AI is exciting, but Asia’s opportunities are diverse

Asia is a dynamic and multi-faceted region, but that might not be obvious from the performance of stock markets in recent years. Gains have been led by a narrow handful of artificial intelligence (AI) supply chain companies – notably those semiconductor and memory companies integral to the build out of data centres. This tight focus ignores a wealth of other growth themes shaping the Asian region.

The ongoing sell-off across Asian technology stocks has highlighted the risks of this concentration. After a period of exceptional share price performance, investors are reassessing how quickly AI-related demand can translate into earnings growth and whether spending levels can continue to rise at the pace that markets had anticipated. While AI remains a powerful long-term theme, the recent market volatility is a reminder that successful investing requires looking beyond a handful of technology winners. The AI trade had been strong across global stock markets. Asian companies have been frontline beneficiaries of the vast spending programmes from US technology giants such as Alphabet, Meta and Microsoft. Goldman Sachs estimates that spending on AI will be $765bn in 2026, with the majority spent on compute power and data centres.

Semiconductors and memory have been at the heart of this spending. Samsung, TSMC and SK Hynix have been large and long-running positions in the Aberdeen Asian Income Fund and have benefitted significantly. However, their share prices have moved a long way very fast, and that should give any active manager pause for thought. While we still believe in the outlook for these companies, we are increasingly prioritising other thematics in the Asian market, where growth prospects remain attractive and valuations are less demanding. 

AI adjacent

Some of these themes have a relationship to AI spending but are not as concentrated. Data centre growth is helping drive earnings growth for infrastructure companies, for example, but it is not the only source of growth for the sector. As countries become wealthier, there is structural demand for new hospitals, schools, shopping centres, transport links and other key real estate and infrastructure. We have exposure to companies that are beneficiaries of these build outs. While such opportunities may benefit from AI investment, their earnings drivers are broader and more diversified. They should provide greater resilience if AI infrastructure spending grows more slowly than markets now expect.

Energy security is a similar theme. It was already a powerful force across Asia, particularly in China, as countries look to shake off their dependence on fossil fuels. However, it has become even more pressing because of AI. One of the key bottlenecks for AI is power. Data centres are power hungry: to meet AI demand, countries need plentiful domestic energy or foreign sourcing. It also needs to be consistent and reliable. 

Against that backdrop, we see significant demand for batteries, as companies and data centres look to improve the reliability of their energy supply. There is also significant demand for gas turbines across the world as data centres and gas plants look to meet energy and reliability requirements. Much of the supply chain for these turbines can be found in Asia and companies have strong visibility on earnings for years into the future. 

The path to electrification and energy independence also requires the re-engineering of grids across the world. They need to have sufficient capacity to support increasing electricity loads. Grid systems may be old and, in many cases, not fit for purpose. This is another source of opportunity for investors as global grid infrastructure needs to be upgraded and maintained.

Defence: an important theme

Some of Asia’s most attractive opportunities have little direct connection to AI, and defence is one example. Defence has been an important theme across global financial markets as it has become clear that geopolitical uncertainty is here to stay. Historic alliances are breaking down, forcing governments to spend more on protecting themselves. Conflicts in the Middle East and Ukraine have driven up military spending by governments across the world.

This has been a notable phenomenon in Europe and the US, but is also evident in Asia with military spending hitting $681bn in 2025.  China is now the world’s second largest military spender (after the US), and increased its military spending by 7.4% to $336 billion last year. 

Asian companies are beneficiaries of both domestic and international military spending. For example, some key parts of the shipbuilding supply chain are in Asia. Korean and Philippine companies are seeing significant demand from US defence companies. This is another theme we have in the portfolio. 

Growing middle class

As Asian countries become wealthier, a growing middle class is changing consumption patterns across the region. This has been a long-running theme, but has been less evident more recently as higher inflation and the wobbly Chinese property market have dented consumer confidence. However, in the long-term, we believe it is a well-supported trend – Asian countries are still getting wealthier, the middle class is still growing and with it, demand for new goods and services. 

Consumer premiumisation continues to be a clear phenomenon, as consumers have moved from generic products to branded goods. There has also been a move to certain domestic brands, particularly in China, rather than international luxury brands. 

It is also possible to take exposure to the growth of the middle class through the financial services sector. As households grow wealthier, they tend to take steps to protect their wealth – life insurance, for example, or long-term savings. In China, India and other Asean markets, we see significant growth in this part of the market, with the population increasingly investing in equities via mutual funds, or in insurance products. There are also a lot of flows going into wealth management. We see this as a solid, long-term trend. 

There are other smaller themes that we have exposure to in the portfolio. Robotics are becoming an interesting area. Several Chinese and Korean companies have a presence in robotics and are expected to see phenomenal growth rates as global companies prioritise factory automation and efficiency. These companies have been helped by the localisation of supply chains, with Asian companies now able to produce from plants all over the world. 

The re-shoring theme affects a few companies we hold and is an interesting theme we need to observe. Re-shoring or near-shoring supply chains requires initial up-front capital expenditure, but it tends to be a feature of resilient, cash generative companies. The economics abroad can be better than what companies are able to achieve domestically. Companies that want to protect or expand their international sales in the longer-term are putting in the capital spending to support long-term growth. 

AI may garner more headlines and will remain an important source of growth, but Asia's investment landscape extends far beyond semiconductors and data centres. Infrastructure, energy security, defence, financial services, robotics and the region's growing middle class all provide sources of earnings growth.

Importantly, for our trust, these growth opportunities also come with progressive dividends, allowing us to deliver on our twin goals of growing capital and paying a growing dividend to our shareholders.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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Issued by abrdn Investments Limited, registered in Scotland (No. 108419), 1 George Street, Edinburgh EH2 2LL, authorised and regulated by the Financial Conduct Authority in the UK. Aberdeen Asian Income Fund Limited has a registered office at JTC House, 28 Esplanade, St Helier, Jersey JE4 2QP, JTC Fund Solutions (Jersey) Limited acts as the administrator, and the Collective Investment Fund is regulated by the Jersey Financial Services Commission.

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