De-leveraging in AI stocks dominated Asia Pacific market rotation in July

Overview

This report is JPMorgan's monthly review of Asia Pacific markets in July 2026. Its core conclusion is that de-leveraging and the unwinding of crowded positions in AI-related stocks were the main drivers of market, sector and style rotation across Asia Pacific during the month. Technology and technology-heavy markets significantly underperformed, North Asia came under pressure, while ASEAN, India, financials, value and low-volatility styles received relatively strong fund support.

Core views

The report believes that the July pullback was amplified more by position de-leveraging than by broad deterioration in AI fundamentals. Results from major Asian technology companies remained strong, and companies continued to raise capital expenditure and express confidence in future AI demand. Consensus FTM EPS was revised upward for Korea and Taiwan, with Korea expected to post the region's highest EPS CAGR in 2026 and 2027. On valuation, Korea and Indonesia were significantly below historical averages, with Korea's FTM PE at only 5.1x. The report favors selectively buying high-quality AI semiconductors on weakness, while diversifying AI crowding risk through financials, IT services, internet and other lagging sectors.

Analysis framework

The report applies a regional equity macro framework, explaining structural changes in Asia Pacific equity markets in July through market returns, sector returns, consensus earnings revisions, valuation relative to historical averages, foreign fund flows, global macro variables and style factor performance.

Methodology notes

• Equity Macro StrategyMarket, Sector and Style Rotation Analysis

  Identify the path of fund migration following de-leveraging through market, sector and factor performance.

  The report views rotation from North Asia toward ASEAN and India, from technology and industrials toward consumer discretionary and financials, and from momentum and growth toward low volatility and value as the main manifestations of the unwinding of AI positions.

• Earnings Expectations AnalysisConsensus FTM EPS Revisions

  Measure marginal changes in fundamentals using revisions to 12-month forward EPS forecasts.

  Korea and Taiwan received upward revisions, while India and Indonesia were revised downward; China's IT and consumer discretionary sectors also saw upward revisions.

• Valuation AnalysisCurrent FTM PE Relative to the 10-Year Historical Average

  Measure regional market valuations relative to their historical positions using standard deviations.

  Korea and Indonesia were 2.9 and 2.8 standard deviations below their historical averages, respectively; China and India were near their historical averages, while Taiwan was 1.7 standard deviations above its historical average.

• Fund Flow AnalysisForeign Equity Fund Flow Tracking

  Assess regional allocation shifts using foreign inflows and outflows.

  In July, foreign investors exited Taiwan and Korea and shifted toward India, while China's southbound flows also accelerated significantly.

• Quantitative Factor AnalysisAsia ex-Japan Long-Short Style Factors

  Observe the unwinding of crowded trades through the performance of momentum, growth, low-volatility and value style factors.

  The 12-month price momentum long-short factor fell 40% from its peak, the growth factor was negative, and low volatility and value significantly outperformed.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• AI Semiconductors and APAC IT

  Core source of the shock and a subsequent area for selective positioning on weakness

  Strengths

  Major Asian technology companies delivered strong results, while AI demand, capital expenditure and cloud demand continue to support medium-term fundamentals.

  Weaknesses

  De-leveraging in July caused APAC IT to fall 13.5%, while global semiconductors corrected 30% to 40% since late June.

  Comparison

  Technology and growth styles significantly underperformed financials, value and low volatility in July.

  Risks

  Sustainability of AI capital expenditure, monetization pace, competitive pressure, tighter regulation and slow rebuilding of leverage.

• Korea

  The market most heavily hit by AI de-leveraging but with outstanding valuation and earnings elasticity

  Strengths

  FTM EPS revisions were positive, expected EPS CAGR was the highest in the region, and FTM PE was only 5.1x.

  Weaknesses

  The market fell 17.9% in July, with the KOSPI plunging sharply at one point; technology and industrials came under pressure.

  Comparison

  Korea significantly lagged China, ASEAN and India in July, but remained strong year to date.

  Risks

  Momentum unwinding, technology output adjustments, policy tightening and uncertainty over capital returns.

• Taiwan

  AI fundamentals remained strong but fund flow pressure was significant

  Strengths

  FTM EPS was significantly revised upward; TSMC beat expectations and raised its FY26 revenue growth and capital expenditure guidance.

  Weaknesses

  Foreign investors withdrew $23 billion in July, while market valuation was 1.7 standard deviations above its historical average.

  Comparison

  The decline was smaller than in Korea, but fund flow pressure was more pronounced; unlike ASEAN and India, Taiwan lacked short-term fund flow support.

  Risks

  High valuation, continued foreign outflows, weak demand for non-AI mature-node products and consumer electronics.

• China and Hong Kong Markets

  A rebound in large internet stocks drove regional relative strength

  Strengths

  China rose 9.0% in July, Baba rose 26%, and EPS for IT and consumer discretionary was revised upward.

  Weaknesses

  Domestic macro demand remained weak, and JPMorgan lowered its 2026 GDP forecast from 4.7% to 4.6%.

  Comparison

  China performed better overall than North Asian technology markets, but fundamentals still require confirmation from policy and consumption improvements.

