AI slump revives Asia’s forgotten trades from China to India

Synopsis

Global investors are rethinking their Asia bets as the AI trade loses momentum following the US midterm elections. India and China are emerging as potential beneficiaries of the shift, with funds rotating towards undervalued stocks, domestic growth, healthcare, consumer companies and financials. India's limited AI exposure, easing oil prices and renewed foreign inflows are strengthening its appeal.

The unraveling of the AI trade after the US midterm elections is forcing investors to rethink their Asia playbook, reviving demand for out-of-favor Chinese and Indian stocks as well as companies poised to benefit from easing inflation and trade tensions.

Aberdeen Investments favors markets powered by stronger domestic growth, including India and Vietnam, and sees upside in Chinese technology firms. Hedge fund Lotus Asset Management is long Hong Kong equity futures, while Allianz Global Investors is looking at healthcare and consumer companies.

“I expect investors to diversify more broadly and reduce their concentration in the AI trade,” said Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA. “This should be supportive of China and other markets where valuations are less demanding.”

India could also benefit, although its dependence on imported energy remains a headwind, he added.

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China and India as Hedges

Hao Hong, chief investment officer at Lotus, said he is betting against oil and petrochemical firms and going long precious metals and Hong Kong equity futures.

A Hong Kong gauge tracking mainland companies gained 5.2% last week, its best performance since March 2025.

Meanwhile, some global investors are interested in using China’s onshore market exposure as a diversifier to their AI-heavy portfolio, according to Jason Lui, head of Asia-Pacific equity and derivatives strategy at BNP Paribas SA.

India’s appeal, meanwhile, has grown as oil prices declined on expectations of an earlier end to the Iran war, easing a key pressure point for the energy-importing economy. The market’s lack of AI exposure is also now seen as an advantage.

LOGOS Asset Management’s chief investment officer Charlie Hong said he sold his shares in SK Hynix Inc., Samsung Electronics Co., Intel Corp. and Lumentum Holdings Inc. last month and has since boosted his Indian holdings with shares of new-age tech companies, financial firms and contract drug manufacturers.

India’s benchmark Nifty 50 gained 8.6% last week. registering its best week since 2021, as overseas investors returned in force. Foreign funds poured a net $1.9 billion into local shares last week through Wednesday.

The sudden shift has kept market participants busy. Utkarsh Singh, a Mumbai-based senior manager at SBI-SG Global Securities Pvt., started taking calls from clients in Singapore as early as 6:30 a.m. Friday and continued fielding queries late into the day as Indian stocks rallied.

“Foreign investors are suddenly pouring in,” Singh said. “I have taken more calls from foreign funds this week than I have all year,” he said. “I think we will see more inflows.”

Before the latest gains, key benchmarks in India and China had ranked among the world’s worst-performing stock indexes this year through October.

Going Beyond AI

Beyond China and India, investors are also taking a fresh look at previously overlooked corners of Asian markets that offer value and less exposure to the AI boom.

While defence and financial stocks could underperform, healthcare and consumer staples firms may get a boost, Allianz Global Investors’ chief investment officer for public markets Michael Krautzberger and strategist Liam Wash wrote in a recent note.

In Korea, Fidelity’s long-only portfolio manager Dale Nicholls said he sees early signs of rotation beyond the semiconductor heavyweights, particularly among domestic pension funds.

“Consumption-related areas stand out, spanning sectors from wellness through to some of the K-pop entertainment agencies” and Korea’s beauty and cosmetics industry, he said.

At hedge fund ACG Management Pte., managing director Hui Ling Loh said Korea’s consumer stocks including retailers, cosmetics, food and beverage are benefiting from the perception that they are largely domestically oriented and face limited tariff and policy risks from the US.

Phillip Wool, head of portfolio management at Rayliant Global Advisors, said he sees opportunity in Korea and Taiwan, “but it’s going to be beyond the highest-profile chip stocks that have run up so much and are now subject to so much unease.”

One stock Wool likes is LG Electronics Inc., which he holds in his active emerging-markets exchange-traded fund. The company sells a lot of TVs, refrigerators and washing machines in the US, which “could be a catalyst for some upside as tariff pressure eases,” he said.

The prospect of less isolationist US trade policies has also raised investor confidence in auto firms including Japan’s Toyota Motor Corp. and South Korea’s Hyundai Motor Co.

Not everyone is ready to abandon AI. Some investors say the selloff may offer an opportunity to buy the dip, given the sector’s longer-term growth prospects.

But for now, caution remains the prevalent mood.

Foreigners will likely continue to sell Asia’s AI “picks and shovels” stocks, said Manishi Raychaudhuri, chief executive officer of Emmer Capital Partners Ltd. “India and China are the only two large liquid markets offering a considerable array of non-AI exposures.”

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