HONG KONG, Oct 19 (Reuters) – As doubts mount over Asia’s AI boom, some of the region’s strongest returns are building far from the hype. While tech dominates the headlines, old-economy mainstays are also key drivers of the broader market story.
Technology accounts for six of Asia’s 15 best-performing market sectors in 2026 thus far. But the remaining nine tell a non-tech story anchored in financials, energy, industrials and process industries.
Admittedly, some of these themes overlap with the AI capital expenditure juggernaut. For example, investments in power generation, grid infrastructure and industrial cooling are clearly being propelled by data centre needs.
But AI is not the only driver of these old-economy investment sweet spots, as geopolitical unrest and high energy prices are also playing a role. Fears about a slowdown in the tech boom may rattle Asian markets — as we saw last week — but they will not necessarily bring the Asian surge to a screeching halt.
DEFENCE AND INFRASTRUCTURE
Rising global defence spending has been a major investment driver worldwide this year, as military tensions escalate, most notably in the Middle East and Europe.
This trend has been building ever since Russia’s invasion of Ukraine in 2022 and has skyrocketed as US President Donald Trump has put more pressure on European allies to increase defence spending.
North Atlantic Treaty Organization (NATO) members, which account for 65% of global defence expenditure, committed in June 2025 to raise their annual defence spending to 5% of gross domestic product by 2035. Global defence spending represented only 2.4% of global GDP in 2025.
The widening conflict in the Middle East, which escalated following the US-Israeli strikes on Iran on February 28, has also highlighted the vulnerability of countries throughout the Gulf.
Asian defence manufacturers stand to gain from this global defence spending boom as Western capacity constraints potentially give Asian rivals an edge in delivery times and prices for comparable equipment.
According to the Stockholm International Peace Research Institute, South Korea supplied 8.6% of all arms imported by European NATO members during 2021–25, ahead of Israel’s 7.7% and France’s 7.4%. This came as Europe’s overall arms imports roughly tripled.
At the same time, “insourcing” of defence manufacturing – creating a homegrown military-industrial complex – is already a trend in several Asian nations. India aims for 70% defence “indigenisation” by 2027, Indonesia seeks 60% local content in defence equipment by 2030, and Vietnam is targeting 50% domestic inputs in select armaments by 2030.
Increasing defence needs and military modernization are also spurring a broader infrastructure buildout globally. This includes reinforced bridges, roads, ports and railways, which are needed to transport heavy equipment, alongside fortified energy grids, telecommunications services, and cyber networks.
McKinsey forecasts $106 trillion in global infrastructure investment through 2040, with Asia accounting for roughly 65% of that. The region’s domestic industry has several advantages, including local ties, inexpensive state financing and integrated operations that can lower costs and speed delivery.
Asia’s own infrastructure buildout could be mammoth too. Regional transport infrastructure alone could require investment of $2.6 trillion annually through 2035, according to the Asian Transport Observatory and the Asian Development Bank. That would represent more than three times the roughly $800 billion annual average spent from 2020 to 2025.
Reflecting these trends, the order books of major Asian industrial and defence groups — including Larsen & Toubro , Hanwha Aerospace and China Railway Group — already stand at several times annual revenue, supporting a robust growth outlook.
The global drive for energy independence should also benefit Asia, the leader in clean energy technologies. The stickiness of crude oil prices above $100 a barrel – and the related shock of the closure of the Strait of Hormuz this year – should push more consumers, businesses and governments toward renewables, particularly solar power, battery energy storage, offshore wind and electric vehicles.
While Chinese companies currently dominate this space, fierce domestic competition, termed “involution,” has dampened their margins, just as trade friction with the US and Europe has led to higher tariffs.
Companies best positioned may be those with significant overseas revenue and well-established foreign manufacturing facilities and supply chains that can overcome tariff walls and trade restrictions. According to FactSet, Chinese EV makers BYD and Geely draw 43% and 23% of their respective revenue from abroad, while Chinese battery titan CATL generates 34% of its revenue overseas.
This strategy is no slam dunk, of course. Swapping AI exposure for heavy industry and state-backed defence does not eliminate risk — it merely trades tech valuation hype for other more familiar hazards.
Defence and infrastructure orders come mostly from governments, raising the risk of bureaucratic delays, cost overruns, and abrupt legislative budget cuts. On the green energy front, the risk remains that Asia’s fierce domestic price wars could spread outward when companies compete in foreign markets.
Meanwhile, prolonged inflation, elevated energy prices and high interest rates could slow infrastructure buildouts and trigger corporate defaults. And a truly massive AI pullback could have ripple effects across the region’s markets.
Yet, for now, Asia’s old economy continues to offer genuine substance beyond all the tech-driven hype.
(The views expressed here are those of Manishi Raychaudhuri, the founder and CEO of Emmer Capital Partners Ltd and the former head of Asia-Pacific Equity Research at BNP Paribas Securities.)
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(Writing by Manishi Raychaudhuri; Editing by Marguerita Choy and Anna Szymanski)
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