“The economy that clearly stands out is the US. We expect it to continue growing above trend, with GDP growth of 2.2% this year. That compares with 0.4% for the Euro area, 1% for the UK and 0.6% for Japan, which means the US is growing more than twice as fast as other major developed markets,” says Subbaraman.
This is partly because the US is benefiting disproportionately from the AI transformation, he adds. While other economies face greater stagflation risk, with rising inflation and slowing growth, the US appears to be experiencing classic overheating.
Outside the US, all eyes are on “China shock 2.0”. China’s rising export share in electric vehicles (EVs), batteries, solar, construction machinery and shipbuilding is increasing the vulnerability of some Southeast Asian and North Asian countries. As the US raises tariffs and geopolitical tensions escalate, China is redirecting exports to Europe and Asia, gaining market share in both regions. This is creating intense competition, which supports Nomura’s view that pass-through into core inflation will be limited due to severe competitive pressure, says Subbaraman.
Analysing its vulnerability scorecard, Nomura found that Indonesia, Thailand and the Philippines are most vulnerable to China shock 2.0, reflecting high shares of relatively low-value-added and labour-intensive manufacturing sectors. In contrast, Malaysia, India and Vietnam, identified as the main beneficiaries of supply-chain diversification or with the greatest potential to move up the value chain, score quite favourably.
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AI in China
Within China, there are concerns about the extent to which the AI boom can provide support, lift credit demand and push up Chinese bond yields, as well as revive consumption and investment. Nomura chief China economist Ting Lu is very confident that AI will have a positive impact on the economy, noting that while the US is clearly a winner in AI, there is little dispute that China is a runner-up that is quickly catching up.
“China also has its own strengths. It has a massive manufacturing base, accounting for about 30% of global manufacturing. It has a high AI adoption rate, a stable power supply that is more than twice the size of the US, as well as strong policy support from the government. We are seeing significant strategic investment, both directly from the government and indirectly from corporations,” he adds.
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Still, Lu admits that AI cannot solve most of China’s problems. Although AI investment in China remains smaller than in the US, Nomura estimates it accounts for only around 0.8% of its economy.
While China’s headline export growth of 14% in the first four months was impressive, the benefits are more limited than they appear, says Lu. Much of the AI-related price uplift is in memory chips and GPUs, of which China is a net importer.
Meanwhile, South Korea has already experienced benefits from the AI supercycle, as seen in strong tech-related export and GDP growth, as well as surging asset prices. Although higher revenues from the AI revolution could mean lower fiscal risk premiums in the long run, near-term market focus has been on solid economic growth and potential rate hikes from central banks, pushing rates higher.
Nomura chief economist India and ex-Japan, Sonal Varma, says the standout for South Korea this year is its current account surplus, which it projects to be US$300 billion ($389.21 billion) or 15.5% of GDP — a record high. This is benefiting the country through various channels on the terms-of-trade front, she adds.
Despite this, Nomura believes that domestic spillovers from the AI boom will be more limited. Bonuses and wage increases for chip sector employees — which account for less than 1% of total employment — are largely in the form of stocks, not cash. Even the equity wealth effect is concentrated in the hands of higher-income households, says Varma.
Asean economies diverge
Within Asean, there is a clear bifurcation, with outperformers pulling further ahead while laggards fall further behind than expected, says chief Asean economist Euben Paracuelles. The war involving Iran has exacerbated the trend, particularly for large net energy importers in Southeast Asia, including Thailand and the Philippines.
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From a growth perspective, Nomura’s positive view on Malaysia and Singapore is not only being driven by AI and the tech supercycle. Paracuelles says both economies are being supported by multiple growth engines, including a boost to manufacturing and significant spillovers into services. As a result, the growth pickup has been broad-based. Infrastructure spending has also been coming through in both countries, with strong construction activity in both the public and private sectors.
“We also remain positive on the progress being made in the Johor-Singapore Special Economic Zone (JS-SEZ), which has always been seen as a win-win for both countries. A lot of foreign direct investment (FDI) has been flowing into Johor and Malaysia more broadly, which is why Malaysia is now being described as a new FDI magnet in Asia. Singapore also benefits, as this allows it to focus on higher value-added manufacturing and productivity gains,” he adds.
