AI rout after US midterms hits Asia hard, reviving out-of-favour Chinese and Indian stocks

The AI trade suffered a significant setback following the US midterm elections, which has led investors to reevaluate their Asia investment strategies. This shift has revived interest in previously out-of-favor Chinese and Indian stocks, as well as companies poised to benefit from easing inflation and trade tensions. Aberdeen Investments favors markets driven by stronger domestic growth, such as India and Vietnam, and sees potential in Chinese technology firms.

Hedge fund Lotus Asset Management is long Hong Kong equity futures, while Allianz Global Investors is looking into healthcare and consumer companies. Asia has been among the hardest-hit regions by the market fallout from Democrats' victory in Congress, with many of the region's largest stocks, including Samsung Electronics, SK Hynix, and Taiwan Semiconductor Manufacturing Co., being critical suppliers to the global AI build-out.

This exposure has left local markets especially vulnerable, prompting investors to brace for increased scrutiny of the industry and question whether substantial investments in computing infrastructure will generate sufficient returns. Rajeev De Mello, a global macro portfolio manager at Gama Asset Management, anticipates a broader diversification among investors, reducing their concentration in the AI trade.

India could potentially benefit, despite its dependence on imported energy, as its valuation is less demanding compared to other markets. Hong Hao, chief investment officer at Lotus, is betting against oil and petrochemical firms, while going long on precious metals and Hong Kong equity futures. Hong Kong's gauge tracking mainland companies saw a 5.2% gain last week, marking its best performance since March 2025.

Moreover, some global investors are viewing China's onshore market as a diversifier from their AI-heavy portfolios. India's appeal has grown as oil prices declined due to expectations of an early end to the Iran war, alleviating a key pressure point for the energy-importing economy. The market's lack of AI exposure is now seen as an advantage.

Logos Asset Management's chief investment officer, Charlie Hong, sold his shares in SK Hynix, Samsung Electronics, Intel, and Lumentum Holdings in October and has since increased his Indian holdings with new-age tech companies, financial firms, and contract drug manufacturers. India's benchmark Nifty 50 gained 8.6% last week, registering its best weekly performance since 2021 as overseas investors returned in large numbers.

After the recent rally, key benchmarks in India and China were among the world's worst-performing stock indexes through October. Beyond China and India, investors are also exploring previously overlooked Asian markets with value and less exposure to the AI boom. While defense and financial stocks may underperform, healthcare and consumer staples firms could gain from the perception of limited tariff and policy risks from the US.

In South Korea, Fidelity's long-only portfolio manager, Dale Nicholls, sees early signs of rotation beyond semiconductor heavyweights, particularly among domestic pension funds. He highlights sectors like wellness, K-pop entertainment agencies, and the beauty and cosmetics industry. At hedge fund ACG Management, managing director Hui Ling Loh points to consumer stocks in South Korea, including retailers, cosmetics, food, and beverage, as benefiting from their domestic orientation and limited exposure to US trade risks.

Phillip Wool, head of portfolio management at Rayliant Global Advisors, sees opportunities in South Korea and Taiwan, but believes the focus should be on companies beyond the highly overvalued chip stocks that have experienced significant gains and now face considerable unease. The prospect of less isolationist US trade policies has increased investor confidence in auto firms like Toyota Motor and Hyundai Motor.

However, not everyone is ready to abandon the AI sector, with some investors viewing the recent sell-off as an opportunity to buy the dip due to the longer-term growth prospects of the industry. Foreign investors are expected to continue selling Asia's AI "picks and shovels" stocks. Manishi Raychaudhuri, CEO of Emmer Capital Partners, emphasizes that India and China remain the only two large liquid markets offering a diverse array of non-AI exposures.