast, JPMorgan strategists have recommended bullish structures on the iShares MSCI Emerging Markets ETF, expecting the equities to continue outperforming given the AI theme, a more supportive macro backdrop, and strong fundamentals. Ahead of the upcoming summit between Presidents Donald Trump and Xi Jinping, investors have boosted bullish positioning in US-traded Chinese ETFs, buying call spreads on the iShares China Large-Cap ETF and calls on the KraneShares CSI China Internet ETF.

The JPMorgan strategists have also advised call spreads on the Taiex or worst-of calls on the Kospi 200 and Japan's Nikkei-225 Stock Average to bet on the AI hardware rally. They have noted that US large-cap tech, Korean memory and component suppliers, and Taiwan's semiconductor ecosystem are all showing the same pattern - earnings delivery remains strongest where exposure to AI hardware bottlenecks is highest.

Read also: US-Iran Tensions Spark Uptick in Oil Prices Amid Global Market Decline