Asia's Market Surge: AI Demand and Trade Pacts Fuel Investor Confidence

Asia stocks gained momentum in the third quarter of 2025, driven by renewed optimism surrounding artificial intelligence (AI) advancements and improved trade dynamics, with the Nikkei 225 hitting fresh record highs amid leadership changes in Japan. The MSCI Asia Pacific Index, excluding Japan, rose 2% in July, marking its fifth consecutive month of gains, as foreign investors poured $25.7 billion into markets across the region over the past three months. This surge was attributed to a combination of global AI-driven demand and strategic trade agreements that reduced tariff-related uncertainties .

Foreign inflows into tech-exporting hubs like China Taiwan and South Korea reached unprecedented levels. Investors injected $7.78 billion into China Taiwan, the highest since the 2008 financial crisis, while South Korea attracted $4.52 billion, the most since February 2024. These figures reflect growing confidence in the region's role in the global AI supply chain, particularly as demand for semiconductors and data centers accelerates . Thailand also saw its first net inflows since September 2023, with $499 million entering its equity markets as investors capitalized on undervalued stocks amid a 14% surge in its benchmark SET index .

Japan's Nikkei 225, meanwhile, reached multi-decade highs, fueled by a combination of structural reforms and a shift in leadership under the newly appointed Prime Minister. While the index's performance was not explicitly tied to AI-related corporate strategies in the provided data, analysts noted that Japan's broader economic policies-aimed at revitalizing innovation and attracting foreign capital-have bolstered market sentiment. The index advanced roughly 6% in July alone, aligning with regional trends of optimism around AI-driven growth .

The regional equity rally was further supported by stabilizing trade relationships. Improved tariff arrangements between Asian economies and the United States reduced volatility in financial markets, allowing investors to allocate capital more confidently. For instance, Vietnam attracted $326 million in July after securing favorable trade terms with the U.S., signaling its growing appeal as an alternative manufacturing hub . Conversely, India and Indonesia faced outflows, with India recording a $2.1 billion net withdrawal-the largest since February 2025-due to regulatory uncertainties and currency pressures .

Looking ahead, the confluence of AI adoption and geopolitical realignments is expected to shape the region's economic trajectory. While the Reuters report did not quantify future projections, the broader trend of foreign capital inflows suggests sustained momentum for Asian equities. The CNA article highlighted that markets are anticipating further Federal Reserve rate cuts, which could amplify the current rally as lower global interest rates make emerging markets more attractive .