Asia's Stock Funds Shift Focus to Laggards Amid AI Volatility

Singapore, Singapore Jul 25, 2026 ALN: [HONG KONG] Investors in Asia are increasingly shifting their focus from high-flying stocks associated with artificial intelligence (AI) to more traditional sectors and underperforming companies. This trend is underscored by a growing sense of caution among fund managers, who are trimming their bets on popular AI trades due to heightened volatility in the market.

Major investment firms, including Fidelity International and BNP Paribas Asset Management, have begun reducing their exposure to South Korean equities and semiconductor stocks, reallocating funds to Chinese companies instead. M&G Investments has similarly cut its holdings in Taiwan, while Eastspring Investments has opted to invest in lagging markets, particularly in India. This strategic shift indicates a broader trend among investors who are seeking stability in their portfolios amidst unpredictable market conditions.

The implications of this shift are significant. South-east Asian stocks are on track for their best monthly performance against broader Asian peers in 24 years, with Indonesia emerging as one of the world’s top performers in July. This newfound interest in South-east Asia is not just a fleeting trend; it reflects a deeper reassessment of risk and opportunity in the region. India, in particular, has attracted considerable foreign investment this month, signaling renewed confidence in its market dynamics.

The reshuffling of investment strategies highlights the growing caution among investors regarding the AI trade. In Asia, the AI sector has experienced wild swings, particularly in markets like South Korea, where stock prices have fluctuated dramatically. Even as global chip stocks have staged a partial recovery from a significant downturn earlier this month, concerns about companies' ability to monetize AI technology have prompted fund managers to explore opportunities in more defensive sectors. These sectors include banks and consumer goods, as well as underperformers like China’s Internet giants, which have not seen the same level of enthusiasm as their AI counterparts.

Ian Samson, a portfolio manager at Fidelity, commented on the current market volatility, stating, "The extreme volatility you’re seeing in Korea and to a lesser extent Taiwan has made it a little bit more difficult to buy the dip. The volatility means that from a portfolio construction perspective, we have to be careful about buying too aggressively." This sentiment is echoed by other investment professionals who are re-evaluating their strategies in light of the unpredictable market environment.

Citigroup has also made adjustments, recently cutting its exposure to Korean stocks while upgrading its allocation to Chinese equities. The bank cited the volatile trading conditions in Korea and the potential for China’s market to benefit as the rally broadens beyond a narrow group of AI winners. This shift reflects a broader trend of reallocating resources to markets perceived as more stable and promising.

In stark contrast to the volatility experienced in South Korea and Taiwan, Hong Kong’s Hang Seng Index is poised for its largest monthly outperformance against Korea’s Kospi index. This performance is bolstered by gains in Chinese internet giants and banks, which have seen a resurgence in investor interest.

Meanwhile, the MSCI Asean Index has climbed 5.8 percent this month, significantly outperforming the nearly 4 percent decline in the MSCI Asia Pacific Index. This marks a pivotal moment for South-east Asian markets, placing them on track for the most substantial monthly outperformance in over two decades. Thai stocks have surged approximately 30 percent this year, driven by optimism surrounding the current government’s ability to stabilize the political landscape. In Indonesia, bank stocks have rallied following an unexpected rate hike by the central bank, further contributing to the region's positive momentum.

India has also seen a robust influx of foreign capital, with approximately US$2 billion flowing into its equities market this month. This influx positions India as one of the top destinations for investment in the region. Notably, shares of major information technology firms such as HCL Technologies and Tata Consultancy Services have rebounded, rising about 18 percent and 11 percent, respectively, in July. This recovery reflects a growing belief in the potential of Indian tech firms despite the broader market uncertainties.

However, some investors caution that this rotation towards more stable stocks may be tentative. There remains a long-term optimism about AI demand and the potential for earnings growth in that sector. Additionally, a recent surge in oil prices poses a threat to the momentum of energy-dependent markets, including those in South-east Asia and India. This duality of opportunity and risk creates a complex landscape for investors navigating the current market.

Yi Ling Ong, managing partner at Golden Horse Fund Management, noted, "We have been trimming Korea exposure progressively over the last couple of weeks as risk/reward became increasingly asymmetric at these levels – though this is tactical rebalancing rather than a structural exit." This perspective highlights the ongoing assessment of risk versus potential reward in an environment marked by volatility.

Looking ahead, the market is poised for a critical test as major tech companies prepare to report their quarterly earnings. Alphabet's plans to invest up to US$200 billion this year in AI computing power provided a brief boost to hardware stocks, although a sell-off resumed shortly thereafter. The upcoming earnings reports from Meta Platforms, Microsoft, and Apple will be closely watched, as these companies have forecasted significant capital expenditures, with estimates reaching as high as US$725 billion for this calendar year. Analysts predict that this figure could climb to nearly US$900 billion by 2027, reflecting an aggressive push into AI technology.

Despite this optimism, persistent concerns that the AI rally has advanced too quickly remain a key factor influencing investor behavior. The uncertainty surrounding the sustainability of AI growth is prompting many to seek refuge in less glamorous stocks that offer steadier returns and clearer earnings prospects. John Tsai, portfolio manager at Eastspring Investments, encapsulated this sentiment, stating, "It’s just the uncertainty, unpredictability of this volatility," adding that the next phase of market rotation will depend heavily on the performance of major US tech companies and their long-term capital expenditure guidance.

In conclusion, the current landscape of Asian stock funds reflects a significant shift in investor sentiment. As caution prevails amid AI volatility, a growing number of investors are turning their attention to traditional sectors and lagging stocks that offer the promise of stability and predictable returns. This trend not only highlights the complexities of the current market but also underscores the evolving nature of investment strategies in response to shifting economic conditions and technological advancements.