Asia and EM Outlook 2H26: AI powers the next leg higher as valuation remains attractive

• AI remains the dominant growth engine. North Asia continues to lead the region as surging AI infrastructure investment, persistent semiconductor supply constraints, and strong pricing power support a multi-year earnings upcycle for Taiwan and South Korea.
  
  
• China's AI opportunity extends beyond semiconductors. China's AI investment is accelerating across the entire stack — from energy to large language models and applications — creating a new structural growth engine, even as the broader economy remains two-speed.
  
  
• Singapore offers diversified returns beyond AI. A recovery in electronics exports, resilient industrial earnings, attractive bank dividends, and ongoing capital market reforms make Singapore a compelling source of both income and growth.
  
  
• Valuations remain supportive despite strong market gains. Asian and emerging market equities still trade below their historical averages and developed market peers — a discount that looks increasingly unwarranted given improving corporate governance, AI-driven index composition, and stronger earnings.
  
  
• Broadly constructive, but selective in individual market exposure. We favour Taiwan, South Korea, China's AI ecosystem, and Singapore. India remains the exception — rising macroeconomic pressures, weaker earnings momentum, and limited participation in the AI investment cycle keep us underweight.

The first half of 2026 marked a remarkable run for Asian and Emerging Market (EM) equities. Yet beneath the headline gains, a clear divide emerged between markets directly benefiting from the global AI investment cycle and those still dependent on a broader domestic economic recovery.

North Asia was the standout performer. South Korea and Taiwan delivered exceptional returns as surging investment in AI infrastructure, persistent shortages of advanced memory chips, and strong semiconductor pricing translated into robust earnings growth. Elsewhere, markets such as China, India, and much of ASEAN experienced a more uneven performance.

Looking into the second half of the year, while Asia as a whole should continue to deliver respectable returns, the drivers can become even more differentiated. Investors are likely to be rewarded most by focusing on markets where AI-driven demand is converting into visible earnings growth and valuations remain compelling.

Figure 1: Asian and EM equities led global markets in 1H2026

AI remains the defining growth engine for South Korea and Taiwan

The global AI investment cycle shows little sign of slowing. Combined capital expenditure by Microsoft, Amazon, Alphabet, and Meta is expected to reach USD700–725 billion in 2026, up around 77% from 2025. Importantly, all four hyperscalers continue to describe themselves as supply-constrained rather than demand-constrained, reinforcing confidence in sustained AI infrastructure spending. Much of this investment continues to flow through North Asia, home to the world's most critical semiconductor manufacturers.

South Korea sits at the centre of this investment cycle through its dominance in memory chips. According to Counterpoint Research, Samsung Electronics and SK Hynix together account for approximately 79% of global High Bandwidth Memory (HBM) production and 67% of the global DRAM market at the end of March 2026.  As AI workloads become increasingly memory-intensive, demand continues to outstrip supply, allowing Korean manufacturers to maintain significant pricing power.

TrendForce forecasts DRAM contract prices to increase another 13–18% quarter-on-quarter in 3Q2026, extending quarterly price increases through at least the second half of 2027. Supply shortages are unlikely to ease anytime soon. Both Samsung Electronics and SK Hynix have indicated that their 2026 production capacity is fully booked, while meaningful new manufacturing capacity will only arrive gradually from 2028 onwards. SK Hynix's Indiana facility is expected to begin production around 2028, while Micron's New York mega-fab is not scheduled to commence operations until 2030. These lengthy expansion timelines reinforce our view that the current earnings cycle is likely to extend over multiple years, rather than being a short-lived spike.

Taiwan represents the second critical pillar of Asia's AI investment story. TSMC controlled an estimated 73% of the global foundry market in the first quarter of 2026, supported by robust demand for its advanced process technologies and expanding Chip-on-Wafer-on-Substrate (CoWoS) packaging capacity.

