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Asia’s AI leaders drove strong returns, but crowded trades and rising valuations narrow opportunities; selectivity is key as risks build.

Asia ex-Japan equities are increasingly characterised by narrowing breadth rather than a lack of opportunity. Market leadership has concentrated, returns are more position-driven, and the distinction between momentum and valuation is tighter.

AI-linked companies continue to drive earnings upgrades, capital inflows and performance. However, market gains are increasingly uneven, with a small cohort of stocks accounting for a disproportionate share of returns. As capital recycles into perceived winners, flows are becoming as influential as fundamentals in shaping outcomes.

This dynamic is consistent with prior cycles, where strong structural themes coincided with narrow leadership and rising asymmetry. While upside persists, the margin for error is reduced, particularly where valuations already discount sustained growth.

Today, AI is reshaping Asia’s earnings landscape, but capital concentration has amplified divergence. The opportunity set is polarising between crowded growth exposures and less-owned segments where expectations — and valuations — remain more subdued.

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China: Valuation as a starting point

China continues to stand apart in this regard. After a prolonged period of weak sentiment and sustained capital outflows, valuations remain undemanding, with parts of the market trading at around 11x forward earnings. That starting point matters. It does not require a strong cyclical recovery to generate reasonable outcomes; rather, it creates a more balanced risk-reward profile.

Our focus, therefore, is less on finding high growth and more on identifying where expectations have already adjusted. In a market where capital allocation discipline is beginning to improve, there are areas where downside appears better protected than in more crowded parts of the region. The challenge is not opportunity, but selectivity, particularly in avoiding those segments still facing structural headwinds.

South Korea and Taiwan: Strong momentum, rising expectations

South Korea and Taiwan remain central to the AI trade, with semiconductor supply chains delivering strong earnings and performance. Yet the valuation picture is more nuanced than it first appears.

In South Korea, the KOSPI Index does not look expensive. Samsung Electronics, which we hold, and SK Hynix¹, where we are underweight, trade at forward multiples of around 6–7x despite year-to-date share price gains of roughly 173% and 218%, respectively. We believe that, rather than signalling pessimism, these low multiples reflect expectations of exceptionally strong near-term earnings driven by demand for high-bandwidth memory.

This matters. When earnings are elevated, multiples can compress even as prices rise, masking how much optimism is already embedded. The key question is therefore one of durability. If current conditions prove cyclical, the margin for error becomes narrower than headline valuations suggest.

Our positioning reflects that balance. We retain exposure through Samsung, where valuation, balance sheet strength and diversification provide a more favourable asymmetry. By contrast, we remain cautious on more concentrated, higher-beta names such as SK Hynix, where outcomes are more tightly tied to a single part of the cycle.

In Taiwan, the structural story remains compelling, but much of the technology complex now appears priced for continued strength and near-perfect execution. As in South Korea, expectations have risen, and with them, the risk of disappointment.

India: Strong story, tighter valuation constraints

India presents a different form of asymmetry. The structural growth narrative is well understood and widely owned, but the near-term picture is somewhat less clear. Investment momentum has yet to reaccelerate decisively, and there are signs that fundamentals may be softening at the margin.

Valuations, however, remain elevated, at around 24x forward earnings. That combination leaves limited room for disappointment. With expectations still high and external risks becoming more visible, the balance of outcomes appears less favourable than elsewhere in the region. We therefore remain underweight, finding it difficult to justify current multiples in the absence of a clearer reacceleration in growth.

Thailand: Out of favour, but not without merit

Thailand, by contrast, sits at the other end of the spectrum. It remains out of favour, with valuations reflecting a cautious view following a period of political and macro uncertainty.

Yet it is precisely this lack of enthusiasm that creates a different opportunity set. Positioning is light, expectations are modest, and the bar for positive surprise is lower. That does not remove risk, but it changes its nature. Compared with more crowded markets, downside appears more contained, while recovery potential is less fully priced.

Bringing it together

Across the Asia ex-Japan region, the divergence is becoming more pronounced. On one side, a relatively narrow group of companies, closely tied to the AI theme, continues to drive performance, supported by strong narratives and persistent flows. On the other, a broader set of markets offers less immediacy, but in some cases, more supportive valuations.

The Federated Hermes Asia ex-Japan team seeks to balance these dynamics by remaining engaged with the structural growth themes while maintaining a disciplined, contrarian, bottom-up approach. The focus is on identifying companies where the price being paid is attractive relative to the value the investment team believes is present.

History suggests that periods of narrow leadership rarely persist indefinitely. They tend to evolve, often subtly at first, before more decisively. When they do, the opportunity set broadens again, but typically for those willing to look beyond the consensus ahead of time.

For now, this tension between momentum and discipline remains a defining feature of the Asia ex-Japan region.

 

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Disclaimer

For professional investors only. Capital at risk.

The value of investments and income from them may go down as well as up, and you may not get back the original amount invested. The views and opinions contained herein are those of the author and may not necessarily represent views expressed or reflected in other communications. This does not constitute a solicitation or offer to any person to buy or sell any related securities or financial instruments.

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