From the CIO’s Desk – Asia Quarterly: Q1 2026

The first quarter of 2026 was a study in how quickly narratives can shift. What began as a constructive setup across Asia gave way, in March, to an indiscriminate sell-off as the US-Iran conflict upended global risk appetite. But dislocations of this kind are where conviction matters most. In this quarter’s commentary, we explain why the US is turning inward, why the LLM disruption thesis (upending smart, innovative companies) is losing steam, and why Asia, with its structural resilience, attractive valuations, and high-quality businesses on sale, presents one of the most compelling entry points we have seen in years. Enjoy!

Market Review

The MSCI All Country Asia Ex-Japan Index was down 1.13% (in USD terms¹) over Q1 2026, pulling back 13.70% in March alone. Relative to the rest of the region, South Korea and Thailand were the top performers for the quarter, while Indonesia and India were the laggards. Sector-wise, IT and Industrials led the performance over Q1, while Communication Services and Consumer Discretionary were the worst-performing sectors.

MSCI China declined 8.89% over Q1 2026, though Hong Kong bucked the trend with a 5.46% gain. The quarter was defined by a pivot from policy optimism to geopolitical anxiety. Early-quarter sentiment was supported by the release of full-year 2025 GDP at 5.0% (meeting Beijing’s target), the formal end of the “three red lines” policy, and the National People’s Congress setting a 2026 GDP growth target of 4.5% to 5%, alongside the launch of the 15th Five-Year Plan. Manufacturing activity proved resilient, with the official manufacturing purchaser’s index (PMI) rebounding to a 12-month high of 50.4 in March after two months of contraction, driven by post-Lunar New Year production resumption.² However, the onset of the US-Iran conflict in early March drove a 7.72% decline for the month as energy input costs surged and risk sentiment deteriorated across the region.

Indian equities underperformed the region, with MSCI India declining 18.09% over Q1 2026. The drawdown was overwhelmingly concentrated in March, with equities falling14.93% as the US-Iran conflict triggered a broad-based risk-off. Foreign portfolio investors (FPI) pulled out a record ~USD 12.7 billion from Indian equities in March alone, the heaviest monthly outflow on record, with FPIs net sellers on every trading day of the month.³ The surge in crude oil prices above USD 100 per barrel was particularly damaging given India’s reliance on Middle Eastern crude, weighing on the rupee and reigniting inflation concerns. Manufacturing PMI fell to a 45-month low of 53.9 in March from 56.9 in February, as input cost inflation hit its sharpest level since August 2022.⁴ The March weakness overshadowed earlier constructive developments, including the announced US-India trade framework and the landmark India-EU trade agreement.

Korean equities were the region’s standout, delivering a Q1 return of 16.70%. The first two months of the year saw a parabolic rally as KOSPI broke through the 5,000 and then 5,500 levels to fresh record highs, powered by the AI-driven memory semiconductor supercycle. Samsung Electronics surpassed 1,000 trillion won in market capitalization for the first time, while SK Hynix continued to rally on insatiable demand for HBM chips. However, March delivered a sharp 25.39% correction as the Middle East conflict triggered profit-taking after the extraordinary run-up, with foreign investors unwinding positions aggressively. Underlying economic data remained softer than equity performance suggested, with full-year 2025 GDP growing just 1.0% and Q4 contracting 0.2% quarter-on-quarter, though the Bank of Korea projects a recovery to 2.0% growth in 2026.

Taiwanese equities gained 9.15% over Q1, led by TSMC and the broader AI supply chain. January and February saw the TAIEX surge past 35,000 to fresh all-time highs, with foreign institutional investors buying aggressively on the back of continued AI-related capex from US hyperscalers. March, however, saw equities pull back 12.92% as the Middle East conflict amplified pre-existing geopolitical concerns, and with energy disruptions raising questions about semiconductor supply chain resilience. Broader tech names, including Delta Electronics and Hon Hai, gave back earlier gains, though the fundamental chip demand picture remained intact heading into Q2.

Within ASEAN, performance diverged sharply. Thailand was the region’s top performer for Q1 (+15.68%), driven by a decisive early-February election that saw the Bhumjaithai Party secure a strong mandate, and amplified by a surprise 25bp rate cut from the Bank of Thailand to 1.00%. Malaysia (+2.47%) held up relatively well, supported by its position as a net hydrocarbon exporter, while Singapore (-1.14%) was broadly flat, maintaining its role as a relative safe haven. Indonesia was the region’s worst performer, declining 20.45% over Q1 2026, hit by a confluence of negative catalysts, including the MSCI’s warning in late January of a potential downgrade from “emerging” to “frontier” market status.