More importantly, Taiwan's competitive advantage extends far beyond TSMC itself. The island hosts one of the world's most tightly integrated semiconductor ecosystems of roughly 190 companies, including chip designer MediaTek, advanced packaging leader ASE, substrate manufacturer Unimicron Technology, and numerous testing and materials suppliers, creating an ecosystem that enables rapid collaboration, efficient procurement, and short production lead times. This dense industrial cluster also translates into a significant cost advantage. According to SemiAnalysis, the 5nm wafer production costs at TSMC's Fab 18 in Taiwan are approximately 2.4 times lower than at its Fab 21 facility in Arizona.

As a result, despite TSMC's overseas expansion, its most advanced manufacturing, engineering talent and CoWoS packaging capacity are expected to remain concentrated in Taiwan. As AI investment continues to accelerate, a substantial share of global AI infrastructure spending will continue to flow back into Taiwan's semiconductor ecosystem, reinforcing its strategic importance to the global AI supply chain.

Related article: Taiwan Outlook 2H26: Taiwan’s irreplaceable AI supply chain and why the re-rating is not over

China’s full stack AI strategy is reshaping its growth story

China is increasingly becoming a two-speed economy. While consumer spending remains subdued and the property sector continues to weigh on domestic demand, AI and advanced manufacturing have emerged as powerful new engines of growth.

AI investment is accelerating across both the public and private sectors. Tencent, Alibaba, Baidu, and ByteDance are expected to increase combined AI capital expenditure to approximately USD84 billion by 2027, around 60% higher than 2025 levels. Complementing private investment, Beijing has launched an estimated RMB2 trillion AI infrastructure programme over the next five years to accelerate semiconductor self-sufficiency and AI adoption. Companies across the semiconductor value chain, from chip designers and foundries to memory manufacturers and equipment suppliers, are well positioned to benefit from sustained localisation efforts.

China's role in the global AI supply chain also extends beyond domestic substitution. Despite efforts to localise semiconductor production, the country remains an indispensable manufacturing base for the global electronics industry. A significant proportion of printed circuit boards (PCBs) used in AI hardware — including systems built for Nvidia, Google, and Apple — are produced in China, by manufacturers such as Victory Giant and WUS Printed Circuit.

Rising global demand for AI-related manufacturing is showing up at the macro level too: China's integrated circuit exports rose by 122% year-on-year in June, while the high-tech manufacturing PMI rose to 53.5, marking its 18th consecutive month of expansion. Together, these indicators highlight the growing importance of AI-related manufacturing as a driver of China's industrial economy.

The benefits are increasingly flowing through to China's internet platforms. Hang Seng Tech constituents such as Alibaba, Tencent, and Baidu occupy the application layer of the AI stack, monetising AI through cloud computing, digital advertising and enterprise software. For the quarter ended 31 March 2026, Alibaba Cloud grew 38% year-on-year, with AI-related products contributing around 30% of external cloud revenue, while Tencent's marketing revenue increased 20%, supported by the rollout of its Hunyuan 3.0 large language model and AI-powered services across the WeChat ecosystem.

Beyond AI monetisation, the earnings outlook for China's internet sector is also expected to improve in 2H2026. Alibaba, Meituan, and JD.com have shifted away from aggressive subsidy-led competition in instant commerce towards improving unit economics and profitability. Alibaba's 1QFY2027 earnings preview suggest this strategic pivot is beginning to translate into stronger earnings, supporting the case for further valuation recovery across the Hang Seng Tech Index.

Singapore offers both AI-driven growth and stable income

While Singapore is not a direct AI hardware producer, it is benefitting from the semiconductor upcycle through its export-oriented industrial sector. AI-driven demand for semiconductor equipment and electronics has driven strong manufacturing demand from Venture Corporation and UMS Holdings. This strength is also reflected at the macro level, with electronics non-oil domestic exports surging 94.8% year-on-year in May.

Beyond semiconductors, other industrial champions including ST Engineering and Yangzijiang Shipbuilding continue to enjoy multi-year earnings visibility, supported by record order books, rising defence spending, and resilient shipping demand.

