Rising real yields pressure Asian tech multiples

Foreign investors pulled more than USD 10 billion from Asian equity markets over the past month, marking one of the sharpest sentiment reversals since the 2022 tightening cycle. The retreat followed a cooling in the artificial intelligence trade and renewed caution around earnings durability, valuation stretch, and rising real yields.

The flows matter because foreign participation remains a marginal price setter in Korea, Taiwan, and India, where non-resident ownership still influences benchmark direction despite increasing domestic liquidity. The selloff was concentrated in North Asia — Taiwan and Korea, home to the region’s AI hardware supply chain — but spillovers reached Southeast Asia as global funds deleveraged exposure to higher-beta markets.

Mechanically, the unwind occurred through ETFs and passive index reallocations rather than discretionary selling. As U.S. real yields rose toward the high end of their three-year range, the risk-free anchor repriced global equity duration. Valuations for AI hardware leaders had expanded to cycle highs on forward earnings expectations that imply 15–20% annual growth through 2026. When guidance normalized and semiconductor capital-equipment orders softened, positioning quickly shifted from momentum to gross exposure reduction. This dynamic mirrored past episodes where Asian tech corrections were triggered not by revenue contraction, but by rate-driven multiple compression.

The flow data reveals rotation, not disorder. Outflows from Taiwan and Korea were offset partially by inflows into India and ASEAN defensive sectors, showing that allocators did not abandon Asia broadly but redistributed toward lower-volatility earnings streams. Net foreign investment into India remains positive year-to-date due to domestic demand resilience, 7% GDP expansion, and policy stability. Meanwhile, Indonesia and Malaysia benefited modestly from commodity-linked inflows as crude stabilized and real rates remained attractive. This pattern historically precedes a stabilization in regional benchmarks once rate volatility moderates.

The macro backdrop contextualizes the shift. Asia remains the world’s fastest-growing economic bloc, contributing roughly 60% of global GDP expansion. Korea’s exports have re-accelerated into positive year-on-year territory, driven by semiconductor unit shipments, and Taiwan continues to anchor advanced chip manufacturing. However, markets had priced perfection into AI-linked earnings trajectories.

When U.S. and European clients signaled longer procurement cycles, sell-side earnings revisions turned negative. With forward price-to-earnings multiples for key AI hardware firms trading above long-term averages, foreign investors faced asymmetric downside if growth moderated, making derisking a rational choice rather than panic.

Equity performance therefore represents a macro signal: yen-weakness-driven earnings beats and supply chain re-shoring are no longer sufficient to guarantee flows when funding costs rise. At the same time, domestic institutions have increased market depth. Korea’s pension funds and India’s mutual fund SIP flows continue to neutralize foreign flow impact more effectively than a decade ago. This structural liquidity explains why benchmarks did not experience disorderly drawdowns despite the magnitude of foreign outflows.

Looking ahead, three measurable indicators will determine whether flows return. First, U.S. 5-year real yields. If they stabilize or compress by 25–40 basis points, global equity duration becomes investable again, supporting re-risking. Second, earnings revisions for Asia semiconductors. A turn from negative to neutral typically precedes renewed inflows within two to three weeks. Third, valuation normalization. If forward multiples revert to their five-year average, the region becomes attractive on a relative basis versus the U.S., where mega-cap concentration amplifies factor-risk.

The structural case for Asia remains intact. The AI hardware supply chain, domestic liquidity, and cost of capital advantages support the medium-term earnings trajectory. Short-term volatility reflects rate sensitivity, not a break in fundamentals. If bond volatility subsides and earnings revisions bottom, foreign flows can swing positive quickly, particularly into Korea and Taiwan — the markets that suffered the deepest outflow intensity.