Capital is tilting East: Inside Asia’s AI gold rush

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Sjoerd Leenart: Welcome to J.P. Morgan's Making Sense channel. I'm Sjoerd Leenart , CEO and head of J.P. Morgan's banking business in Asia Pacific. I look after our strategy and operations across 17 markets in Asia. And today I'm joined by Joyce Chang, chair of global research at J.P. Morgan, to discuss the key takeaways from the investor seminar that we hosted around the IMF World Bank annual meetings, which had returned to Bangkok for the first time in 35 years. Now, Joyce, since the last time you were in Bangkok, the region's GDP has grown nearly ninefold since 1998 to four and a half trillion faster than that of most emerging and developed markets. The 11 countries of Southeast Asia are home to nearly 700 million people and taken together, they would rank as the world's fourth largest economy. The Association of Southeast Asian Nations forms one of the most cohesive and effective associations in the world, next to the European Union. Joyce, it was absolutely great to have you in Bangkok with our clients and J.P. Morgan's senior management team to witness the tremendous growth and opportunities that we see in Asia.

Joyce Chang: Oh, well, Sjoerd, thank you so much. It's just wonderful to be with you. It was my second tour at the IMF World Bank meetings in Bangkok, hosting investor meetings with developed markets and emerging markets policymakers. I was last hosting these meetings in Bangkok in 1991, a year that I was out of graduate school. And during the first decade of my career, I spent a lot of time in the region. And back then, the focus was different. It was on how countries could integrate into a more open global order. Well, today that order is fragmented. Markets are repricing the cost of capital, energy, and access to trade. And the questions have shifted from how to integrate to who pays for security, debt sustainability and resilience. There's just so much to discuss. So Sjoerd, before we get into what we took away from the conference, I really would love to have you talk about your priorities in the ASEAN region and in Asia more broadly.

Sjoerd Leenart:  Well, there's a lot of tailwinds that are propelling economies and businesses in Asia. There's what I call the manufacturing renaissance driven by AI data center demand and also the rewiring of global trades and manufacturing capacity. And you see places like Korea, Taiwan, Japan, and to an extent China, they're beneficiaries of that. And then there's certain policy actions that are driving growth. Think of the government stimulus in China, market reforms in Japan and Korea, and then there are places like India or Vietnam or Malaysia, which benefits from a China plus one strategy, but also the growth of domestic demand and the growth of their middle class. So all of that really has led to very divergent, but in totality regional GDP growth of 4.5%. And as you know, that's two, three times what we see in the US and Europe. And on the back of that, you see corporates being active, you see wealth being created, and you see capital markets being both active and very liquid. Now, when we go to a country, we intend to be there forever. So investments, they're going up, they're going down, but they never stop and they're broad based across all these 17 countries. More specifically, we're hiring people to cover the corporate sector, including increasingly mid-cap and innovation economy, private bankers to cover the growing number of wealthy Asian clients. And we're investing in our tech stack in equities, in payments and other products to ensure we are best in class in our delivery.

Joyce Chang: Sjoerd, it's really impressive what I see happening in the ASEAN region. They've really been able to find their place on the value supply chain. So maybe I can just talk a little bit about what we saw and what we heard at the conference on the global macro and the market outlook. What we've seen is that the global economy and markets have been remarkably resilient with AI investment offsetting the energy shocks, also the interest rate shocks that we've seen. But I think one of the concerns is that is this nearing its limits? We've seen some uneven outcomes between AI CapEx beneficiaries and energy shock vulnerabilities. So the IMF still has fairly constructive projections. They are looking at growth at 3.1% this year and actually increasing next year to 3.4%. But we also see a rise in global headline inflation to 4.7% because of higher commodity prices as well. But I think one thing that just struck me was that a lot of the IMF said that resilience is no cause for celebration and bringing very little joy. They're concerned about just the number of shocks the global economy has experienced. And they do point to the flexibility that has come from energy markets, AI related capital spending and fiscal and monetary supports. But they point out that the countries that are benefiting are narrowing, that just 32 countries in the world account for 95% of global growth, down from 54 back in April. But Asia, as you mentioned, Sjoerd, is a bright spot. The regional growth projections continue to be revised up because many countries are benefiting from the ongoing technology boom, notably Korea and several ASEAN economies along with China, India and Japan. But we've also seen some downward revisions in other parts of the globe. In particular, there's a lot of discussion on Europe's need to accelerate reforms to raise productivity and growth since they face aging populations, high energy costs and rising debt burdens in their economies. So we have seen strong performance from Asia, which we both note, but just more challenges in some other parts of the world.