The Singapore equity market remains anchored by its banking sector, with DBS, OCBC, and UOB accounting for roughly half of the Straits Times Index. Continued geopolitical uncertainty has reinforced Singapore's status as a regional safe haven, supporting wealth management inflows and fee income growth. Meanwhile, with SORA appearing to have reached its trough and policy rates potentially shifting towards gradual hikes, banks could see renewed support for net interest margins. Combined with dividend yields exceeding 4%, Singapore continues to offer one of the strongest income propositions among developed equity markets.

Structural reforms are providing an additional tailwind. As of early June 2026, approximately SGD2.6 billion under the Equity Market Development Programme remained available for deployment, following SGD3.95 billion of completed placements. Liquidity has improved markedly, with SGX’s Securities Daily Average Value (SDAV) rising 79% year-on-year in May and overall market turnover increasing 70%. Small- and mid-cap companies have been among the biggest beneficiaries, supported by improving liquidity and valuation re-rating.

Related article: Singapore Outlook 2H26: Yield, growth and revitalisation in one market

India: The only major market that we underweight

India is the only major Asian market where we remain underweight.

The macroeconomic backdrop has become more challenging. As one of the world's largest crude oil importers, India remains highly exposed to elevated energy prices. Combined with El Niño-driven rainfall disruption, headline inflation has accelerated to 4.4% YoY in June, raising the possibility of further monetary tightening later this year. Fiscal pressures are also mounting, as higher energy subsidies risk pushing the fiscal deficit above the government's 4.3% of GDP target.

In addition, corporate earnings are also likely to remain under pressure. India's IT services sector continues to face restrained enterprise technology spending, while the country's limited participation in the AI hardware ecosystem means it is unlikely to experience the earnings upgrades currently benefiting North Asia. Together with a weakening rupee and subdued foreign capital inflows, these factors create a less supportive backdrop for equity valuations.

Upgrade Asia ex-Japan and EM fair PE multiples

Despite the strong rally in the first half of 2026, Asian and emerging market equities continue to trade at attractive valuations relative to both their 10-year historical averages and developed markets (Figure 2). Importantly, recent gains have been driven primarily by stronger earnings rather than multiple expansion.

South Korea remains a prime example. Despite being the best-performing market, the KOSPI Index trades at just 7.1x forward earnings as of 13 July 2026, as earnings upgrades have outpaced share prices. In China, valuations remain depressed due to overly pessimistic sentiment towards internet companies and the broader equity market. Meanwhile, India's valuation premium has moderated following sustained institutional outflows, bringing multiple back to a more reasonable level.

Figure 2: Asia and Emerging Markets continue to trade at discounts to developed markets and their historical averages

Historically, we applied valuation discounts to Asia and emerging markets to reflect several structural challenges. These included China's regulatory uncertainty and weak private sector confidence, and South Korea's corporate governance issues — both of which contributed to discounted valuations. We believe these structural headwinds have eased meaningfully. In China, stronger policy support for the private sector and a more stable regulatory environment have helped restore some investor confidence. In South Korea, the Corporate Value-up Programme has strengthened shareholder returns through higher dividends, larger buybacks, and treasury share cancellations.

At the same time, AI has fundamentally reshaped the earnings profile of both the MSCI Asia ex-Japan and MSCI Emerging Markets indices. As of 30 June 2026, information technology accounted for roughly half of both indices, up from just over 20% two years earlier. More importantly, earnings are increasingly driven by globally competitive AI leaders whose growth is underpinned by structural, multi-year demand and supply commitments — rather than the short inventory cycles that have historically defined semiconductor earnings. With hyperscaler capex plans locked in and shortages expected to persist over the next few years, this cycle offers substantially more earnings visibility than prior semiconductor upcycles — characteristics that justify higher valuation multiples than traditional cyclical businesses would command.

As a result, we raise the fair PE for the MSCI Asia ex-Japan Index from 13.5x to 14.5x and for the MSCI Emerging Markets Index from 12.0x to 13.5x. Asia ex-Japan should continue to trade at a premium, reflecting its greater technology exposure, superior earnings visibility, and lower allocation to frontier markets. Based on these revised multiples, we estimate 28.4% upside for MSCI Asia ex-Japan and 20.0% upside for MSCI Emerging Markets through FY2028.

