Asia August 2026 Market Commentary
While Asian equities did recover in August after a punishing July, markets remain on edge. The margin-call-driven momentum unwind in leveraged tech and artificial intelligence (AI) positions remains a drag on sentiment. The resumption of hostilities in the Middle East played very poorly in crude and treasury markets, and there are growing concerns over debasement weighing on the US dollar and putting a firm bid under precious metals.
We are mindful that a protracted conflict in the Middle East would keep energy prices and inflation expectations elevated, pushing government borrowing costs higher just as concerns over US policy credibility rush into the wall of federal debt and refinancing needs.
That said, our conviction stands, validated by the data behind recent trading activity and shareholder registries: this summer’s correction in the markets is more of a reset on crowded positioning rather than a reassessment of fundamentals. Earnings across the region are inflecting positively, and we are encouraged by market performance broadening out, underpinned by the commitment to accelerate the build-out of AI and energy infrastructure across Asia, the urgency surrounding establishing supply chain security for energy and critical minerals, rising defense spending across the region, and the reform momentum in Japan and Korea.
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A Few Thoughts on the Headlines:
The risk of interest rate hikes is back on the table post Warsh’s hawkish Jackson Hole tilt. What we are watching for is the speed of the potential adjustments in market pricing along the yield curve – because that is what is most disruptive to markets – and not necessarily the level of interest rates, which remain extremely low by historical standards. Duration risk is asymmetric for equities, contributing significantly to the de-rating in one-year-forward earnings multiples for Asia Pacific, from 16x to 12x even as resilient earnings/cash flows growth continues to surprise market expectations positively. We remain focused on identifying and investing in companies with sustainable revenue conversion into earnings and cash flows, while continuing to avoid the long duration ‘narratives’ that necessarily require an uplift from sentiment and multiples.
The debate over AI has fragmented; it is a brave new world. The market continues to argue over token ‘maxxing’ and the demand for compute continuing to scale, the price/utility tradeoffs between the frontier and the open-weight models, the standoff between the US China on access to leading edge equipment, chips, and AI regulation, the backlash against datacenters in the lead-up to the US midterms, and of course, the questions over circular financing risks, and the probability of earning an economic return on investment given the massive commitments being made by the hyperscalers and the various language models globally. Not surprisingly, markets are unsettled, rotating schizophrenically between the hyperscalers, the power providers, compute, semis, memory, and back.
There is no viable off-ramp in the Middle East, and geopolitics compounds it. The US and Iran (and their proxies) have resumed missile and drone strikes targeting energy, civil, and military infrastructure across the region. The energy complex has taken note, and crude oil, LNG, and coal prices continue to trend higher in response to the supply constraints and strategic storage reserves sitting below normal. And on top of that, we have the US midterms shaping rhetoric and near-term policy bravado, the BRICS summit in New Delhi where Xi, Putin, and Modi are expected to present a united front, a high-stakes Trump-Xi summit, and the uncomfortable tail risks tied to election outcomes in Germany, France, Brazil, and Israel looming into year-end. There’s a lot on the table.
Japan: A Stronger Yen and a Repriced Shield
Two things shifted in Japan in the last month. The yen stopped falling, and the US security guarantees that had effectively been in place for 75 years can no longer be taken for granted.
The yen has appreciated from a forty-year low of 164 yen/US$ to ~154 yen/US$ in the first week of September. It does reflect ~US$100bn of coordinated intervention and significant jawboning from both Tokyo and Washington. With JGB yields above 3%, a three-decade high, markets seem to be anticipating yield-curve ‘normalization,’ debt-funded fiscal expansion, sustained nominal growth and wage inflation, and a repricing of Bank of Japan policy ahead of the September 18 meeting. A stronger yen – and we could certainly see it trading in a band around 150 yen/US$ – would certainly assuage some of the stress from higher imported energy prices, and higher defense procurement targets.
Japanese policymakers have also had to come to terms with a more assertive China, exposing Japan’s supply-chain vulnerabilities in procuring adequate energy, rare earths, and critical minerals. To make things worse, the US is explicitly pressing its allies to shoulder more of the defense burden for the Asia Pacific, while signaling the de-prioritization of its longer-term priorities in the region by unilaterally truncating the joint US/South Korean military exercises, and relocating critical Indo-Pacific defense assets to bolster the US military efforts in the Persian Gulf. We do expect Japan to boost its defense spending from ~2% of GDP to ~3% of GDP, translating to ~US$40bn uplift in its domestic defense budget, and would categorize the cabinet decision to ease the historical restrictions on the export of finished defense products as a singular statement of intent to protect Japanese territorial and economic interests across the region.
Conclusion:
The market has de-rated, while earnings, free cash flow, capital discipline, and capital returns continue to surprise the market on the upside.
We are mindful of the risks to growth and to earnings from higher energy prices fueling higher inflationary expectations and, as a result, triggering more restrictive monetary policy; from consumer wallets being squeezed by higher energy and food prices; and from a potential slowdown in AI-related infrastructure capex.
On balance, we expect markets to remain extremely choppy but to fundamentally trend higher.
We are particularly encouraged by market performance continuing to broaden out, rewarding positive revenues, earnings, cash flow inflections, and strong valuation support.
Our core convictions are in the persistent ‘shortages’ we have identified in memory, testing, optical networking, ABF substrates, MLCC and CoWoS packaging, in prioritizing regional energy security, in the urgency surrounding the build-out of ex-China critical minerals infrastructure, in accelerating defense spending globally, in the reform momentum in Japan and Korea, in nascent reflation in Hong Kong and Japan, and in the renewed bid for transition and precious metals.
Behind The Commentary
Prem Manjooran, CIO
35 years investing in Asia
Prem Manjooran is Principal at Tantallon Capital Advisors, where he is the Chief Investment Officer of the Tantallon India Fund and the Tantallon Asia Impact Fund. Prem has spent 35 years investing across Asia through a full range of economic and market cycles. That depth of experience shapes his approach: a seasoned macro view on monetary policy, capital flows, and geopolitics as it pertains to Asia, a disciplined thematic investment approach identifying opportunity and risk, and a deeply calibrated micro, company-by-company perspective built over decades of fundamental investment research and analysis.
Over his career, Prem has built a deep network of relationships across corporate Asia, engaging directly with entrepreneurs and management leadership teams on strategy, capital allocation, and governance. That access and depth of engagement underpins his conviction in Asia’s structural growth story: the view that true innovation, industrialization, and financial inclusion are most durable when paired with disciplined capital allocation and accountability to all stakeholders.
Prior to joining Tantallon Capital, Prem spent 22 years at The Capital Group Companies as an equity analyst and specialist investor covering Asia, moving between market-generalist and industry-specialist roles over the course of his tenure there. He grew up in Mumbai and Calcutta and has spent most of his career living and working across the region he covers.
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