Portfolio Commentary & Outlook

The ongoing conflict in the Middle East has triggered a sharp risk-off move across global markets. Asian equities have not been spared, dragged lower by the kind of “baby with the bathwater” correlations that have historically penalized emerging markets during global shocks. Foreign investors pulled an estimated ~USD 65 billion from Korea, Taiwan, and India in March alone, the largest monthly outflow since 2008-09.⁵

Chart: Among EMs, Korea, Taiwan, and India were the most sold-off markets foreign investors in March

Source: Bloomberg, BofA Securities, April 2026

While the absence of a clear ceasefire remains a near-term dampener, negotiations are underway and making meaningful progress, validating our view that the March drawdown was a temporary dislocation. Markets appear to share this view – Asian equities rallied ~10% month-to-date as of April 13th, on the back of US-Iran negotiations, suggesting that the base case for a resolution is increasingly being priced in.

Our base case remains that the conflict will not escalate materially from here, and that it is in the interest of all parties to find an off-ramp. Negotiations have already made significant progress, and while the most difficult issues, particularly around Iran’s nuclear enrichment program, remain unresolved, neither side has shown an appetite for further escalation. We are optimistic that a middle ground will ultimately be found. China’s role will be critical in this regard; it is Beijing that has the leverage to bring Iran to the negotiating table, and we expect it to use that influence constructively. That said, we are not complacent. We are closely monitoring for signs of further escalation, and we acknowledge the tail risk that a prolonged US blockade of the Strait of Hormuz risks drawing China to the conflict in favor of Iran as they look to secure their energy supplies, which would meaningfully change the trajectory. For now, however, our central expectation is that all parties will seek a resolution in the near term, not least because the US has pressing reasons to move on.

For Asia, the market reaction overlooks a fundamental shift: Asian economies are more structurally resilient, less correlated to the conflict, and better positioned than in previous crises. Before we hone in on why we believe this dislocation presents a compelling buying opportunity for Asia, it is worth stepping back to frame the global backdrop, specifically, the US political cycle and the evolving AI investment narrative, both of which reinforce the case for Asia.

1. The US Turns Inwards

The US is about to get preoccupied with domestic issues, and we believe markets are underestimating what that means for capital allocation. Like any political term, the first half is always the best window to tackle tough external challenges, and this administration has done exactly that: Iran, Venezuela, tariffs, immigration, and sanctions lists. The second half of the term, particularly heading into the midterms, always pivots toward the issues that actually drive electoral outcomes at home. For this administration, those issues are clearly 1) affordability and 2) job disruption. Going forward, we expect the US political conversation to become increasingly inward-looking and, frankly, more populist in tone. By contrast, the rest of the world, and Asia in particular, is likely to look relatively more stable, more predictable, and more investor friendly.

The US is also where the biggest political backlash against AI will come from, and it will come sooner than most investors expect. The US has the highest corporate margins, the most acute affordability crisis among developed economies, and is the fastest adopter of AI. It is therefore also where AI-driven job displacement will hit hardest and fastest, precisely in the white-collar and middle-management segments of the workforce that the MAGA platform would want to defend. European businesses will be slower to adopt AI, and that adoption gap only widens the political asymmetry. So far, we have not yet seen an organized political backlash, but the administration is visibly restless. Once the Middle East situation stabilizes, its attention will rotate squarely to the domestic agenda, and we think AI’s impact on jobs will be next in line. It only takes a handful of politicians to pick up this narrative and run with it and, when they do, the implications for AI capex plans and US corporate margin expectations will be significant.

The knock-on effect is a structural reallocation of global capital. For years, we have highlighted the anomaly that the US represents approximately 30% of global GDP but nearly 60% of global market capitalization. That gap has been sustained by the perception of US exceptionalism and the dominance of US tech platforms. As US policymaking becomes more populist and unpredictable, and as Asian and other EM policy frameworks continue to demonstrate stability, consistency, and industrial focus, we expect that gap to narrow. This is not a short-term trade; it is a multi-year rebalancing that, in our view, has only just begun.

