Is it time to consider Asia Pacific ex-Japan?

By Joss Murphy on 4 February 2026 in Asia/Emerging Markets

Sentiment for the Asia ex-Japan region been poor due to regular underperformance when compared with developed markets over the past decade. More recently, the introduction of US tariffs, a worrying slowdown in China, the strong US dollar and some questionable stock valuations have added to the concerns. But optimism appears to be increasing as we enter 2026, with plenty of exciting stock opportunities and a more favourable economic backdrop.

Setting the scene

Asia equities were resilient in 2025, supported by policy measures, robust domestic demand and AI-driven innovation, according to Mike Shiao, Invesco’s chief investment officer for Asia ex-Japan. He said: “The global monetary environment is likely to continue its rate-cut cycle, prompting investors to rotate away from US markets toward more attractively-valued Asian economies.”

He believes Asian equities will be underpinned by improving earnings prospects, supportive liquidity conditions, and structural reform momentum*. “In this environment, Asian markets are well-positioned to capture both cyclical tailwinds and long-term secular growth trends, offering compelling investment opportunities for global investors,” he added.

A region of innovation

Asia Pacific ex-Japan has been a challenging region for investors over the past decade. The phenomenal economic and population growth hasn’t always translated into market returns.

However, Qian Zhang, investment specialist on the Baillie Gifford Pacific fund, recently told us that there were far more attractive companies available these days. “The universe for us is no longer just very boring banks, utilities and energy companies. There is a genuine broadening of innovation-led companies that are at the forefront of several big trends.”

Qian believes there are four significant themes: AI hardware, advanced manufacturing, supply chain dynamics and rising domestic consumption. She gives in-depth insights into these themes in our recent podcast interview:

Korea, China or India?

Sean Taylor, manager of Matthews Pacific Tiger, expects the AI theme to develop, benefiting both Taiwan and Korea from the capital expenditure of US hyperscalers**. Korea also has diversified economic strengths in the industrials area, including both the shipbuilding and defence sectors

“We believe it is strongly positioned, for example, to capture market share in the power sector as grid infrastructures are upgraded to meet AI and renewable energy demand,” he said. Sean also expects positive corporate governance reforms to continue to develop and broaden across Asian markets, which will be welcome.

Jonathan Pines, lead manager of Federated Hermes Asia ex-Japan Equity, is also positive, remaining overweight in both Korea and China. “We expect broad outperformance of stocks in these countries to sooner-or-later result in country outperformance, which we hope will supplement our ongoing outperformance from stock picking,” he said. Samsung Electronics, the South Korean tech giant, is currently the largest individual holding in the portfolio at 9.4%, with China as the fund’s largest country exposure with a 38.6% allocation***.

After a challenging few years, “pockets of healthy demand” are emerging in certain domestically-focused sectors, according to the team behind the FSSA All China fund. “Chinese companies in a range of sectors – from electric vehicles to medical devices – are also becoming increasingly competitive on the global stage,” they said. Looking ahead, they acknowledge that although they’re excited about China’s future, it may take some time for the investment case to play out, adding “many companies we own in the portfolio are trading at attractive valuations, and the risk-reward looks favourable.”

Lastly, India is projected to lead major Asia-Pacific economies in 2026 with GDP growth of 6.6% and inflation at 4.2%, according to the Mastercard Economics Institute’s annual outlook^. The study predicts that growth will be supported by strong domestic demand, monetary easing, tax reforms and lower global commodity prices.

According to the team on the UTI India Dynamic Equity fund, India continues to stand out as the fastest-growing major economy, reflecting its resilience and the strength of its domestic drivers, even as global headwinds persist. “While there may be some volatility in the market in the near term given that valuations are towards the higher end of the fair value zone, the long-term growth potential of the Indian economy along with stable policy environment make the Indian market attractive for long- term investors,” they wrote.

Diversity could be key

Asia Pacific ex-Japan is a vast region with numerous country dynamics at play. This is why a well diversified approach could make a lot of sense. For example, the Schroder Asian Alpha Plus fund has a flexible approach with the management team exploiting stock-market inefficiencies. The resulting portfolio is usually made up of large companies with giants such as Taiwan Semiconductor Manufacturing, Samsung Electronics and HDFC Bank among its largest holdings***. The fund also has exposure to all three key countries we’ve outlined with China, Korea and India accounting for half of the portfolio***.

*Source: Invesco, 24 November 2025

**Source: Matthews Asia, 19 December 2025

***Source: fund factsheet, 31 December 2025

^Source: Mastercard Economics Institute, 15 December 2025