Asian stock markets rose on Monday as investors shifted their focus away from renewed Middle East tensions over the weekend, turning their attention back to fundamentals and the prospects for further negotiations. The MSCI Asia Pacific Index gained as much as 0.8%, while the MSCI Emerging Markets Index erased all losses incurred during the nearly two-month-long conflict involving Iran. U.S. stock index futures pared earlier losses that had reached up to 1.1%. Crude oil and the U.S. dollar also retreated from their intraday highs.
Analysts and strategists view these market movements as an indication that investors are currently positioning their portfolios under the assumption that the peak period of uncertainty has passed. They believe the market is at a critical inflection point, transitioning from "wartime pricing" to "normalized trading." Factors driving market sentiment include a more optimistic outlook for negotiations, a resurgence in artificial intelligence-related trading, and a renewed focus on corporate fundamentals as the earnings season progresses. Within the current market framework, optimistic expectations for peace talks serve as a cornerstone supporting investor sentiment. Despite persistent geopolitical tensions, the overall market mood has not shifted to full-scale risk aversion. Given that both sides remain open to dialogue, investors see an opportunity for potential de-escalation.
Matthew Haupt, Portfolio Manager at Wilson Asset Management, commented, "I believe market pricing already reflects expectations for a final agreement in the Middle East and a return to normalcy. So far, we've seen a very mature reaction in index futures, as most are now willing to look past these fluctuations since the ultimate outcome is largely anticipated."
Asian markets staged a low-volume rebound, yet institutions remain cautiously bearish, with AI semiconductors acting as the primary engine for gains. Uncertainty intensified after former U.S. President Trump and Iranian officials expressed differing views on the next phase of the conflict, casting doubt on the prospects for peace talks before a ceasefire deadline. Akira Hirakawa, Chief Global Strategist at Tokai Tokyo Intelligence Laboratory, noted, "The immediate focus is on whether U.S.-Iran talks will actually take place. The likelihood of Iran ultimately canceling the talks is low, so while investors may be hesitant, it's difficult for them to adopt a bearish stance."
Despite subdued trading volumes reflecting a wait-and-see attitude—for instance, indicators for South Korea's KOSPI index were about 33% below the previous month's average—the continued decline in short positions on Japanese stocks and a lower short-selling ratio reveal institutional investors' caution against taking aggressive bearish positions as major indices approach historical highs. Some market observers point out that short-selling has become more challenging as key Asian indices, including Japan's Nikkei 225 and Taiwan's Weighted Index, rebound to record levels. The short-selling ratio for Japanese stocks has declined since the beginning of the month, with its 5-day moving average falling to approximately 38.8% by last Friday, down from 41.8% on April 3.
The core driver behind this "structural market trend" stems from the robust fundamentals of the artificial intelligence industry. Hiroshi Takei, Strategist at Resona Holdings, stated, "Looking at the indices, the Nikkei is particularly close to its all-time high. In terms of sector contributions, the gains are almost entirely driven by the semiconductor industry. This suggests other sectors still have room to rise." On Monday, South Korean shares rose over 1%, erasing losses triggered by the Iran conflict, primarily fueled by gains in chipmakers as AI trading returned to the forefront of investor focus.
Despite the ongoing conflict, earnings from Asian tech firms remain strong: Taiwan Semiconductor Manufacturing Company raised its 2026 revenue forecast due to robust AI chip demand, Samsung Electronics reported an eight-fold increase in quarterly profit, and the upcoming earnings report from South Korean memory chipmaker SK Hynix on Thursday is also seen as a key factor influencing tech stock performance. Analysts widely believe that Asia, as the heart of the global semiconductor supply chain, has demonstrated remarkable resilience by balancing geopolitical risks against technological gains, with capital accelerating its flow into the tech sector, which is underpinned by long-term growth logic.
Billy Leung, Investment Strategist at Global X Management, said, "We are approaching or are already at the peak of uncertainty. Asia has been the region most impacted by peace trading. The structural foundation of the AI industry remains intact. Capital flows into memory chips are accelerating."
Asian defense stocks experience a structural bull market. However, behind this optimism regarding "peak uncertainty," capital flows are not spreading indiscriminately but are showing highly selective characteristics. Investors are no longer viewing geopolitical conflicts merely as short-term disruptions but are beginning to deeply price in the industrial transformations catalyzed by prolonged conflict. This shift in logic has directly propelled Asian defense stocks from being "safe-haven tools" to experiencing a "structural bull market."
Institutions, including Bank of America Securities, argue that the current rally in defense stocks is not short-term speculation on geopolitical themes but a strategic opportunity with long-term growth support. According to the Bloomberg Aerospace & Defense Index, three of the world's top five performing defense companies this year are from Asia: South Korea's Hanwha Systems, LIG Nex1, and Japan's AstroScale Holdings. This indicates that as the "back-and-forth" situation in the Middle East boosts global defense demand, Asian defense companies are becoming core beneficiaries of global orders due to their cost advantages, supply chain resilience, and faster delivery capabilities. The depth and breadth of this favorable landscape have exceeded market expectations.
Institutions like BlackRock and Jupiter Asset Management point out that even if conflicts ease in the short term, the irreversible shift in national strategies from "passive defense" to "active deterrence" is underway. NATO's goal to increase defense spending to 5% of GDP by 2035 sets a long-term tone for elevated global military expenditures. Analysts note that Asian defense manufacturers have transformed from mere weapons procurers into key players with R&D innovation capabilities, deeply integrated into U.S. and European supply chains. Advanced technology and cost-effectiveness from South Korean firms, policy support for local production from the Indian government, and ST Engineering's steady 13% gain in Singapore during the conflict collectively form a high-growth trajectory expected to last for years.
Although defense stocks experienced volatility during the conflict due to profit-taking, long-term capital allocation remains steadfast. As analyzed by Allspring Global Investments, the sell-off during the peak of the conflict was more a psychological reaction to market de-risking rather than a deterioration in fundamentals.
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