Higher-for-longer rates set to hit Asia’s tech sectors as Fed stays the course: analysts
The region’s central banks are likely to take divergent monetary paths independent of the US Federal Reserve
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[SINGAPORE] The US Federal Reserve’s decision to hold rates, accompanied by hawkish messaging, means inflation will remain closely watched while Asia’s tech sectors will have to contend with higher-for-longer rates, say analysts.
The Federal Open Market Committee’s (FOMC) split vote on Wednesday (Jul 29) – with three officials who wanted to hike – and Fed chair Kevin Warsh’s avoidance of forward guidance have injected uncertainty into global markets, as well as volatility into the long end of the US Treasury curve.
Warsh, who took over as Fed chair in May, indicated that he has “no tolerance” for inflation, which has been running above the central bank’s 2 per cent target for more than five years. That comes against a backdrop of continually climbing energy costs amid the Iran conflict.
The Fed “will not waver” on getting inflation back to the 2 per cent target, Warsh said.
While central banks in Asia are likely to take divergent monetary paths independent of the Fed, analysts believe the region’s crucial tech sectors could take a hit from higher rates.
Gary Tan, portfolio manager for the intrinsic emerging-markets equity team at Allspring Global Investments, said the impact on Asia should be “manageable, given healthier balance sheets and stronger external positions than in previous cycles”.
“We do expect volatility to remain elevated as markets reassess the outlook for inflation, interest rates and growth,” he added.
“That said, we see this primarily as a valuation and positioning adjustment, particularly within AI-related equities, rather than a deterioration in the underlying fundamentals of Asian companies.”
Michael Langham, emerging-markets economist at Aberdeen Investments, expects regional monetary policy to remain broadly “growth supportive” through the second half of 2026, even if modest tightening occurs in South Korea, Japan and eventually India.
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“Asia’s position as a key cog in global manufacturing puts it in a good position. Whether it be supply-chain reorganisation and diversification or expanding export markets and external position resilience, Asia is well placed,” he said.
“Where the vulnerabilities lie is in markets which aren’t adapting to the shift in regime: economies failing to adapt to more shocks to oil and gas, climate shocks to food and greater investment needs from defence to climate change.”
AI capex under pressure
Not cutting rates carries implications for Asia’s tech sector.
James Ooi, market strategist at Tiger Brokers, warned that sustained higher rates risk pressuring capital expenditure.
He pointed out that artificial intelligence-related companies rely heavily on both debt and equity financing for massive infrastructure build-outs.
“Higher-for-longer interest rates may weigh on valuations, increase financing costs and make it more expensive to raise fresh capital, potentially slowing the pace of AI investment and weighing on broader economic growth.”
This is a critical headwind for Asian equity markets, some of which are heavily weighted towards parts of the semiconductor supply chain.
Allspring’s Tan noted that the biggest effect of the Fed’s stance is likely to be felt in markets “particularly within North Asia’s AI supply chain, where higher rates and a steeper yield curve create a headwind for long duration technology valuations”.
Kerry Craig, global market strategist at JP Morgan Asset Management, said the immediate impact of the FOMC meeting on Asia is being overshadowed by “lingering concerns on sustainability of earnings among AI-linked names”.
He suggested that earnings announcements from US hyperscalers, as well as key memory and semiconductor firms in the region, will be more meaningful for equity markets right now than the Fed’s rhetoric.
However, Aberdeen’s Langham pointed out that it depends on what is driving the higher-for-longer regime.
If it is supply-demand imbalances in an AI capex cycle or fiscal dominance that keeps demand for Asian exporters strong, that can offset any impact from higher US dollar borrowing costs.
“If it’s because of a persistence of global supply shocks... that is a bigger challenge for Asian policymakers,” he said.
“It will mean higher rates globally and lower growth, particularly for economies reliant on imports and where there are large youth populations facing employment issues,” he added, pointing to India, Indonesia, Pakistan and the Philippines.
Asia’s central banks setting their own paths
Asia’s central banks are increasingly charting their own courses based on other macroeconomic factors.
Tan expects “greater divergence among Asian central banks, as each economy faces a different inflation outlook, particularly given varying exposure to higher energy prices and imported inflation”.
The Monetary Authority of Singapore (MAS) tightened its monetary policy on Monday, slightly increasing the rate of appreciation for the Singapore dollar nominal effective exchange rate band to combat imported inflation driven by higher global energy prices.
Langham said that Asia’s central bankers “can be independent of the Fed path if the domestic factors allow it”.
“We’ve seen Asian central banks deliver easing cycles ahead of the Fed post-pandemic and alternatively begin hiking while the Fed’s on hold,” he added. “But if domestic fundamentals weaken, it could leave markets more vulnerable to ‘hot money’ outflows if the Fed starts hiking.”
Navin Saigal, head of global fixed income for the Asia-Pacific at BlackRock, noted that while Australia and parts of North Asia fight inflationary pressures and Japan normalises its policy, China and Thailand are battling deflationary backdrops.
“At the same time, oil, food and AI-related supply shocks have made the policy trade-off more complex, reinforcing the need to distinguish between markets where higher yields compensate investors and markets where policy or currency pressure can still force more tightening,” he said.
“In our view, this is where Asia becomes especially relevant to global fixed-income portfolios.”
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