Asia Cross Asset: Taking stock of the North Asian equity surge

Hello and welcome to this At Any Rate Asia podcast, where we periodically discuss all things macro and markets in Asia. I'm your host, Tarindam Sandilya. I look after Asia macro strategy for the bank.

Now as far as Asia goes, there's so much going on at a top down and bottom up level across the region that we can almost host a podcast length conversation per country. For starters, there's this small issue of the ongoing closure of the Strait of Hormuz, which has had differentiated impacts across various Asian countries, has been particularly painful for South Asia. The degrees of freedom available to policymakers to respond to this challenging set of circumstances also differs quite a lot by country.

But once again, the surplus North Asians with tech driven external and fiscal surpluses find themselves in a better position than the cash strapped South Asians tearing down the barrel of wider fiscal deficits and some degree of FX instability. But by far the most pronounced dimension of the haves versus have nots divide across the continent is along the AI winner, loser axis, which also happens to overlap with this geographical North versus South divergence. So on the one hand, you have the likes of Cosby and TWSE that have racked up almost scarcely believable and almost 80% and 40% returns to ITD respectively, while the likes of Nifty and JCI in South Asia have trailed severely at minus 10 and minus 22% respectively.

So in this podcast, what we're trying to do is unpack this AI driven outperformance of the quite literally and metaphorically Northern block. To do which I have with me Mixo Lars, Asia equity and quant strategist responsible for coverage of Korean and Taiwan equity markets. Mixo has been jet setting across the region and beyond over the past several weeks, given the enormous investor interest in the space.

And it felt, therefore, an opportune time to get him on this podcast to discuss his takeaways from his many client conversations. Mixo, welcome. Hope you've been able to catch some rest over the weekend after a hectic few weeks on the road.

Thank you. Thank you for having me. Pleasure to talk to you.

Great. So maybe for starters, just set the stage for us on this swashbuckling AI trade in North Asian stocks. You know, this AI team has been popular for several quarters now, so it's not exactly new news for investors.

And Korean and Taiwanese equities have already enjoyed phenomenal values in 2025 on the back of this trend. And yet, if you look at 26, you know, the YTD performance has already surpassed 25. And the slope of the price charts in particular and to a non equity person like me, they seem to have gone parabolic in just the last few weeks.

For example, Cosby has done what, like 50 percent since the March lows. So very curious to understand what has changed in terms of both fundamentals and flows to generate this sort of extraordinary price momentum. Yeah, that's a fair, fair point and fair observations.

So I would say from my perspective, what we're seeing year to date is that the market set up for the AI stocks has substantially improved since around the end of 1Q. And there's two big reasons for this. Firstly, the AI monetization dynamics have substantially improved year to date.

So this started with the token consumption growth that we saw accelerate through January, February and March. And what we've seen is that across model makers, you know, across the world, the pricing dynamics have improved quite a bit. So the net effect of that is that a lot of concerns that investors had from around late 4Q about the potential issues with monetization of AI, those have improved quite a lot.

So when you think about the CapEx beneficiaries, which is the hardware companies listed in Asia, from their perspective, the money has been coming through pretty much in a straight line. So if the monetization concerns are eased, then that pathway somewhat extends and people have visibility on this CapEx continuing for the foreseeable future. So that's one.

And the second thing with, like you mentioned, the, you know, the breakout of hostilities in Iran, what we have seen is that the macro environment has shifted from what was previously what we would previously call Goldilocks to somewhat like stagflation. And what this means for equity is that while in Goldilocks, you are looking at growth kind of spreading out and broadening out and laggard spaces, value spaces catching up. In the case of stagflation, this becomes a reconvergence trade where the leadership becomes narrow again and stuff that has been doing well, which is mostly in the momentum camp in the AI camp, that continues to do well.

So given a combination of these two things, we have seen a sudden acceleration from the beginning of April in terms of how investors are seeing the prospects of AI companies. And hence, though, you can see the price action in markets. Understood.

So then the obvious follow up for you is, can this momentum continue going forward? And both from a specialist equity, but also from a more generalist macro investor perspective, what should we look out for as catalysts, both positive and potentially negative in the months ahead? That's indeed a question that we get asked probably the most frequently at this point, because I think people sort of understand the positive dynamics in the AI space.

They sort of understand that the visibility on CapEx continuing for the foreseeable future has increased. And as a result, investors are often asking us how this thing could end, right? How this trade could go wrong and how they should be looking out for science in terms of when they should start to take profits here.

So there are many types of problems, right? One is just in terms of positioning. And our colleagues in the positioning intelligence team across the JPMorgan Prime team have commented over the weekend that crowding and momentum seems to have gotten quite extreme pretty much in every region that they track.

So this could lead to some tactical pullback. We are seeing some of that in the price action on Friday and today, where we've seen some profit-taking in the AI space as well. And so this sort of action is perhaps a little bit expected, and you should expect some near-term pause in the momentum upside because of the positioning crowding.