On inflation, the countries facing the biggest risks are the Philippines and, to a certain extent, Singapore. In the Philippines, inflation rose to above 7%, partly due to the lack of fuel subsidies. In Singapore, core inflation is expected to rise to around 3% by the third quarter, which is well above historical averages, Paracuelles notes.
For other Asean economies, inflation pressures remain limited. Even with the energy shock, inflation is still within central bank targets in many cases, says Paracuelles. One example is Thailand, partly due to a very low starting point after many months of deflation.
Malaysia, on the other hand, presents less concern despite its fuel subsidies. This is because there is scope for its state-owned oil and gas company, Petronas, to provide additional revenue. Additionally, the Malaysian government has been proactive in implementing energy conservation measures, including quotas on the maximum amount of subsidised RON95 fuel, helping to contain the pressure.
Nomura expects almost every central bank in Asean to hike or tighten policy in some form, with the exception of the Bank of Thailand, which is more concerned about growth. In the Philippines, the focus is on containing inflation risks. Therefore, back-to-back rate hikes are expected over the next few months.
In Indonesia, the focus is on containing foreign-exchange pressures, which are expected to persist as the current account deficit widens. Bank Indonesia is therefore expected to keep hiking, although growth concerns may limit the extent of tightening, says Paracuelles.
Meanwhile, Bank Negara Malaysia (BNM) is expected to hike rates later this year, more as a normalisation from the current accommodative stance, given the strength of the economy and manageable inflation pressures. “Where our view differs from consensus is that we think BNM is also concerned about financial stability risks. Our own indicator suggests there has been some build-up of these risks, and BNM is likely to see that as a reason not to keep interest rates too low for too long. We therefore expect policy to be normalised by the fourth quarter,” adds Paracuelles.
Asian equities
For equities, Nomura has a constructive stance on Asia ex-Japan. Its end-2026 target for the MSCI ex-Japan Index is 1,316, expecting mid-teen returns. Nomura Asia Pacific equity strategist Chetan Seth says the main reason for its positive view is strong earnings growth of around 60% for 2026 and 22% for the following year, above consensus.
The robust growth is expected to be driven largely by AI. South Korea, Taiwan and China dominate the index, with many companies in these markets well-positioned to deliver strong earnings growth from the AI capex cycle, adds Seth.
Over the next three to six months, Nomura is focused on four key themes. The first is oil, Iran and energy. In the near term, oil prices are expected to remain elevated, although the firm is pencilling in the eventual reopening of the Strait of Hormuz, which could create upside for Asian equities and broaden the rally, which has so far been largely driven by tech stocks.
The AI tech cycle is the second theme. Seth says Nomura is quite constructive on AI — believing that the AI infrastructure capex cycle can continue — with the four to six large listed US hyperscalers expected to spend about US$700 billion in 2026. That represents roughly 70% to 72% year-on-year growth.
“This is important because the money that these guys spend essentially flows into companies listed in the Asian region. Samsung, SK Hynix, Taiwan Semiconductor Manufacturing Co., and many others sit at the centre of the AI capex buildout,” he adds.
The third theme is the US growth, inflation and rates outlook. Nomura’s house view is that the US Federal Reserve will stay on hold, which Seth says is not a bad outcome for equities. The key downside risk would be rate hikes, which is not its base case.
The final theme is US-China relations. Nomura’s general view is that there will be relative stability until at least the US midterms. Any escalation would be a risk for China equities and parts of Asia, while a meaningful improvement would be positive for China.
In terms of market implications, Nomura is “overweight” on South Korea, remaining bullish with a KOSPI target of 10,000 to 11,000 in 2H2026. The firm is also positive on China, another overweight market, with a target of 8,900 for MSCI China, implying around 11% to 12% upside.
Nomura has “neutral” to “underweight” ratings across Southeast Asia. Within the region, the firm likes Singapore and Malaysia, while remaining cautious on Indonesia, the Philippines and Thailand.
