AI, Inflation, and Investor Risk: What Matters Most for Asia Investors in Q3 2026

Asia Pacific equities spent the second quarter of 2026 being pulled along almost entirely by one sector. Technology surged more than 90% on a broad market-cap basis after risk eased following the Middle East conflict.

In a recent webinar, Morningstar's Lorraine Tan, Director of Equity Research, Asia; Phelix Lee, Senior Equity Analyst, Asia; Arvind Subramanian, Senior Analyst, Manager Research Asia; and Jackie Choy, Senior Principal, Passive Strategies Ratings, Global, walked through the market backdrop and the AI-driven semiconductor capex cycle.

The discussion the tech-driven rally, oil and inflation, AI adoption in active management, and the risks in leveraged single-stock products.

Here are some of the most pressing questions they addressed.

Lorraine: The key markets driver was the technology sector, and almost nothing else really performed nearly as well. Tech was up more than 92% in the second quarter, based on the broad Asian market cap performances.

That move came after risk "abated" following the Iran war, and it was enough that tech basically now makes up around 30% of the Asian market cap, up from 19% as of the end of 2025 and overtaking financials.

Healthcare didn't share in the rally. Collectively healthcare was down about 17%, with no particular reason that we can think of other than perhaps some concerns over input costs.

Hong Kong, China valuations are relatively attractive, trading at about a 10 to 11% discount to our fair valuations. Japan tells a different story. Japan went from a 14% discount in the first quarter to a 24% premium to our fair value. Though, the recent pullback that we've seen makes it a little bit more palatable.

Within healthcare, some of the names that we like include Innovent, Daiichi Sankyo in Japan, Samsung Bio and Wuxi. In Japan, one name in particular is Hoya, which is basically a Med tech company getting its growth primarily from the semiconductor space.

Looking outside tech, we're seeing more opportunities in healthcare in Asia, China, banks, select Internet and select REITs. The healthcare space is a little bit more interesting to us right now.

Lorraine: This remains obviously a risk, although the risk seems to be somewhat softened because the oil supply actually seems to have held up better. Oil has been helped by alternative sources of supply coming in from North Africa and continued purchases of Iranian oil as well as Russian oil.

The key question now is whether we're seeing ships being able to get out of the Strait of Hormuz without a whole lot of damage. So far, we're not seeing a huge uptick in oil prices like what we saw in February.

Overall, we still see the risk as somewhat benign, though we have a little bit more concern over some of the other commodities where supply disruptions will keep the cost of some materials high. This will create some inflationary impact if cost pass-throughs stick.

We don't think the Fed will raise rates, since we don't think there's enough inflation pressure or sustained inflation pressure over the next few months to warrant a rate hike.

Arvind: Fixed income as an asset class has seen lesser use cases, but we did come across one interesting example. An emerging-markets debt team created agents using AI that mimic how their own analyst team looks at various emerging market countries. The aim is not really to replace human analysts but to see where AI can help and where humans are better.

So far, in markets like say Brazil, where data is more readily available, the AI agent is able to do a better job. Meanwhile in frontier markets like Ivory Coast, where data is not as structured, the human analyst tends to do better in terms of providing useful calls. It's still an experimental use case, but you can sense the direction of how managers are using AI differently.

Jackie: The products are designed for daily sort of leverage and inversed returns of the underlying stock. The appropriate use is for hedging purposes.

If you have an exposure in a stock, for example SK Hynix, you could potentially use an inverse product to help you with a hedging sort of portfolio maneuver to reduce the risk during volatile periods. In practice, though, a lot of investors have been using them for speculation purposes, which we would not recommend, given their leveraged, volatile nature.

Use them for hedging purposes from a portfolio management perspective and only if you know the complexity and know how they work before using them. These products are not appropriate as buy and hold investments and should only be used by traders who understand how these products work.