In 2024, Taiwan has been the top-performing stock market in Asia, with Japan following closely behind.

• Taiwan's stock market was the top performer in Asia-Pacific during the first half of 2024, thanks to optimism in AI.
• In the first six months of the year, the stock markets in Thailand and Indonesia experienced the largest declines in the region, with losses of 8% and nearly 3% respectively.

In the first quarter of 2024, Taiwan's stock market outperformed the rest of Asia-Pacific, thanks to the optimism surrounding artificial intelligence.

The AI value chain has driven a 28% increase in the stock market so far this year.

In the first half of the year, Foxconn, traded as , experienced a 105% increase, while Heavyweight only climbed 63%.

According to T. Rowe Price's global equity portfolio specialist, Rahul Ghosh, the global markets' performance this year has been mainly influenced by the themes of Artificial Intelligence and central bank policy, and this trend is expected to continue.

The global economic activity is being driven by the potential and scale of the AI investment cycle, with the impact of these investments expanding to sectors such as industrials, materials, and utilities, as stated.

Despite being surpassed by its regional benchmark index earlier this year, Japan's Nikkei index has still gained about 18% in the first six months.

In February, the Nikkei surpassed its 34-year record, reaching a new all-time high of 38,915.87, which was previously set on Dec. 29, 1989.

On March 22, the index surpassed its previous all-time closing high and reached a new record of 40,888.43.

According to CNBC, analysts predict that Japan will be the preferred market in Asia, despite Taiwan's current leadership in the region.

The fourth largest economy in the world has seen a tangible and considerable impact from improved corporate governance standards, as stated by Ghosh.

Ben Powell, the chief APAC investment strategist at the BlackRock Investment Institute, stated in a June 14 note that the Bank of Japan is becoming more confident in its ability to achieve its inflation targets. As a result, the bank plans to normalize its monetary policy in a gradual and measured manner.

Powell stated that Japan's macroeconomic environment is conducive to risk assets. "We continue to maintain a high allocation to Japanese equities due to the strong corporate reforms, robust earnings, and the valuation support from persistently negative real interest rates."

Despite the majority of Asian markets experiencing growth this year, Thailand, Indonesia, and the Philippines have seen a decline in their stock markets.

In the first six months, Thailand's SET Index dropped 8%, making it the poorest performing index in the region. Meanwhile, the Jakarta Composite fell by 2.88% and the Philippine stock exchange index decreased approximately 0.6% during the same period.

All eyes on the Fed

Central banks in Asia closely monitor the Federal Reserve's next move, as they typically base their monetary policy decisions on the U.S. central bank's anticipated actions.

The Fed indicated at the end of 2023 that it planned to make several rate cuts in 2023.

The Fed's May meeting dot plot projected only a 25 basis point cut for the remainder of 2024, which is a significant departure from the 75 basis point cut implied in the graph released at the end of March.

A dot plot displays the FOMC members' projected interest rate for the bank's short-term rate at specific points in the future.

The central bank has revised its forecast for monetary policy tightening in 2025, projecting four cuts of 25 basis points each.

The Fed has been hesitant to lower interest rates due to unexpectedly high inflation and strong employment and wage growth in the U.S.

The question now is: When will the first rate cut happen?

According to the CME FedWatch tool, 61% of traders anticipate the Fed reducing rates by 25 basis points during the September meeting.

On June 16, Neel Kashkari, President of the Minneapolis Federal Reserve, predicted that it is likely the U.S. central bank will reduce interest rates at least once this year, but he anticipates the decision will be made in December.

T. Rowe Price's head of international fixed income, Ken Orchard, shared Kashkari's perspective.

"The Fed may cut 25 basis points at its December policy meeting, following the November elections and potentially once in the summer."

He predicted that the central bank will enact fewer cuts in 2025 than the dot plot suggests, and he called the 2025 outlook "murkier" than this year.

Orchard warned that there's a possibility the Fed may increase borrowing costs next year, and suggested that one or two rate reductions might be more realistic.

"The possibility of insurance cuts by the Fed increasing inflation and increasing the likelihood of a hiking bias in 2025 is a concern."

Lombard Odier's senior macro strategist, Homin Lee, expressed a more optimistic outlook and predicted two interest rate cuts in the second half of 2024, according to a report by CNBC.

The Fed's revised dot plot caused the bank to predict only one less cut in its May 9 outlook report.

Lee stated that although the Fed has an "asymmetric" stance, meaning the hurdle for renewed tightening is high but the hurdle for rate cuts is low, we are still confident that rate cuts will begin in September.