What’s Next for Asian Stocks as Year Ends?
There was a sharp turnaround in Asia’s top-performing sector in Q3. Here’s why that’s unlikely to last.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
It’s time to check the score heading into the fourth quarter.
Asian stocks are generally performing exceptionally well. The S&P Asia Pacific Broad Market Index is up 28.7% year to date, more than double the 12.8% gain for the S&P 500.
But there’s also been a sharp divergence between Asian markets in 2026, an issue I first explored in Q2. Allocate to the wrong country or sector, and you could be looking at a loss for the year so far. Q3 even saw Asia’s most-successful investment play being overturned.
Asia 50 Up Almost 50%
So where should we be looking as we move toward the end of the year? To make the comparisons even, I’m looking at the S&P Dow Jones indexes tracking these sectors and markets.
Much of Asia’s performance is explained by AI. Or the absence of it.
You have done phenomenally well investing into the largest Asia listings. The S&P Asia 50 index has powered ahead 46.7%. The index tracks 50 blue chips across four markets: Hong Kong, Singapore, South Korea and Taiwan.
U.S. investors are able to track that index via the iShares Asia 50 ETF (AIA). That will give them a hefty dose of semiconductor exposure, with the largest three holdings coming in the form of chip foundry Taiwan Semiconductor Manufacturing Co. (TSM) (TW:2330), the largest component at 22.8% of assets; and the two Korean chip heavyweights, Samsung Electronics (KR:005930), at 14.9%, and SK Hynix (SKHY) (KR:000660), at 7.0%.
The Asia 50 is, however, supplemented by other major Asia-based companies. The entertainment conglomerate and WeChat app operator Tencent Holdings (TCEHY) (HK:0700) is 4.2% of assets, China’s e-commerce market leader Alibaba Group Holding (BABA) (HK:9988) is 4.1%, and the banks DBS Group (DBSDY) (S:D05) at 2.4% and China Construction Bank (HK:0939), at 2.3%, also rank among the largest components.
While semiconductors explain the outperformance of the Asia 50, the chip play lost its way in Q3.
South Korean stocks lost 19.7% for Q3 as semiconductor stocks came off their June all-time highs. Even after that correction, however, the Korean market is up massively with an Asia-best gain of 71.2%, just ahead of the S&P Taiwan Broad Market Index, up 70.3%. TSM, Samsung and Hynix explain most of those moves.
The ‘Opposite of AI’
On the flipside, stocks are down 5.2% in India for the year, the “anti-AI” play. India’s information/technology outsourcing providers stand to suffer if AI replaces their roles. That has produced steep corrections in the likes of Wipro (WIT) (NSE:WIPRO), Infosys (INFY) (NSE:INFY) and Tata Consultancy Services (TTNQY) (NSE:TCS), all down more than 35% so far in 2026.
You have fared even worse as an investor into China (where stocks are down 6.9%), the Philippines (down 13.2%) and Indonesia (down a whopping 31.2%). China and the Philippines both suffer slowing growth, while Indonesia has suffered massive outflows due to questions surrounding market transparency. Index provider MSCI continues to threaten to downgrade Indonesia from emerging-market status down to a frontier market, a decision that now looms on November 11.
India’s woes explain why the communication-services sector in Asia is down 11.9% for the first three quarters of the year. That’s the worst sector showing, with losses across Asia also in consumer discretionary (down 7.4%), real estate (down 6.4%) and consumer staples (down 1.1%).
Financials Benefit as Rates Rise
Tech is the top sector in Asia, up 72.3% thanks to the strong semiconductor showing. It’s a surprise, though, to see financials as the next-best sector in Asia, with the banking sector posting gains of 19.4% through Q3.
In large part, that’s because Asian central banks have shifted to a tightening stance, bringing higher interest rates, and higher bank margins. Even the Bank of Japan, which pioneered negative interest rates when it trimmed them below zero in 2016, has turned hawkish. We are also seeing corporate-governance reforms in Japan and South Korea that are improving dividend-payout ratios and protections for minority shareholders.
Buy Sector Selloffs, Avoid Stock-Specific Plunge
Where will Asian markets head for Q4 and into 2027?
There was a fascinating column penned by Spencer Jakab in The Wall Street Journal on September 18. “How to Tell Whether a Plunging Stock Will Keep Plunging” looks at whether it truly pays to reach out and grab that falling knife.
The story points to analysis from Adam Parker and the team at Triumvirate Research, studying thousands of sharp drawdowns over the last 25 years. Ruling out biotech stocks surrounding drug failures or approvals, as well as financial crises, the Triumvirate team essentially found that:
- It pays to buy into sector selloffs like the “SaaSpocalype” that saw software companies sell off in February
- It does not pay to buy into stock selloffs produced by earnings disappointments and other company-specific results
There is no sign heading into 2027 that the exceptionally tight supply in the semiconductor sector is easing. Major chipmakers have sold out their entire production for next year, and earnings continue to be exceptionally strong.
We saw that on Wednesday night with strong numbers from Micron Technology (MU). Micron, Hynix and Samsung can’t keep up with demand. Yes, there are quibbles about Micron’s gross margins, producing Thursday’s 1.2% loss in early Thursday trade. But sales and earnings beat expectations.
To me, the sector weakness in semiconductor stocks is a temporary correction after they overheated in June. I would expect continued strength so long as we see the AI buildout continue. The Asia 50 and the major chip stocks should continue to lead into next year.
We are seeing slowing sales growth in the I/T outsourcing companies. I would therefore continue to avoid Indian equities unless we see earnings improvements from its major companies. The concerning economic conditions in China, the Philippines and Indonesia will likely continue to pressure stocks there, with the potential for a bounce in Indonesia at least should MSCI remove the market-status downgrade threat with its decision due on November 11.
At the time of publication, McMillan was long TSMC.
