Asian stocks enter 2026 under cloud of AI valuation risks, policy divergence

Core Viewpoint - Asian equities started the new year with significant gains, but concerns over an artificial intelligence bubble and differing interest rate paths across the region may pose challenges [1] Group 1: AI Sector Dynamics - Asia's strong connections to the global AI supply chain make it vulnerable to downturns on Wall Street, despite cheaper valuations for Chinese chipmakers and China's push for technological self-sufficiency providing some protection [2] - The investment enthusiasm surrounding AI has been a major factor in Asian stocks outperforming global peers, with a regional information technology index reaching a record high [3] - There are concerns about the concentration of a few major tech firms in markets like Taiwan and Korea, which may lead to increased volatility as the AI rally continues [4] - Some analysts suggest a shift from AI excitement to potential fatigue, indicating risks if there is a decline in AI capital expenditure or earnings [6] Group 2: China's Technological Self-Reliance - Optimism is growing for Chinese chipmakers as the government considers a support package of up to $70 billion for the semiconductor industry [7] - Recent successful trading debuts of companies like MetaX Integrated Circuits and Moore Threads Technology indicate strong investor interest, prompting other firms to seek funding [8] - Chinese tech stocks are appealing due to their lower valuations, with a key gauge trading at 19 times forward earnings compared to 25 times for the Nasdaq 100 Index [9] Group 3: Central Bank Policies - The Federal Reserve's anticipated rate cuts in 2026 will influence capital flows and risk sentiment across Asia, potentially allowing central banks in countries like India and Thailand to lower borrowing costs [11] - In contrast, the Bank of Japan faces pressure to raise rates to combat inflation, while New Zealand and Australia are expected to pivot towards tightening policies [12] Group 4: Market Rotation and Laggards - Investors are diversifying away from US assets and the crowded AI trade, looking to revive lagging markets [13] - India's NSE Nifty 50 Index underperformed in 2025, but expectations of lower consumption tax rates and interest rate cuts may drive a reversal in trends [14] - Southeast Asia, which lagged behind the broader region last year, may benefit from government stimulus efforts [14] - Korea's stock market, which saw a 76% rally last year, continues to attract attention, with the Kospi Index closing above 4,300 and targeting the 5,000 level [15][16] Group 5: Corporate Governance and Small-Cap Stocks - The future of the bull run in Korea will depend on government initiatives to enhance corporate governance and support small-cap stocks [17]