As 2026 unfolds, Asian equity markets present a tale of two divergent paths. South Korea has emerged as the clear outperformer, extending a powerful rally that began in late 2025. The market surged 76% last year and has added another 47% year-to-date as of late February. This marks a dramatic reversal from a decade of underperformance and the so-called “Korea Discount.” The question now is whether this momentum can be sustained.
Four pillars support the bullish case for Korea. Valuations remain attractive by global standards, with the market trading at approximately 1.8x book value and 9x forward earnings despite triple-digit earnings growth in key sectors. The country sits at the epicentre of the global AI semiconductor supercycle. High-bandwidth memory exports have risen 44% year-on-year, with strength extending into peripheral industries including autos, defence, nuclear power, shipping, and materials. This broadening dynamic transforms the story from narrow chip exposure into a comprehensive industrial upgrade.
Governance improvements are gaining traction through the government’s Value-Up Program, mandatory treasury share cancellations, and strengthened fiduciary duties. These reforms are gradually narrowing the structural discount that long plagued Korean corporates. On the flows side, foreign investors are reversing chronic underweights, while domestic tax incentives encourage a shift from property and overseas assets back into the home market.
Nevertheless, risks remain. Korea’s earnings momentum is heavily tied to the durability of the semiconductor cycle. Any cooling in pricing or demand could rapidly pressure profits. Even accounting for this vulnerability, South Korea stands among the most attractively valued developed markets globally, positioning it in the early-to-mid stages of a potential multi-year re-rating.
In contrast, China presents a more complex and fragile picture. After a solid 2025, Chinese equities have lagged significantly in early 2026, rising only around 1% year-to-date compared to the strong gains in South Korea and Taiwan. A global rotation into AI hardware has disproportionately benefited North Asian tech supply chains while leaving China on the sidelines.
Domestic challenges compound the issue. Consumption remains subdued, with retail sales growth slowing to 1.3% late last year. The property sector continues to weigh on household confidence, and policy support has been relatively modest, limiting a sharp demand rebound. Export momentum has softened, particularly outside of select tech areas. The Hang Seng Tech Index has fallen sharply, down over 10% year-to-date and 20% from its peak.
Yet beneath the surface, important structural shifts are underway. Earnings are stabilising, with consensus now forecasting a mid-teens rebound in 2026. Reduced competition and the official “anti-involution” campaign have eased destructive price wars, supporting margin improvement. This recovery does not depend on a headline GDP surge but rather on greater operational efficiency and productivity gains.
China’s longer-term growth engines remain intact: rising R&D intensity, technological self-reliance, and large-scale upgrades across manufacturing, energy, and digital infrastructure. The emerging Five-Year Plan reinforces this evolution toward quality growth, innovation, green energy, advanced manufacturing, and a stronger social safety net, while reducing reliance on property.
Portfolio managers have responded with discipline. In South Korea, an earlier overweight position has been trimmed from +20% to +9.5%, primarily through profit-taking in the strongest performers such as certain stockbrokers and banks. Core holdings with compelling value are retained. In China, the opportunity set is broadening across four areas: consumer-related businesses that appear to have bottomed with more realistic expectations; commodity-linked sectors showing early earnings improvement; overlooked tech and AI beneficiaries in robotics, precision components, clean energy technologies, and advanced industrial applications; and high-yielding stocks offering 4-5% sustainable dividends for income and downside protection.
Thailand warrants a brief mention as a selective contrarian play. With sentiment depressed and valuations at multi-year lows, targeted opportunities exist, though this remains a cautious, stock-specific rather than broad allocation call.
Overall, 2026 underscores the importance of differentiation across Asia. South Korea offers a compelling growth re-rating story anchored in AI and reforms. China requires patience but presents a transition toward higher-quality, innovation-led growth. For long-term investors, both markets reward selectivity, rigorous bottom-up analysis, and a willingness to look beyond near-term volatility toward structural improvement.