A long-held tenet of Asia’s markets is suddenly breaking apart

[TOKYO] A breakdown in the relationship between Asia’s stocks and its currencies is flashing a signal for global funds to rethink their investment strategy in the region.

The 30-day correlation between the MSCI Asia-Pacific Index and the Bloomberg Asia Dollar Index, which typically move in lockstep, has dipped below zero for the first time since September 2024. Across the region, a number of markets are seeing their currencies weakening despite a relentless, record-breaking rally in domestic stocks.

Nowhere is the divergence more glaring than in South Korea, where the Kospi is continuing to rally in 2026 after trouncing global peers with a 76 per cent surge in 2025, and yet the won plunged to near a 17-year low this week. Similar patterns are emerging in markets such as Japan and Taiwan.

While the jury is out on how long these trends will endure, one thing is clear for at least the immediate future: stock performance no longer implies currency strength. And such mixed cross-asset signals have investors bracing for higher volatility, with some preparing to add more hedges.

“It’s definitely a big surprise, particularly in Korea,” said Ian Samson, a portfolio manager overseeing US$1.6 billion in assets at Fidelity International. “The fact that you have got these huge current accounts surpluses, you have got strong equity markets and you are not seeing the currencies participate at home, that’s very strange and it’s not necessarily particularly healthy.”

Traders say there are separate forces in play on each side of the equation: while a frenzy over artificial intelligence (AI) is fuelling stock gains, currencies are simultaneously facing pressure from fund outflows in part due to a series of rate cuts taken by Asian central banks to shield their economies from US tariffs.

“These markets are dancing to different tunes, that’s the simplest, most reasonable explanation,” said Homin Lee, senior macro strategist at Lombard Odier Singapore.

While stocks are reacting to thematic, sectoral developments, currencies are moving on flows and macro factors, including softening expectations of rate cuts by the Federal Reserve in the first half of the year, he said.

Lee said that he sees the decoupling as a short-term development.

SEE ALSO

Sell US, buy Asia? US outlook clouded on threat to Fed, geopolitical tensions: analysts

AI and liquidity to drive Asia markets in 2026 amid US fiscal risks: Schroders

What 2025 taught markets, and what comes next

Case for hedging

Vantage Point Asset Management and Berenberg are among those considering hedging their Asia exposure.

For dollar-funded investors, it helps that hedging costs have fallen to an average of 0.31 per cent for eight major Asian currencies, close to the lowest in a year, according to three-month forward implied yields compiled by Bloomberg.

“It is possible that equities still have more upside in the near term. However, the conditions might warrant putting on a hedge soon and the cost of protection is inexpensive,” said Nick Ferres, chief investment officer for Vantage Point Asset Management, which runs an Asia-focused global macro fund in Singapore.

Some others are less concerned.

“The currency angle is important, but we are not too fussed about modest currency pressure across Apac for the equity outlook of strongly rebounding export-oriented economies,” said Aninda Mitra, head of Asia macro and investment strategy at BNY Investments.

In many ways, the AI infrastructure trade is the biggest swing factor when it comes to the outlook for Asian stocks. For now, they are off to a strong start in 2026 and investors are expecting the momentum to carry through.

“For unhedged investors, the situation is more complex,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg, which oversees 39 billion euros (S$58 billion). “Even if equities deliver positive returns, any modest underperformance of local currencies against the US dollar can erode gains or heighten portfolio volatility.” BLOOMBERG