The second thing is just something risk external to AI, right? This could be either the increase in bond deals that we're seeing recently, and I would love to hear your views on that, and how that plays into the broader equity risk appetite overall. And of course, the AI trade being a relatively higher beta trade within the equity space, it does get impacted by worsening of risk appetite.

And thirdly would be policy, where if the global policies, particularly from the US administration, which have so far been very supportive of AI and development of AI, if that turns a bit more cautious, then investors might start to extrapolate that into meaning that the hyperscalers in the US might also slow down spending. So these are, I would say, somewhat external risks or positioning risks into the AI trade, which we are mindful of. But really the question becomes from a more fundamental perspective, where is the monetization going to come from and how is that looking?

And as I mentioned in my previous answer, the monetization aspects have definitely improved year to date. And until we see that worsen again, we are happy to be long in this space and use any pullbacks as opportunities to add positions. Yeah, no, thanks for that, Meg.

So the rise in bond deals that you mentioned, it's a relatively new dynamic, I'd say, for most of the long end of the DN curves. It's the biggest risk that we are tracking ourselves in global macro, I mean, the extent to which this sort of morphs into a quasi duration trade in equities, I think is going to be a very interesting plotline to follow in the weeks ahead. But so far, we've discussed the AI trade in North Asia almost as a monolithic block, not really made any nuanced distinction between the two players, Korea and Taiwan, who of course have different strengths, they operate in slightly different areas of the tech stack, you'll know far better than me.

Are there any differences to flag here between how these two markets may behave, their relative resilience, or is it just one big AI team without a lot of subsurface nuance? I mean, if you don't want to get into the nitty gritties and details on this, it is actually reasonable to treat all of this as a monolithic AI trade, because in the end, the biggest exposures in both Korea and Taiwan tech, which is basically driving the upside in Korea and Taiwan, both of these are exposed to capex that is coming out of the US hyperscalers. So they're all building towards the same stack.

So the volumes are going to be very similar. So any increase in US capex is going to flow through into upside in revenues for both Taiwan and Korean hardware stack. That having said, when you look at, if you do want to get into the nitty gritties, what you see is that across the hardware stack, the best performing stocks have been in segments where there has been pricing power.

Now this pricing power results from two things. One is just a supply and demand and pretty much at this point, every segment is in somewhat supply shortage. And so there is some element of pricing power across the entire stack.

But secondly, it's how the industry behaves in terms of competitive dynamics, and also the relationships that these companies have with their customers and how they choose to maintain those. And here we've seen a significant divergence between what the large caps in Korea are doing versus the large caps in Taiwan, where there's been a lot more pricing discipline in Taiwan. And as a result, the upside to revenues upside to earnings has been relatively muted.

Whereas in the case of Korea, you've seen substantial increase in pricing. And as a result, revenue estimates, earnings estimates are up in a very, very large fashion. So for example, the memory makers in Korea, their earnings in 2026 versus 2025 is any up anywhere between five to six times.

But those numbers to somebody operating in relatively far more muted, less volatile rates and FX markets just appear outside of our limits of comprehension. But let me wear my FX hat for a minute here, maybe vent a little bit and try to understand better from you this great asset class disconnect in North Asia that we've seen over the past few months. You know, while domestic equities have been on an absolute tear, there's been no such luck for currencies such as the Korean won and the Taiwan dollar, right?

So one key reason that's been cited always on a backward looking basis is that FX has underperformed, especially in the case of Korea, because of the outsized amount of foreign selling amid this ongoing price boom, which is surprisingly nearly 2x in dollar billion quantum of the outflows that we've seen, even from an under pressure equity market like India YTD. And this has broken down the previous equity FX correlations. So very, very curious to understand from you what is driving this strange flow behavior on behalf of foreigners?

No, it's a fair question. And it's, you know, again, across our investor discussions over the last few weeks in the US, in Hong Kong and in Singapore, there is some amount of confusion among investors as to why there's been such large foreign selling. And like you mentioned, this has been particularly large in the case of Korea, but we've also seen outflows from Taiwan.

But again, I would first point out that all of these outflows, both in Korea and in Taiwan, are very limited to the large cap stocks. So we've seen investors sell very concentrated positions in the large cap stocks. And I think one of the reasons that we can somewhat point to is that these positions on their portfolios, on the books, were just getting extremely large and difficult to manage from a risk management perspective.

And as a result, particularly for EM and Asia long only investors, they've started to hit either portfolio position limits or their risk limits. And as a result of that, they've been trimming their positions really through most of 1Q. We've seen some buying from foreign investors in 2Q, but it's relatively small in size.

So perhaps this selling that we've seen from foreign long only investors in 1Q has been the biggest driver of these country level equity outflows from both Korea and Taiwan. Now, the other thing that we also hear is that the hedging activity from investors has changed in terms of their equity positions in Korea and Taiwan. Now, we don't have really much visibility into this and how this is evolving.