Sjoerd Leenart: Now Joyce, I also wanted to ask you about the strong performance of the equity markets despite all the issues that are going on in the world, rising yields, higher fiscal deficits, heavy issuance across developed markets. What was the investor mood on the market outlook?

Joyce Chang: Well, the investor mood was that two things can be true at the same time, Sjoerd. Overall, even though there was recognition of the higher rates, sentiment was still positive on equities despite the prospect for higher for longer yields. But the prevailing tone compared to earlier this year was selectively risk on. There was more of an emphasis on quality and diversification rather than a universal stance that's tied to the AI CapEx boom. So we think that the AI CapEx plans will continue to drive the market higher over the near term, but there's more concern about the market's capacity to absorb the scale of AI and hyperscaling financing, particularly in the debt markets. And this is in large part because we've seen the surge in sovereign bond yields and developed markets and more competition and higher costs for capital. So compared to some of the conferences that we hosted earlier this year where fear of missing out was really the big driver, this set of meetings surfaced more direct questions about the return on investment and productivity gains. There was also a lot more discussion about second order effects and the growing threat of cybersecurity attacks. And these are greater concerns that we see surfacing across our clients and at J.P. Morgan as well. I do have to say one thing that really stood out to me was that the mood was very constructive on emerging markets. Emerging markets fundamentals are stronger in the cycle. Better external balances, more proactive inflation management, also better fiscal and debt dynamics when you compare it to the developed markets. And we see that policy, when we've met with all of the different central banks and ministries of finance have really anchored basic balances and the strong growth has attracted portfolio flows. We're looking at portfolios coming back to levels that we haven't seen in a number of years. So, Sjoerd  I want to ask you, in Asia, we've seen that the AI related companies are half of the regional equity indexes, over 70% of earnings growth. And this is surprise on the upside. We've continued to have to revise these revisions up. How are you looking at the AI financing ecosystem broadly, particularly the build out in debt markets? Because it seems that the AI infrastructure is increasingly capital intensive and debt financed.

Sjoerd Leenart: It's certainly a rapidly emerging theme in Asia. And after the US, we expect actually most data center investments and activity to happen in Asia. There is a big need for computing power here in the region, both from the big Chinese companies, but also from the global hyperscalers who are looking for places where land, electricity, grids are sufficient to support their computing needs in the region. Now, like in the US, we do see some pushback from governments in places like Thailand, Australia, where governments and regulators have put certain projects on pause to assess whether demand for energy does not affect other industries or most importantly, the consumer. How all of it will be financed is, I guess for the market in general, remains a bit of a question mark. And I think here in Asia, we're working hard to find alternative sources of liquidity from private capital to public capital to the debt markets to help finance these projects.

Joyce Chang: Yeah, I really agree with those observations. I mean, from the meetings we have had in Thailand, we continue to see substantial AI CapEx. And most of the hyperscalers investment plans actually seem relatively insensitive to interest rates given some of the strong cash generation and strategic priorities. It's still a hyper growth regime given the earnings visibility. And we actually think that AI CapEx is going to increase to somewhere around one and a half trillion dollars or higher from about 900 billion this year. We see that the demand for computing capacity still exceeds available supply and these infrastructure bottlenecks probably will persist for another two or three years. But the profitability to us that stands out is strongest amongst the North Asian hardware suppliers. This is where we see semiconductor capacity growth that remains well below some of the AI related demand growth. And the leadership is still in place in semiconductors and hardware in Korea and Taiwan, which placed them at the center of the AI investment cycle. Memory chips have also emerged as a really critical component of AI infrastructure with their share of data center spending growing to nearly 50%. So Sjoerd, I want to ask you to talk a little bit more about China. We get a lot of questions about the US-China constructive strategic stability and also about the China 2.0 shock, particularly from our European policy makers. So many have observed that the US China Summit was high on pageantry, but maybe on the outcomes, not so much to talk about with a focus on constructive strategic stability. How have you seen the US-China relationship evolving and how are you looking at the nature of cross-border activity? Are companies more cautious about transactions?

