Asian stock indices distorted by AI, opening the way to sector diversification

Investments are tending to concentrate on the AI giants, while the rest of the market is struggling. Indonesia is raising interest rates to counter inflationary pressures, while interesting opportunities are emerging in biotechnology and industrial machinery.

by Marcel Zimmermann, manager of the Lemanik Asian Opportunity fund

The theme of artificial intelligence is distorting sentiment across the Asian equity market: market momentum is accelerating, with investors increasingly placing their bets on the biggest names in artificial intelligence and semiconductors. As a result, technology-heavy indices such as Korea’s Kospi, Taiwan and the Nikkei are massively outperforming the other markets. However, excluding AI stocks from Samsung and SK Hynix, the Korean Kospi index would have ended the month deep in negative territory. Other markets in the region, such as Hong Kong, Asean and India, in fact posted flat to negative performance in May.

The mid-May meeting between US President Donald Trump and Chinese President Xi Jinping helped ease trade tensions in Asian markets and improve investor confidence. Although significant differences remain, both sides expressed their willingness to keep the dialogue going and pursue greater economic cooperation. Economic data remained broadly solid across the region, supported by stabilising manufacturing activity, resilient consumer spending and continued strength in demand linked to the technology sector. The Bank Indonesia raised its benchmark rate by 50 basis points because of inflationary pressures and weakness in the currency. In China, targeted support measures were maintained to sustain growth, particularly in real estate and domestic consumption.

Over the month, we continued to take profits on technology stocks linked to artificial intelligence and diversified investments into the Asian biotechnology segment, energy storage system makers, producers of components for humanoids and food stocks in the Asean region. Artificial intelligence, applied to the biotechnology sector, should make it possible to speed up research and development of new drugs. The United States and China are clearly at the forefront in this field. Another sector with strong potential for productivity gains is industrial machinery, where further automation with robots and humanoids could lead to rising margins. Japanese, Chinese and South Korean machinery manufacturers are well positioned to benefit from this trend.

In general, Asian equities are supported by stronger earnings prospects, long-term growth trends and attractive valuations. We believe that sound sector diversification can improve risk-adjusted returns by reducing dependence on individual stocks or market events.