Peiqian Liu
Asia is entering the next phase of its growth cycle. Manufacturing and exports remain resilient, supported by artificial intelligence (AI) investment, energy security and supply-chain diversification. But after years of heavy reliance on external demand, Asian economies are increasingly seeking new growth drivers at home. The key question for the coming years is whether external surpluses can be channeled into broader domestic growth.
Peiqian Liu, Asia Economist, Fidelity International comments: “Across Asia, governments are using fiscal policy, industrial policy and incentives to develop new sources of growth around AI, semiconductors, energy, defence and advanced manufacturing. While the direction is similar, the policy objectives and starting points are quite different.
“South Korea is supporting large-scale investment in AI and semiconductors, while Taiwan is seeking to redirect domestic savings towards strategic investment, and Japan’s growth strategy aims to crowd private capital into strategic industries. Meanwhile, mainland China is redirecting investment from property to AI, advanced manufacturing and energy.
“However, policymakers across these economies also face distinct constraints, creating fresh challenges for markets as they navigate competing pressures from inflation, fiscal deficits, foreign exchange and capital flows. South Korea increasingly resembles a conventional reflationary cycle, as stronger technology exports support corporate profits, fiscal revenues and investment while inflation constrains monetary policy. Taiwan could face similar pressures if stronger income and fiscal support were to be transformed into consumption. The policy mix may therefore feature a fiscal accelerator alongside a monetary brake.
“Mainland China remains an outlier in the region. New growth engines in technology and advanced manufacturing continue to power ahead, but the transition remains uneven. Weak property activity and household demand continue to weigh on inflation, while softer private borrowing limits the effectiveness of monetary easing. The challenge is therefore not mainland China’s ability to generate investment, but whether the new economy can become large enough to offset the drag from the old growth model and eventually generate stronger domestic demand.
“Japan is the region’s most significant macro policy experiment. The government’s investment-led growth strategy and long-term nominal GDP ambitions aim to lift growth after decades of subdued capital spending. However, pressure on the yen and JGB market underscores the key constraint: fiscal expansion must strengthen productive capacity without eroding confidence, pushing bond yields significantly higher or prompting a more forceful Bank of Japan response.
“Across Japan, South Korea and Taiwan, a shared policy mix is emerging: more supportive fiscal policy alongside relatively tight monetary policy. Governments are trying to spur investment and domestic demand, while central banks remain constrained by inflation, currency pressures and financial stability concerns. Mainland China stands apart, with persistent disinflation and weak demand leaving scope for both fiscal and monetary easing. This divergence is likely to become a more important feature of Asia’s macro landscape in the coming quarters.
“Global monetary conditions remain important. Elevated US yields can limit room for Asian central banks to ease and put pressure on regional currencies, while excessive Fed tightening could eventually weaken the US investment and AI demand supporting Asia’s export cycle.
“The key test ahead is whether the technology windfall can translate into sustained domestic investment and demand, even as central banks manage the resulting inflation and financial-market pressures. If that transmission takes hold, the AI-led export boom could become more than an external demand cycle. It may signal the start of a broader Asian investment and reflation cycle, moving the region from accumulating external surpluses to putting capital back to work.”
Asia’s North star for investors
Investors are seeking strong structural themes, improving domestic fundamentals and attractive valuations. Mainland China, Japan, South Korea and Taiwan offer all three, arguably more compellingly than any other region globally.
Ian Samson, Portfolio Manager, Fidelity International comments: “Asia is at the centre of several major forces shaping global markets, from AI and semiconductor demand to electrification and energy resilience. Investor-friendly domestic reforms are also gaining momentum across these markets, turning what was once a headwind for international investors into a more supportive backdrop.
“This is why North Asia is drawing growing interest from active managers and asset allocators. The opportunity is broadest in equities, while currencies and fixed income require a more selective approach, with mainland China offering the clearest opportunity.
“Japan’s reflation story is creating a more supportive backdrop for equities, as the return of inflation, stronger nominal growth, supportive fiscal policy and still-low real yields help improve the outlook for domestically exposed businesses. Banks should benefit as higher interest rates restore lending margins, while Japanese mid-caps offer an attractive mix of strong earnings momentum and reasonable valuations. If healthy inflation, wage growth and stimulus continue, Japan’s equity market could remain one of the region’s most compelling opportunities. Taiwan, on the other hand, offers exposure to one of the world’s most dynamic semiconductor and AI hardware ecosystems, often at a discount to comparable opportunities in Western markets.
“Mainland China’s investment opportunity is extremely diverse, with policy support supercharging growth in areas such as advanced manufacturing, energy storage, optical networking and other strategic technologies, even as headline growth remains sluggish and the old economy struggles. Markets such as ChiNext and STAR50 offer access to these high-growth opportunities, but active management is critical given the pace of innovation and the stark divide between sustainable winners and future low-margin commodity players.”
AI and energy resilience take centre stage
Ian comments: “Artificial intelligence is becoming as much an infrastructure story as a technology one. Its rapid expansion is driving demand for computing power, advanced semiconductors, memory, networking equipment and reliable power infrastructure, much of which is concentrated in North Asia.
“South Korea and Taiwan are critical to global semiconductor supply chains, while Japan remains deeply embedded in semiconductor equipment and advanced manufacturing. Mainland China is also expanding across hardware, optical networking, energy storage and other areas tied to digital infrastructure. Together, these markets offer investors several ways to access the AI capital expenditure cycle.
“Valuations remain relatively restrained in parts of the market. South Korea’s technology giants look attractively valued if demand can hold near recent levels, while Taiwan trades at a discount to global equities despite being home to some of the world’s most important technology hardware companies.
“However, risks do remain, given the semiconductor sector’s historically cyclical nature and current valuations reliance on resilient earnings. However, if the AI infrastructure build-out extends into the next decade, The region should be well placed to benefit through the companies supplying the components, equipment and physical infrastructure behind AI.
“Asia is also central to the expansion of global energy infrastructure. Electrification is driving demand for grid equipment, battery storage, transmission networks and power-management systems, while data centres are adding another major source of demand for reliable electricity and the infrastructure needed to deliver it.
“This is creating opportunities beyond the traditional renewable-energy sector. Mainland China leads in battery technology and energy storage, while Japan and South Korea have strong industrial capabilities in power equipment, electronic components and infrastructure.”
Trade surpluses and subdued inflation create opportunities in Asian fixed income
Ian comments: “Asian currencies and bonds may attract less attention than equities, but investors should not overlook the region’s stores of value, particularly as concerns persist around US fiscal sustainability and inflation in developed markets.
“Mainland China stands out given its markedly different macroeconomic backdrop. Subdued inflation has supported Chinese government bonds as a store of value, while the country’s large trade surplus provides fundamental support for the renminbi.
“Beyond mainland China, Asia also benefits from undervalued currencies and trade surpluses. While currencies can remain cheap for extended periods, investors seeking to diversify away from the US dollar may find fundamentally supported opportunities in other Asian markets.”