(Bloomberg) — Asia’s artificial intelligence-fueled rally is masking signs of strain, with gains in tech names overshadowing the impact of the US-Iran war on the broader market.
A rotation back into AI has propelled the region’s tech gauge almost 10% higher since the Middle East conflict began, taking it to an all-time high this week. In contrast, most other sectors remain under pressure, with consumer discretionary down nearly 10%.
The divergence underscores persistent concerns over higher energy costs for Asia’s oil-importing economies and their impact on household spending and corporate profits. Strategists say the gap is likely to widen amid uncertainty over the Strait of Hormuz reopening, even as Asia’s stock benchmark rebounds toward record highs.
“This is a one-engine market in two worlds — tech is carrying returns in a vacuum while the rest of Asia’s real economy absorbs a war-driven shock,” said Hebe Chen, senior market analyst at Vantage Global Prime. “Info-tech’s resilience is less a vote of confidence than a process of elimination, as most sectors are directly exposed to higher energy costs and slowing demand.”
The divide is also evident in profit expectations. Earnings-per-share forecast for MSCI Inc.’s info tech sector has risen nearly 60% over the past three months, while estimates for the consumer discretionary sector have fallen by about 7%.
Robust chip demand lifted sales for chipmakers such as SK Hynix Inc. and Taiwan Semiconductor Manufacturing Co. in the first quarter. Regional tech hardware makers may see continued gains as major customers announce AI spending plans — Alphabet Inc. and Meta Platforms Inc. raised their outlooks for capital expenditures in reports before markets opened in Asia on Thursday.
But other companies have begun warning of profit pressure from rising costs and supply-chain disruptions. Shares of Toyota Motor Corp. and Japan Petroleum Exploration Co. have fallen around 19% and 4%, respectively, since the war broke out amid such concerns.
“Outside of AI, there is a genuine absence of catalysts, and many companies’ spending plans and margin outlooks remain on hold until there is greater clarity on the conflict,” said Fabien Yip, a market analyst at IG International. “That gap may widen before it narrows.”
Upcoming earnings commentary may offer investors clearer clues on the war’s impact, with Japanese airlines ANA Holdings Inc. and Japan Airlines Co. set to report results this week. Some, including Shin-Etsu Chemical Co., have withheld forecasts due to price fluctuations caused by the situation in the Middle East.
Of the stocks on the MSCI Asia gauge, only 55% are trading above their 200-day moving average, signaling weak investor conviction in the broader market. In Japan, the benchmark Topix index has underperformed the tech-heavy Nikkei 225 since the conflict, showing the rally’s skewed performance.
The high degree of fund flow concentration in AI is unlikely to be sustainable over the long term, Masanari Takada, a quantitative and derivatives strategist at JPMorgan Securities Japan, wrote in a note. “Without a decline in uncertainty in sectors other than AI/semiconductors and a resulting rotation of funds into these sectors, the inflow of speculative capital is likely to remain stagnant.”
Such narrow market breadth leaves Asia’s stock rally vulnerable. Any slowdown in capital spending by global hyperscalers could derail tech-driven gains, while doubts over the payoff from heavy AI investment have resurfaced after reports that OpenAI fell short of its targets for user growth and revenue.
A credible signal on easing tensions between the US and Iran may lift lagging sectors such as consumer, real estate and materials. Still, economic damage due to the war fallout will not unwind quickly. Authorities in Japan and Thailand have slashed growth estimates as elevated oil prices cloud outlooks.
“Ultimately, the end-game visibility matters more than these technical details for major APAC markets, although the process will still prove more painful for smaller and vulnerable economies outside the key financial market benchmarks,” said Homin Lee, senior macro strategist at Lombard Odier in Singapore.
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