AI trade turns selective

ASIA’s artificial intelligence (AI) trade is set to enter a more selective phase, where investors shift focus from excitement around spending to clearer proof of earnings and cash flow.

The region still sits at the centre of the global AI build-out, supported by strong demand for chips, data centres and technology supply chains. However, the market tone is changing.

Investors are now asking which companies can actually convert this spending wave into sustainable profits.

At Eastspring Investments, the view is that AI is becoming a long-term structural force for Asia rather than a short-term theme.

“The region’s export strength is now being supported by AI-related demand, particularly across AI infrastructure, semiconductors and technology supply chains.

“Equally, the scale of investment, especially in data centres and supporting infrastructure is significant. Asia is both a key supplier of tech hardware and the second-fastest growing region for data centre capacity,” the fund management company explains.

It also highlights that the opportunity is real, but not broad-based. Investors need to be more careful about where they take exposure.

Spending boom

Eastspring asserts that AI exposure in Asia needs to be selective.

It says companies supplying the AI investment cycle stand out as the capital expenditure (capex) boom appears likely to persist despite higher energy prices. Nonetheless, the proof lies in earnings delivery as the focus shifts to the durability of cash flows and returns generated by AI spending, it adds.

According to Sundeep Bihani, portfolio manager at Eastspring, investors should not treat AI exposure as a simple choice between chipmakers and users.

He argues: “Focus on durable businesses where AI improves value and lowers costs, avoid value traps, and look to sectors such as industrials, financials, and travel where AI is lifting efficiency without the hype.”

John Tsai, head of growth equities at Eastspring, points to stronger-than-expected demand in parts of North Asia.

He says: “From a growth perspective, the most compelling AI opportunities are where the pace and scale of growth remain underestimated.

“In several cases, particularly in South Korea and Taiwan, growth assumptions have had to be revised upwards as demand has outpaced expectations.”

Christina Woon, head of equity income at Eastspring, stresses income stability. She says: “For income investors, AI matters only where it supports rising revenues, resilient cash flows, and long-term income stability.

“Look for companies funding AI investment from internal cash flows which helps to preserve balance sheet strength and underpin sustainable income generation.”

Red flags

The Eastspring team also warns that markets can easily get ahead of themselves when AI stories become popular.

Sundeep says a key warning sign is crowded positioning.

“A clear red flag is crowded trades where markets already price in years of supernormal returns. Be wary of theme-chasing and focus on businesses with a proven ability to navigate past cycles and adopt new technology in a disciplined way,” he points out.

Woon adds that investors should watch for companies spending heavily without clarity on returns.

She says: “AI hype is evident when companies talk about rising AI capex without a clear monetisation plan or visibility on how it will drive revenue, efficiency and cash flows.”

Tsai notes that some firms are spending mainly to avoid falling behind rivals.

He says: “Some companies are engaging in AI-driven capex races out of fear of falling behind competitors, reinforcing the need to look past the narrative and focus on the numbers.”

Competitive disruption

There is also concern that AI could speed up competitive disruption across industries, making some traditional business models more fragile.

“Businesses that rely on large, fixed investments but face rapid AI-driven substitution are particularly vulnerable. This is why an active approach is needed to pick the winners,” Sundeep says.

Tsai adds that competitive advantages may not last as long as before, noting that AI has the potential to accelerate competitive shifts, with rapid breakthroughs resetting winners far faster than in previous technology cycles and eroding established advantages sooner than investors expect.

Inside the investment process, AI is already being used as a support tool rather than a replacement for human decision-making.

Woon says AI is primarily used to improve research productivity by speeding up the information processing and surfacing key risks earlier, viewing AI as a tool to improve efficiency, not to replace judgement and decision-making.

Sundeep adds that AI is primarily used as a risk management tool rather than for stock selection, stress-testing whether a business can be made obsolete in the next three to five years.

“These insights are then reflected in valuation work and assumptions around normalised earnings,” he says.

Tsai notes that with traditional sell‑side research becoming less differentiated, AI can improve internal analysis efficiency and enable greater experimentation.

Structural growth

Meanwhile, HSBC Group sees Asia as a key hub in the global AI and manufacturing ecosystem.

“Asia continues to offer some of the strongest structural growth opportunities globally, particularly in North Asia.

“Mainland China and South Korea, along with Hong Kong and Singapore, remain central to the global AI and advanced manufacturing ecosystem through leadership in semiconductors, hardware production and strategic supply chain positioning,” the banking group points out.

It notes that the region also benefits from supply chain realignment, as trade and investment within Asia intensify.

“In China, the investment narrative is shifting beyond Internet platforms towards AI, robotics, advanced manufacturing and export-oriented industrial leaders,” HSBC says.

It highlights that AI development in China should see supercharged growth, given capex plans from major Chinese tech leaders, supportive government policies, and step-up upgrades in software and semiconductors.

“China’s appetite for AI is booming, with daily token usage surging from just two trillion in the second half of 2024 to 140 trillion by March 2026. Two distinct directions of China’s AI development are its focus on cost-effectiveness and industry specific AI agents,” it adds.

Overall, HSBC sees tech and innovation as the biggest engine for Asian equities despite the energy supply shock.

“Earnings upgrades in the tech-dominant South Korea and Taiwan markets have driven a strong recent rally in the regional benchmark, thanks to strong global AI investment and Asia’s strong position in the semiconductor supply chain,” it adds.