Table 1: Earnings projections for the MSCI Asia ex Japan Index

	FY25	FY26E	FY27E	FY28E
PE Ratio (X)	20.2	15.2	12.8	11.3
Earnings Growth (YoY%)	10.3%	33.2%	18.8%	13.2%
Earnings Per Share	54.0	71.9	85.4	96.6
Dividend Yield (%)	1.7%	2.0%	2.1%	2.3%
Target Price (USD)				1,400
Based on 14.5X fair PE ratio
Upside Potential (%)				28.4%
Source: Bloomberg Finance L.P., iFAST Estimates. Data as of 13 Jul 2026.

Table 2: Earnings projections for the MSCI EM Index

	FY25	FY26E	FY27E	FY28E
PE Ratio (X)	18.9	15.3	13.0	11.3
Earnings Growth (YoY%)	8.6%	23.9%	17.2%	15.9%
Earnings Per Share	87.1	107.9	126.5	146.6
Dividend Yield (%)	1.9%	2.1%	2.2%	2.3%
Target Price (USD)				1,980
Based on 13.5X fair PE ratio
Upside Potential (%)				20.0%
Source: Bloomberg Finance L.P., iFAST Estimates. Data as of 13 Jul 2026.

Portfolio positioning: Remain constructive, but increasingly selective

Our highest conviction remains the Asian semiconductor supply chain. Taiwan and South Korea continue to enjoy irreplaceable competitive advantages in advanced foundry and memory chip production. We therefore upgrade Taiwan and South Korea to 4.0 stars "Very Attractive" and raise the Asia Semiconductor theme to 4.5 stars.

Within China, we continue to favour both AI hardware and internet platforms. Semiconductor companies stand to benefit from accelerating localisation and AI infrastructure investment, while Hang Seng Tech offers a recovery and re-rating opportunity as internet companies increasingly monetise AI alongside improving core profitability. We maintain our 3.5 stars "Attractive" rating on China.

Singapore remains one of the region's most compelling defensive opportunities, combining attractive dividend income, resilient earnings growth, and improving market liquidity. We also favour Singapore's small- and mid-cap segment, where stronger earnings momentum and ongoing valuation re-rating provide additional upside. Singapore remains 4.0 stars "Very Attractive".

India remains our least preferred major market. Rising inflationary pressures, weaker earnings momentum, and limited exposure to the global AI investment cycle continue to constrain its relative attractiveness. We maintain our 2.0 stars "Unattractive" rating.

Overall, we remain constructive on Asian and emerging market equities and assign 3.0 stars “Attractive” to both markets, but remain selective in our individual market positioning. The strongest opportunities lie where structural AI tailwinds are translating into sustained earnings growth and remain supported by attractive valuations. This is most evident in North Asia's semiconductor supply chain, China's expanding AI ecosystem, and Singapore's resilient income and reform-driven growth story.

Table 3: Recommended Products

Market / Sector	Recommended Products
Emerging Markets	JPMorgan Funds - Emerging Markets Dividend A (mth) USD Vanguard FTSE Emerging Markets Index Fund ETF Shares (NYSE: VWO)
Asian Markets	M&G (Lux) Asian A Acc USD Fidelity Asia Pacific Dividend A-USD iShares Core MSCI Asia ex Japan ETF (HKEX: 3010)
Asia Semiconductors	Global X Asia Semiconductor ETF (HKEX:3119)
South Korea	LionGlobal Korea USD Franklin FTSE South Korea ETF (NYSE: FLKR)
Taiwan	Franklin FTSE Taiwan ETF (NYSE: FLTW)
Singapore	iFAST-Amova Singapore Equity A SGD Amova Singapore STI ETF (SGX: G3B)
China	Fidelity China Focus A-SGD T. Rowe Price Funds SICAV - China Evolution Equity A USD
China Tech	iShares Hang Seng Tech ETF (HKEX:3067) GF CSI All-Share Information Technology ETF (SZSE:159939)
Hong Kong	Tracker Fund of Hong Kong (HKEX: 2800)

Declaration:

This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.