  Risks

  Weak property and investment activity, soft credit, external risks and insufficient domestic absorption capacity.

• ASEAN

  A region benefiting from fund flows after the unwinding of crowded AI trades

  Strengths

  The region rose 7.4% in July, foreign funds returned, and Thailand, Indonesia, the Philippines and Malaysia all recorded inflows.

  Weaknesses

  Regional divergence was significant; Vietnam fell 6%, while trade deficits widened in some countries.

  Comparison

  Significantly outperformed MSCI AxJ and North Asian markets.

  Risks

  Political events, fiscal discipline, trade deficits, oil prices and changes in monetary policy.

• India

  A beneficiary of the shift in funds away from AI risk

  Strengths

  India recorded $2.3 billion of foreign inflows after four months of selling, while industrial production was stronger than expected.

  Weaknesses

  CPI and WPI were higher than expected, the current account and trade deficits deteriorated, and the INR remained weak.

  Comparison

  Performance was steadier than in Korea and Taiwan, but earnings forecasts were revised downward.

  Risks

  Oil prices, imported inflation, margin pressure and uncertainty surrounding Fed communication.

• Financials, Value, Low Vol

  Defensive and rotation-beneficiary styles in July

  Strengths

  Low volatility and value significantly outperformed, and financials were recommended as one of the core holdings.

  Weaknesses

  If AI risk appetite recovers rapidly, defensive and value styles may temporarily lag.

  Comparison

  Significantly outperformed momentum and growth styles.

  Risks

  Interest rates, the credit cycle, slowing macroeconomic growth and renewed fund flows into growth stocks.

Key data

• MSCI Asia Pacific July Performance-1.3%The overall decline was limited but masked significant intramonth and structural volatility.
• MXASJ July Performance-3.2%Asia ex-Japan markets were weighed down by de-leveraging in AI stocks.
• APAC IT July Performance-13.5%The technology sector significantly underperformed.
• Korea July Performance-17.9%Most affected by the unwinding of technology, industrial and leveraged ETF positions.
• Taiwan July Performance-5.3%The market also saw $23 billion of foreign outflows, but FTM EPS revisions were significant.
• China July Performance+9.0%A rebound in large internet stocks supported the market; Baba rose 26%.
• ASEAN July Performance+7.4%Benefited from diversification away from crowded AI positions.
• India July Performance+1.6%Recorded foreign inflows again after four months of outflows.
• Foreign Equity Inflows into India$2.3bnForeign funds shifted from North Asia toward India.
• Foreign Equity Outflows from Taiwan$23bnThe core source of regional fund flow pressure in July.
• China Southbound FlowsUS$8bnAccelerated from US$3.5bn in June.
• 12-Month Price Momentum Long-Short Factor-40% from peakThe largest correction since 2009.
• US 10-Year Treasury Yield+27bps to 4.7The global macro environment continued to affect risk appetite.
• Dollar Index Direction-3%Most Asian currencies appreciated against the US dollar, except the TWD.
• Korea FTM PE5.1xThe lowest in the region and 2.9 standard deviations below its historical average.
• Korea Expected EPS CAGR+138.1%The report identifies this as the highest in the region for 2026 and 2027.

Impact & implications

For portfolios, the July events suggest that crowding and leveraged capital in the AI chain may have a greater short-term impact on prices than fundamentals themselves. If de-leveraging is nearing completion, high-quality AI semiconductors may offer opportunities to build positions on weakness; however, portfolios should not be overly concentrated in the AI theme. Financials, value, low volatility, IT services, internet and selected lagging sectors can serve as diversification directions. Regionally, ASEAN and India benefited from fund flows, while Korea and Taiwan require monitoring to determine whether a recovery in technology positions and upward earnings revisions can once again drive prices.

Risks

• The sustainability and commercial monetization of AI capital expenditure remain subject to question.
• The unwinding of crowded positions and leveraged ETFs could amplify market volatility.
• Fed communication, rising US 10-year Treasury yields and fluctuations in global risk appetite could continue to pressure valuations.
• Oil prices and uncertainty surrounding Middle East geopolitics could increase inflation and cost pressures.
• If foreign outflows from technology-heavy markets such as Korea and Taiwan continue, the sustainability of any rebound may be limited.
• Weak domestic demand, property, investment and credit in China could weigh on macroeconomic recovery.
• Some markets in India and ASEAN face trade deficits, inflation and currency pressures.

What to watch

• Subsequent results, capital expenditure guidance and AI monetization signals from AI semiconductor and cloud companies.
• Whether de-leveraging in Korea has truly ended, and whether leveraged funds and foreign investors return.
• Whether foreign outflows from Taiwan slow, and whether TSMC can sustain its high capital expenditure and gross margin trajectory.
• Whether fund inflows into ASEAN and India continue.
• Whether China's southbound flows and the rebound in large internet stocks can continue.
• Whether value, low volatility and financial styles can continue to outperform after the momentum factor correction.
• The impact of the US dollar, KRW, JPY, TWD and oil prices on regional earnings and risk appetite.