First Sentier Investors

AI - Boom or Bubble? Asian equities have staged a robust rally in 2025. Yet beneath the headline figure lies a narrow driver of performance.

In the year to date, almost two-thirds of the total return of the MSCI AC Asia Pacific ex-Japan index has been driven by technology and AI-related companies.¹ Outside of these sectors, many high-quality businesses – particularly in Southeast Asia, India and China’s traditional sectors – have not performed despite solid earnings growth, improving governance and attractive valuations.

This bifurcation reflects a broader global trend. In the US, the economy’s resilience has been attributed to a “very significant AI-related, tech-related investment surge.”² In Asia too, Korean and Taiwanese chipmakers and Chinese technology platforms have seen valuations expand rapidly on the future promise of AI.

Taiwan Semiconductor Manufacturing (TSMC), Tencent, Alibaba and Samsung Electronics – all related to the AI theme – are the top four companies in the MSCI AC Asia Pacific ex-Japan index. They now comprise almost a quarter of the index’s weight. On a country level, TSMC commands a staggering 56% of MSCI Taiwan, up from 24% in 2015. Samsung Electronics and SK Hynix together represent almost 40% of MSCI Korea, compared to just 23% a decade ago.³ This underscores the outsized role of a handful of firms in shaping regional returns.

_{Source: Factset, 2025 data as at 14 October 2025. 2015 data as at 30 December 2015.}

With everything seemingly about AI, we believe it is critical to remain disciplined in our investment approach and focused on quality. Looking back through history, we have been here before – including the dot-com bubble, the global financial crisis (GFC), the China equity market exuberance of 2015 and the rise (and subsequent fall) of the profitless growth companies in 2020. Excess will eventually give way to the reality of earnings and cash flows, and when the tide turns, we believe high-quality businesses will preserve capital best.

China: Domestic revival gaining traction

While AI has dominated headlines, other structural themes across Asia—such as domestic recovery in China and reforms in India—offer equally compelling opportunities.

After a challenging few years, we are starting to see pockets of healthy demand emerging in certain domestically focused sectors in China. The government is providing more support for businesses and consumers, perhaps in response to rising geopolitical tensions. And, through multi-year investments in R&D and supply chains, Chinese companies have become more competitive on the global stage. These are all reasons to be positive on the long-term outlook for China equities.

We have seen growing demand in leisure travel with little need for policy support, which gives us more reason to be optimistic. This is partly due to a shift in lifestyles and cultural values, as Chinese people spend more on memorable experiences. We believe demand for leisure travel will continue to grow at a healthy rate over the long term, driven by increasing use of social media, better affordability and convenience.

Geopolitics may remain a headwind for investor sentiment. Despite increasing US protectionism since 2016 when Trump began his first term, China’s exports have continued to grow, driven by demand from Europe and Southeast Asia.⁴ Additionally, Chinese companies have been expanding their manufacturing and sales into new locations.

India: Positive reform with long runway for growth

One thing we don’t worry about in India is the politics. Over the years, India has had many different governments and political parties, some of which were ousted within weeks, while others lasted for more than 10 years. Despite all the political complexities, India has continued to evolve and move forward.

Initiatives like the Goods and Services Tax (GST), which simplified the collection of state and local taxes, Unified Payments Interface (UPI), which brings together multiple bank accounts in a single mobile application, and Aadhaar, India’s digital identification number for individuals, have clearly helped to improve efficiency. While the decade before Covid saw a period of slow growth in India, these reforms are starting to reap rewards and should underpin India’s structural growth.

Conclusion

We are optimistic on the outlook for Asian equities. With a rising share of global GDP growth, Asia should continue to benefit from the shift towards higher value services-led growth, digital transformation and the ongoing financialisation across the region. Valuations also look attractive in comparison to developed markets like the US, while low ownership of Asian equities in global portfolios provides a good backdrop for absolute returns.

While we can’t second guess when the AI theme might run its course, our holdings are characterised by strong competitive advantages, and they have historically managed to preserve margins and profitability through the cycles. We are confident that their strong fundamentals will translate into attractive shareholder returns in the long run, as the market broadens, over time, from its narrow focus on AI.

_{¹FSSA Investment Managers, FactSet, MSCI, as at 30 September 2025.
² https://www.ft.com/content/74224d84-8a7a-4d0d-a30d-1716e2d43b7a
³ FactSet, MSCI, as at 30 September 2025.
⁴ https://en.macromicro.me/charts/17660/cn-exports-markets}