We believe such diversification opportunities and performance variations underscore the potential advantage of an active approach.
Where are the opportunities? On the hardware side, Asia’s chip companies, as well as suppliers of servers/storage and related materials and manufacturing processes, are aiding the buildout.
In software, companies in AI-generated content technologies (e.g., natural language processing, large language models, computer vision) and applications for end users (e.g., chatbots, video/game engines, virtual humans/assistants) are speeding up adoption. The same can be said of companies with technologies that interact with the physical world (e.g., autonomous driving, humanoid robotics, AI of things).
China clouds
China’s economic outlook remains foggy. U.S./China tariffs are key to watch. In addition, China’s property sector needs more fixing, consumers aren’t spending enough, society is aging fast, geopolitical and economic tensions have risen and fiscal reforms continue to underwhelm. While all of this undermines short-term equity market performance, AI is about the long term.
DeepSeek’s large language models advanced the conversation on AI, stressing efficiency in technology and capital deployment. The buildout to general purpose AI will still require massive investment over multiple years. In the short horizon, China’s AI-empowered tech companies could stimulate consumer and business demand in ways monetary and fiscal policies have not. We see three reasons for this:
First, these companies, particularly the internet commerce giants, have a pulse on people’s wants and incentives to spend. Second, both enterprises and individuals in China are known for their strong impulse to adopt new technology. Third, tenuous geopolitical and global trade dynamics compel policymakers to focus on domestic growth engines, and private enterprises appear optimally positioned. President Xi Jinping’s recent meetings with company executives could signal a new era of cooperation.
Our analysis finds that the pre-tariff surge in China-listed shares of diversified internet commerce giants with cloud services was well-grounded in fundamentals. An optimistic view could see the positive momentum broadening in the market, yet caution and a selective approach is warranted as China’s economic story continues to evolve and geopolitical factors, including those related to U.S. policy, feature heavily.
A growing AI ecosystem
AI proliferation outside traditional tech sectors has accelerated thanks to easier and cheaper ways to access it, and as more efficient use of computing power maximizes the capabilities of existing hardware. Asian countries are embracing the AI revolution, from the big infrastructure build to adoption via applications and automation. Japan, for example, has led in efforts to use technology to address societal problems such as the aging population and labor shortages.
Since Chat GPT came out at the end of 2022, correlations across the AI opportunity set have varied widely within Asia. They’ve also shown differentiation relative to their U.S. counterparts in the NASDAQ 100. Our calculations show correlations in the area of 64% for hardware and semiconductors and about 38% for application and physical AI.1
For investors looking forward to the long-term AI opportunity, we believe a global approach to investing in the theme could gain from Asia’s ample breadth, liquidity and potential for sector and currency diversification.