2. The LLM Disruption Thesis is Fading

We have been making the case since September 2025 that the next leg of the AI story belongs to the adopters, not the enablers. In that quarter’s commentary, we first laid out why companies that leverage AI to expand margins, improve user engagement, and capture market share would ultimately capture the economic returns from this technology cycle. The fear in the market has been that OpenAI and similar large language model (LLM) platforms would directly disrupt existing consumer internet businesses, justifying their explosive capex and user growth. Our view has consistently been the opposite: incumbents with distribution, data, and brand equity would be the real winners. That view is now being validated.

OpenAI’s consumer ambitions have repeatedly stalled. The company has pulled back on Sora, its much-hyped video generation product. Its agentic tie-up with Walmart was quietly dismantled. Its attempt to build commerce and travel portals inside ChatGPT has failed to gain meaningful traction. These are not isolated misses; they are evidence that cracking the consumer code is far harder than building a great model. Coding is cheap. LLMs look increasingly commoditized, with limited product differentiation across suppliers. What actually wins in consumer markets is a deep understanding of user pain points, feature sets that delight, and the fulfillment and logistics infrastructure that turns intent into delivery. None of that can be replicated with just a clever prompt.

Meanwhile, smart incumbents are paddling hard. Leading consumer internet companies across Asia are integrating AI agents, investing in both front-end and back-end capabilities, and leveraging their proprietary data to improve targeting, engagement, and unit economics. An analogy we often return to is the old taxi industry in the ride-hailing era: rather than being wiped out, the smarter incumbents adopted the apps themselves and benefited from both the existing taxi system and the ride-hailing network. We are seeing the same dynamic now. Companies that recognize the challenge at the right moment will use LLMs to become more competitive, not be disrupted by them.

At the same time, the AI investment wave itself is approaching its natural ceiling. Hyperscaler capex has grown from approximately USD 250 billion in 2024 to roughly USD 650 billion in 2026, and the rate of growth is now decelerating off a high base.⁶ As the absolute numbers get larger, the pushback grows from multiple fronts. First, the power infrastructure is struggling to keep up: generation capacity is constrained, electricity costs are rising, and data center projects are facing community opposition over water usage and local grid strain. Second, the MAGA base is starting to turn cold on AI as the technology threatens the very career paths (study hard, get a good job) that underpin the social contract of the population. Third, a significant portion of planned AI infrastructure investment is expected to be funded through private credit markets, and those markets are flashing warning signs.

The private credit stress is worth dwelling on. As we flagged in our November 2025 commentary, recent high-profile defaults (First Brands, Tricolor Holdings) have raised concerns about underwriting standards, hidden leverage, and asset-liability mismatches in semi-liquid private credit vehicles. More recently, private credit paper for AI is being placed with high-net-worth individuals, including a member of our own investment team who was pitched to invest. That is a textbook late-cycle distribution signal, echoing the dotcom-era retail push and the pre-GFC securitization wave. The convergence here is what makes us cautious: the largest technology capex cycle in history is being increasingly financed by a credit market that is itself showing cracks. As capital becomes finite, LLM providers will be forced to narrow their focus to where they can earn real returns, and the “everything everywhere all at once” phase of AI spending will give way to a more disciplined cycle. For OpenAI who just saw its revenues surpassed by Anthropic, this is a particularly vulnerable moment.

None of this means we are bearish on AI; it means we are becoming more selective. The AI enabler trade has worked for an extended period, and parts of it still have room to run. But we recognize that the extreme black-and-white treatment of stocks in this cycle will give way to a much more nuanced set of winners and losers as execution risk comes to the forefront.

3. Why Asia: The Dislocation is the Opportunity

Against this backdrop of a US turning inward and an AI investment cycle beginning to mature, Asia is uniquely well-positioned. The March sell-off has been indiscriminate, but the underlying case for the region has arguably never been stronger. Below, we lay out four reasons why we believe the current dislocation is a compelling buying opportunity.