Sjoerd Leenart: Yeah, like global investors, I think we were happy to see these meetings happen. Two have happened. Another two will likely happen this year. And it brings a degree of stability without really a long-term solution. So that's still to be seen. But China is a very big market, 18% of the global GDP. So both corporates and investors need to think how they want to position themselves. And we have to distinguish between those two groups when we think about their China strategy. Corporates, they invest for decades, financial investors, they can obviously move their money around quickly. And I think for the corporate sector, the competitive landscape and the behavior of Chinese consumers has definitely shifted and tariffs are also for them a very significant uncertainty. So, you do see caution and concern, but as I say, it's a big market and companies want to stay invested. So, you see a shift towards more localized operations and also enhancing the product portfolio with more local brands. Now with respect to financial investors, we do see a lot of activity in China. I would say particularly from hedge funds, given the enormous liquidity of the China Hong Kong market and the volatility of those markets. Now not only investors, I would say it's still more cautious as it's unclear whether the consumer, the Chinese consumer and the real estate market have turned a corner. When we look at the behavior of Chinese companies, they continue to go abroad without any pause, more so than ever looking for growth that they can no longer find domestically. And so Southeast Asia, Europe, LATAM, the preferred go-to destinations and the US for obvious reasons seeing less of that Chinese investment. And actually Hong Kong plays a very important role because most Chinese companies would run their regional or global operations through there.

Joyce Chang: No, Sjoerd, I completely agree with those observations. And what I really could see from being in the ASEAN region is that the ASEAN countries are a key beneficiary of regional supply chain reconfigurations in the AI tech cycle. And what we've seen is that China has steadily shifted manufacturing activities to the ASEAN region. Initially, it was to reduce labor costs, but eventually it's been to really adapt to the pivot that we've seen in US trade policy that has favored the ASEAN countries over China in terms of tariff differentials. And so I think that's been an additional tailwind to ASEAN's export performance. But we have seen that it's been a little uneven across the region. There's been a rising tide, which has really helped Vietnam and Thailand as the key recipients of Chinese foreign direct investment. I think that Malaysia and Singapore have also seen their tech exports soar, but Indonesia and the Philippines have lagged a bit due to the smaller manufacturing base. But I agree that we have seen just that a movement of capital and activity towards a variety of markets on China's side. So I want to talk a little bit about the China 2.0 shock because this has been top of mind, particularly as everyone is looking at more turbulence in the bond markets in France and in Europe more broadly. So, we see that China's exports are increasingly absorbing manufacturing output that domestic demand really cannot absorb in China. So a lot of questions have come up about the rebalancing and the consequences of this imbalance, raising concerns that Europe could be the main casualty from the China shock. We are seeing that German has greater direct competitive overlap with China than the US does across autos, manufacturing, machinery, chemicals, and other sectors. And that's made China's export gains more of a problematic for Europe and a larger drag on German's growth. We see that Europe has faced more setbacks here and they're looking at the possibility of adding more sort of trade barriers here, particularly when you look at the auto sector. But I still feel that from the discussions we had, that the recent China and European Union engagement still suggests that there's enough incentives there for both sides to negotiate rather than to enter an uncontrolled trade confirmation. So Sjoerd , I want to just see with you what your thoughts are on any particular opportunities that stand out or that you think will be ones that investors should focus on more in the years ahead or any underestimated risk on your side.

Sjoerd Leenart: Well, as you said, there is a focus on emerging markets and particularly on Asia that we sensed among investors in Bangkok. So I do think a gradual reallocation of money towards that region is happening. But it is, as you alluded to earlier, very uneven. The flows tend to move in and out much more so than what I observe in the US. This year, Korea and Taiwan were obviously darlings in the early parts, but have come off quite significantly. China and Hong Kong reversely have struggled this year after great 2025. And global flows into India have restarted cautiously, I'd say, after we saw 60 billion of outflows over the last two years. And equally in Southeast Asia, you see quite a dispersion between the performance of the markets. So I do feel investors will continue to have to be quite agile in how they reallocate their money between the different Asian markets.

Joyce Chang: Yeah, no, those are great points, Sjoerd . And one thing I just wanted to point out is this was a conference where we had a lot more discussion on cybersecurity risk, that along with global AI systems, they're only as strong as the weakest link and that cyber resilience is really something that will be a greater focus. And many of the discussions I think that stood out were that the number of cyber attacks is growing and that we see that these models can both discover and exploit the vulnerabilities and that what used to be a matter of months has come into hours and soon to minutes as far as the days to exploit these cyber vulnerabilities. So that was also one key takeaway that more focus will be needed on cyber resilience, the crisis preparedness, and also the oversight of critical third party providers here. So Sjoerd, I really want to thank you and the entire Asia Pacific management team for the hospitality. I'm just delighted that you were able to join us today to really bring your on the ground perspectives on what's going on in the Asia region.

Sjoerd Leenart: Well, Joyce, it was an absolute pleasure to have you in Bangkok and it is just unbelievable that you were there as a very young analyst 35 years ago to organize the same conference. It's grown a lot bigger and more important, but it's just wonderful that we had you for all these years with us. So thank you for everything you do for clients and for J.P. Morgan.

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