This year, Asian emerging stock markets, particularly China, have significantly outperformed their European and American counterparts, with foreign capital accelerating its return to Chinese assets. BNP Paribas Asset Management observes a notable reversal in the landscape of Asian and emerging equity markets, identifying breakthroughs in AI technology, corporate earnings recovery, and energy transition demand as the core drivers of capital market growth in China.

**Global Capital Flow Adjustments: China as a Key Destination** BNP Paribas notes that while China's stock market experienced a brief outflow in April due to tariff concerns, sentiment quickly rebounded as policies evolved, leading to rapid capital reallocation—primarily from India. Since April’s low, foreign institutional investors have reinvested approximately $44 billion in China’s active equity assets.

From April onward, global institutions significantly reduced their underweight positions in Chinese equities. Despite lingering tariff pressures, capital has refocused on Chinese assets. This shift began in Q4 2024 and accelerated in Q1 2025, driven by China’s ability to develop competitive generative AI models without relying on cutting-edge GPU chips—a realization that reshaped foreign investors' perception of China’s market potential.

BNP Paribas highlights that emerging market stocks, led by China, remain historically undervalued compared to U.S. equities. However, with Q3 earnings from core sector leaders exceeding expectations, further valuation recovery is anticipated, reinforcing the appeal of emerging market assets.

**Tariff Adjustments Normalized as Market Consensus** The firm asserts that global trade has entered a new phase where tariffs are a long-term fixture. U.S. tariff revenues, generating roughly $30 billion monthly, have partially alleviated fiscal deficits. Market tolerance for trade friction has also risen, with 10%-15% tariffs now deemed "acceptable," a shift from the previous "zero-tariff" expectation.

Institutional strategies have adapted accordingly. While maintaining tighter country-level allocations to hedge against exogenous risks, investors continue targeting high-growth companies. Over the next 18-24 months, trade-related costs may gradually emerge, potentially slowing growth in certain sectors.

Nevertheless, BNP Paribas emphasizes that emerging market corporate fundamentals remain robust, with no signs of widespread distress in Asia by 2026. Firms are expected to optimize balance sheets through non-core asset sales, high-cost debt refinancing, and maturity extensions.

Over the past decade, Asian companies have diversified funding channels, reducing reliance on debt capital markets. Strong local liquidity support in both hard currency and local financing has facilitated deleveraging, with no high-risk sectors or firms identified.

**AI Supply Chain and Energy Transition Opportunities** China’s AI industry boom is not only boosting domestic stocks but also spurring ancillary investments across regional supply chains. Smaller Asian markets like Malaysia and Singapore are seeing a surge in data centers, potentially unlocking investment opportunities elsewhere in the region.

Institutions are eyeing both core AI technologies (e.g., chips, memory) and supporting sectors like energy consumption, cooling, and power supply, making energy transition another key driver. This shift may structurally alter demand for certain commodities.

BNP Paribas highlights early institutional positioning in copper-related assets, anticipating sustained demand from AI infrastructure (e.g., high-speed network cabling, 5G/6G base stations) and electric vehicle batteries. With major copper producers facing force majeure output cuts, prices are expected to remain elevated.