1. China is the adult in the room and deserves a closer look. While the US is consumed by the Middle East conflict, China is exercising restraint and positioning itself as a voice for de-escalation, calling for an immediate ceasefire and pressing Iran to keep the Strait of Hormuz open. This is scoring geopolitical credibility globally. Critically, China is also well-insulated from the oil shock. Its combined strategic and commercial crude stockpiles are estimated at ~1.1 to 1.2 billion barrels, equivalent to roughly three to four months of net imports, one of the largest buffers in the world.⁷ Beyond reserves, China has spent years building structural energy independence through its global leadership in EVs, solar, wind, and battery technology, while diversifying import sources via Russian and Central Asian pipeline routes that bypass the Middle East entirely. A sustained oil spike hurts China’s economy far less than it would have a decade ago, and far less than it hurts more import-dependent regions. Chinese corporates, particularly in manufacturing, technology, and consumer sectors, face lower input-cost pressure relative to global peers, supporting earnings resilience.
2. The broader geopolitical backdrop, counterintuitively, favors Asia. As we outlined above, a prolonged Middle East engagement accelerates the US political pivot toward the midterms, where domestic issues around affordability, employment, and AI-driven job displacement will dominate the agenda. This reduces the likelihood of further aggressive overseas actions and, at the margin, lowers the geopolitical risk premium on Asian assets. Put simply, attention moves away from Asia and toward US domestic concerns, which is a constructive backdrop for the region.
3. The setup before the conflict was constructive, and remains intact. The global economy was on a firming trajectory heading into March: US GDP growth remained resilient, European defence and infrastructure spending was accelerating, and central banks across both developed and emerging markets were easing. In Asia, India’s growth was accelerating, Korea’s industrial cycle was firing on multiple cylinders, and corporate earnings across the region were being revised upward. None of these structural drivers have changed. The uniformly bullish consensus had left markets overbought, and the conflict simply provided the catalyst for a reset that was overdue.
4. Valuations are now at their most attractive levels in years. Across China, India, Korea, and Taiwan, high-quality consumer internet and platform companies have corrected 20% or more from recent highs. Names such as Alibaba, PDD, Sea, and Grab, innovative businesses with durable competitive moats, strong cash generation, and structural growth runways, are trading at significant discounts to intrinsic value. Crucially, many of these companies hold cash balances equivalent to 30% or more of their market capitalization, providing a substantial margin of safety that simply does not exist in most US tech names at current valuations.⁸ These are the best businesses in town, and history has shown that buying them when they are cheap, ignored, and out of favor has been a reliable source of alpha in Asian equities. The two-year forward P/E for the Shikhara Asia Opportunities Fund has come down to 11.8x, a highly compelling risk-adjusted valuation given the quality of the companies in our portfolio, and in our view, a clear buying opportunity.

Table: Cash-to-Market Cap Ratio of Asian Consumer Companies

Source: Company data, Shikhara Investment Management analysis, April 2026. All market cap figures are as of 31 March 2026. Definition of “Liquid Cash” includes cash + restricted cash + short-term investments. Liquid cash for all companies represents the latest report date of 31 December 2025 except for Prosus, which represents liquid cash as of 30 September 2025.

4. Our Portfolio Positioning

We have been active, not passive, through this pullback. Earlier this year, we took profits in several AI enabler positions, particularly in Korea, that had run ahead of fundamentals. The correction has allowed us to redeploy that capital into structural stories at attractive valuations, such as healthcare and internet names. We have added to positions in CATL, the global leader in battery technology, which sits at the cusp of an inflection in energy storage and benefits directly from elevated energy prices. We have also increased exposure to commodity names such as Zijin Mining and China Hongqiao Group, the world’s largest aluminum producer, both of which benefit from supply uncertainty emanating from the Middle East and the structural demand story around electrification, infrastructure buildout, and the global reindustrialization cycle. Importantly, these changes represent less than 5% of the portfolio weight, as we maintain long-term conviction in our portfolio.

The portfolio is built for resilience. Approximately 10% of the Fund is allocated to healthcare names, including Hansoh Pharma and leading hospital operators, that are largely insulated from geopolitical volatility. These businesses are not only defensive in nature but are actively deploying AI to improve productivity and cost competitiveness, making them beneficiaries of the technology cycle rather than victims of it.

Our base case remains that the conflict will move toward resolution in the near term, driven by the strong economic incentives of multiple parties to de-escalate. Historical precedent shows that geopolitical oil shocks tend to create short-lived volatility, and markets typically look through the disruption once supply risks are quantified. When that inflection comes, we expect a sharp recovery in Asian equities, and investors who are positioned ahead of it will benefit disproportionately.

Quarterly Conviction Calls

Each quarter, we highlight a select number of companies that showcase exceptional growth potential. These stocks on our conviction list represent opportunities we believe will deliver substantial value over the coming years. Here are the standout stocks we’re featuring this quarter.

As we have shared with many of our investors, the world today is going to be noisy, uncertain, and at times exhausting to navigate. Environments like this demand exceptional leaders, the kind who can see through the short-term fog and build businesses that compound for the coming years. A few extraordinary companies, run by a few extraordinary leaders, will rise above the rest through this environment. These are the companies that we look for, and it is also the kind of company that we strive to be.