AI slump boosts demand for China and India stocks

The decline in AI-related investments following the US midterm elections has led to renewed interest in Chinese and Indian stocks, as well as companies benefiting from easing inflation and trade tensions.

Aberdeen Investments favors markets powered by stronger domestic growth, including India and Vietnam, while hedge fund Lotus Asset Management is long Hong Kong equity futures.

Asia has been among the hardest hit by the market fallout from the Democrats' sweep of Congress, with many of the region's biggest stocks being critical suppliers to the global AI build-out.

Rajeev De Mello, global macro portfolio manager at Gama Asset Management SA, expects investors to diversify more broadly and reduce their concentration in the AI trade, which should be supportive of China and other markets where valuations are less demanding.

India's appeal has increased as oil prices fall and its lack of AI exposure is viewed as an advantage, with its benchmark Nifty 50 gaining 8.6% last week, marking its best performance since 2021.

Foreign investors have returned to India in force, with $1.9 billion flowing into local shares, according to recent data.

Beyond China and India, investors are also looking at other parts of Asia with less exposure to the AI boom, including healthcare and consumer staples firms.

In South Korea, Fidelity's long-only portfolio manager Dale Nicholls noted early signs of rotation beyond the semiconductor heavyweights, particularly among domestic pension funds, with consumption-related areas standing out.

Hedge fund ACG Management Pte. highlighted Korea's consumer stocks as benefiting from their domestic orientation and limited US policy risks.

Investors remain cautious about AI, with some seeing the selloff as an opportunity to buy the dip, while others continue to sell AI-focused stocks.