So I'd love to hear your views on why you think the Korean won and Taiwan dollar have underperformed so much, given the context that equity markets are doing so well. I'll make so if I and many of my brethren in this macrospace could explain that, we'll probably not be having this particular conversation, but it's a very head scratchy state of affairs. You alluded to the change in FX hedging behavior of foreign flows coming into North Asian stocks.

We heard this chatter last year as well, as you said, data on this is scarce. But if inflows into these equity markets in the back half of last year were FX hedged, then it would not be unreasonable to think that outflows this year would also be FX hedged and therefore this should be relatively FX neutral. But obviously the revealed evidence in terms of price action is that has not been the case.

There's not a lot that you can convincingly hang your hat on, to be honest, other than those outflows having a substantial FX component for whatever reason. One reason that's been put forward is that a lot of this money exiting is supposedly old money that's been sitting in green equities for a long period of time. So this is sort of a first in first out type dynamic and those old flows that FX unhedged and therefore that outflows have had an FX impact.

And so we don't know. We don't know that that's the that's the truth of it. We are looking back at the price action and trying to fit a story to it.

They could generically point to a hit to trade balances across the region from higher oil prices, but it's really not a specifically Korea or Taiwan affliction. In fact, for Taiwan in the past, there's been a pattern of currency authorities allowing the TWD to appreciate a little bit during previous higher oil price instances in order to cushion some of the important inflation effects. But that hasn't repeated in this cycle.

So, you know, at least there you can point to this structurally reduced footprint of Taiwanese lifers as far as their FX hedging needs go after the regulatory changes that the FSC has brought about in the last several quarters. But Korea in particular has been a mystery. I mean, it's far overshot in terms of weakness.

It's beta to DXY. So the fact that DXY is up a little less than 1% YTD is not really adequate explanation. And all of this is happening at a time when tech exports are on a total tear.

The domestic outflows from the National Pension Service and from the retail investor crowd, which were big drivers of one weakness last year, have been relatively muted. And this is not accidental. This is in response to measures that have been enacted by Korean authorities to incentivize retail repatriation onshore, as well as changes in the hedging methodology of the NPS.

And third and most importantly, I think the dynamic that macro investors are focused on is between April to November, there was going to be this $4 to $5 billion at least of monthly inflows into Korean bonds, mostly FX unhedged as a result of inclusion into the World Government Bond Index. And when we run the monthly BOP math, this sort of $4 to $5 billion positive delta was supposed to overcome all the negatives of the past year and prove to be a genuine tailwind for the one. Obviously, that story has not played out.

And I suspect there is a degree of disillusionment amongst the macro crowd. And I think this might leave policymakers with a headache if at any point over the next several months, either the Fed story or the DXY story, which have really been quite benign so far, were to turn more adverse. Right.

Now, away from the FX piece of it, a more generic question to you. You've been on this whirlwind marketing trail over the past few weeks. Obviously, AI and North Asian art performance has been front and center of your discussions.

But just keen to hear what other topics have frequently come up or any pushbacks to our views, which would be interesting for our audience. Yeah, so a lot of the foreign investors we meet are long-only investors looking at the EM portion of global equities or EM or Asia. And there's a sort of bittersweet feeling among these investors, because clearly EM equities have done really well last year, this year, and are outperforming developed markets and U.S. equities, which is really a first in almost 15 years' time now.

But the fact remains that much of this upside is basically being driven by a bunch of stocks which are doing really well in the tech space, and they're doing really well because of the spending that's coming from U.S. hyperscalers. So would you really consider this sort of EM indigenously-driven upside or something that's unique to Asia, or would you just consider this an offshoot of what's happening in the U.S.? So this is something that investors are struggling with.

They love to see the good performance, of course, but the fact that this is not somewhat intrinsically driven by what's happening in Asia and EM makes it a harder sell for global allocators and real money. So that's something that I feel investors feel bittersweet about. I think, relatedly, what we are starting to hear from investors is questions about potential wealth effects, right?

Because equities have done so well, and we know households in Korea and Taiwan tend to be large owners of equities, so there's potentially a very large wealth effect coming from there. We hear from consumer companies, luxury companies across the world, that there is activity picking up in both of these markets. There's a lot of questions also around looking for trades outside of AI, because, like I mentioned, while AI is like 45% of the market here in Asia, there is a bit of positioning from investors' side which is already long, too very long, so there is a bit of a hunt going on for trades other than AI.

And, as we discussed briefly previously, we get a lot of questions more recently on the rates move as well as what's going on in terms of the situation in Iran and the impact that it should be having on oil prices and how each of these markets and economies are preparing their oil balances, trying to sort of offset and buffer the impacts that they're seeing from energy markets. So those are some of the frequently asked topics that come up, but, obviously, across many of these discussions, there's a lot more nuances that come through. All right.

Fantastic. Thanks so much for that, Mikso. Thanks for making time for this podcast.

Thanks to all our listeners for tuning in. I hope this discussion has proven useful for you. We look forward to continuing this conversation with you on At Any Rate Asia.