Stock Markets Have Rebounded So Much—Can They Keep Rising? Institutions See Investment Opportunities But Warn of Two Key Risks

Volatility has intensified recently in AI and semiconductor stocks, and the investment logic in Asian equities is beginning to shift. Barings states that the fundamental outlook for Asian equities remains positive, but as popular AI-related positions become overly concentrated, markets are starting to reassess whether the AI investment cycle can continue and whether corporate earnings can justify current valuations.

SooHai Lim, Head of Barings' Asia (excluding China) Equities team, notes that the July market correction highlighted the risks of overcrowded trades. Looking ahead, investors need to look beyond whether AI capital expenditure continues, and instead refocus on corporate fundamentals—examining earnings quality, balance sheets, and valuation reasonableness.

As AI-related stocks fluctuate, the market is increasingly asking: "Can profits keep up?" Lim points out that several fundamental supports remain for Asian equities, including resilient earnings forecasts across most areas of the semiconductor supply chain and continued investments by major cloud service providers in AI infrastructure.

However, as investment opportunities diverge, simply betting on AI themes is no longer sufficient. Investors are raising their standards for evaluating companies—not only questioning the sustainability of AI demand, but also placing greater emphasis on whether firms can convert AI investments into tangible revenue and profit, and whether current stock prices have already priced in future growth expectations.

Barings believes portfolios should focus on companies with robust earnings capacity and healthy balance sheets, maintaining a cautious and disciplined allocation toward AI-heavy stocks that have become excessively crowded.

Notably, although the MSCI AC Asia ex-Japan Index has surged significantly year-to-date, Barings argues that valuations remain reasonable when considering Asian companies’ attractive earnings growth prospects. The recent volatility in AI-related stocks, rather than being purely negative, has created opportunities for re-evaluation in non-AI supply chain industries. As capital begins rotating out of overcrowded AI trades into other markets, previously lagging sectors and markets are now attracting investor attention.

Oil prices and interest rates are emerging as the next key variables for Asian equities. On the macro front, Barings observes a mixed policy backdrop: markets have downgraded expectations for Federal Reserve rate cuts and are now assessing scenarios where interest rates remain relatively high for an extended period.

Meanwhile, with increasing chances of de-escalation in the Middle East, oil prices have retreated from their July highs, helping ease concerns about inflation and corporate profit margins.

Asian currencies have largely adjusted to changing rate outlooks, and some central banks have even preemptively raised rates to stabilize exchange rates or curb inflation. However, oil price movements remain a significant variable for Asian markets. A sharp rebound in energy prices could reignite inflationary pressures and limit room for monetary easing.

Both Taiwan and South Korea have strengths, but structural risks are surfacing in Korea. Regionally, Barings sees South Korea’s fundamentals as still attractive, particularly supported by earnings forecast revisions and valuations.

Yet after July’s sharp volatility, structural risks in the Korean market have become more apparent. First, the index is heavily concentrated in two major memory chip manufacturers. Second, momentum trading via single-stock leveraged ETFs is prevalent—both factors potentially amplifying market swings.

In contrast, Taiwan can participate more broadly in the AI capital expenditure cycle through a wider supply chain. While Taiwanese stocks trade at relatively higher valuations, market volatility has been comparatively lower.

Barings observes that the wealth effect driven by tech stock profits is gradually spreading to Taiwan’s financial stocks and South Korea’s consumer discretionary sector.

Hong Kong and mainland China markets saw a strong rebound in July, primarily fueled by capital inflows from investors exiting crowded AI positions elsewhere, coupled with supportive policy signals and strong performance from large internet platform stocks, which improved market sentiment.

Barings notes that while China’s domestic recovery remains uneven, current valuations appear attractive relative to regional peers and seem to have already priced in much of the existing macroeconomic uncertainty.

Active IPO markets and strong performances from individual stocks with long-term structural growth themes suggest sustained investor interest in China. Barings maintains a positive view on Hong Kong and China, given favorable stock-picking opportunities.

India and ASEAN are also seeing new investment opportunities. For other Asian markets, India stands to benefit from falling oil prices. Lower energy costs help improve India’s current account and inflation pressures, alleviating some past headwinds.

Among ASEAN markets, Thailand benefits from political stability and exposure to AI capex, while Indonesia rebounded in July after its valuations were downgraded and became attractive again. However, Indonesia’s medium-term outlook depends on whether policy credibility can be restored and whether the November MSCI review brings greater clarity.

Overall, Barings sees structural investment opportunities persisting in Asian equities. Market performance will increasingly depend on corporate earnings delivery, balance sheet quality, and valuation reasonableness. In an environment where the AI investment theme continues but volatility rises, companies with solid fundamentals and long-term growth momentum will remain core holdings in portfolios.