Why 2026 is like 2020 for Asian equities

For investors in Asian equities, the current market environment is not without precedent. The closest recent parallel is 2020, when momentum outperformed the broader benchmark by over 50% and capital became heavily concentrated in a narrow cohort of high-growth, often unprofitable companies. 

Today’s environment presents a more nuanced challenge. As in 2020, returns are highly concentrated and momentum-driven, now centred on AI beneficiaries. However, unlike then, the current market leaders are not uniformly expensive. Select semiconductor memory names, for example, are delivering extraordinary earnings and, in some cases, still trade on low forward multiples of around six to seven times earnings.

The valuation paradox

The present scenario creates an important paradox. On the surface, these companies appear inexpensive; in reality, those valuations are anchored to exceptionally strong and potentially peak-cycle earnings. What matters, therefore, is not simply the multiple, but the sustainability of the earnings base to which that multiple is applied. In our view, current pricing in parts of the AI supply chain increasingly reflects expectations that are both elevated and fragile. Should demand normalise, supply respond, or capital intensity rise, there is a risk that earnings expectations are reset, potentially sharply. In such a scenario, what appears optically cheap today may prove less so in hindsight.

We therefore characterise parts of this opportunity set as ‘ambiguously cheap’: attractive on near-term metrics, but with a high degree of uncertainty around the durability of current profitability and the point in the cycle those earnings represent. 

A dispersion in expectations

This caution is reinforced by the broader market backdrop. Many global equity markets, including the US, Japan, Taiwan, South Korea and India, have been trading at or near all-time highs. By contrast, China, Hong Kong and parts of Southeast Asia remain well below prior peaks, in some cases by a significant margin. This divergence reflects a meaningful dispersion in expectations, with capital concentrated in perceived winners while other markets continue to price in a far more pessimistic outlook.

In contrast to these ‘ambiguously cheap’ areas, other parts of the market, most notably China and selected parts of Southeast Asia, remain what we would describe as ‘unequivocally cheap’, with valuations that embed a far greater degree of pessimism and offer clearer asymmetry alongside lower risk. This is evident not only at the index level but also in high-quality franchises. A major Chinese tech firm, for example, continues to deliver solid operating performance with earnings growth in the high teens, yet trades at approximately 11 times forward earnings – a level that would be difficult to reconcile with an equivalent US-listed peer, where comparable assets would likely command materially higher multiples.

First principles

From a first-principles perspective, the macro backdrop further reinforces this opportunity. Chinese risk-free rates remain exceptionally low, with the 10-year government bond yielding around 1.7% and deposit rates below 1%. Against this backdrop, the Hang Seng Index offers a dividend yield of over 4%, among the highest across major global markets. This combination – low cost of capital, depressed equity valuations, and elevated income – may help make the case for equity ownership. Similar dynamics are evident in parts of Southeast Asia, particularly in banking systems where profitability remains robust and valuations undemanding.

As history has shown, periods of extreme concentration tend not to persist indefinitely. When leadership broadens and fundamentals regain primacy, we believe this balance between participation and discipline can capture better risk-adjusted returns.