Article Invesco Asia Dragon Trust (IAD) Q3 2026: Finding Value Beyond The AI Trade

Invesco Asia Dragon Trust Q3 at a glance:

It has been a difficult quarter for Asian stock markets, as investors have started to worry about the durability of the AI infrastructure trade. This has led to significant swings in key Asian markets such as South Korea and Taiwan, in spite of strong results from many major companies. 

Key takeaways this quarter:

• Asian markets fell heavily in July, led by memory and semiconductor companies, but tentatively recovered through August and September.
• Conflict resumed in Iran, disrupting global oil flows and raising inflationary pressures.
• It was a tougher quarter for China, as weak domestic demand and limited government policy support continued to deter investors.

What has affected Asian markets in the third quarter 2026?

Asian markets weakened significantly in July, as investors started to worry about the sustainability of AI infrastructure spending. Results from the US technology giants showed AI spending eating into their cash flow, while technology progress from China raised competition fears. A wobble became a rout as many hedge funds sold large positions, pushing markets down further¹.

Nevertheless, strong earnings from some of the major memory and semiconductor groups provided reassurance in August and September and markets started to recover. Buyback programmes from some of the major technology companies also enhanced returns². International exports remained strong over the quarter, reflecting sustained global demand for AI-related technology products

China continued its recent run of weakness over the quarter. Domestic demand is still lacklustre, with ongoing property market weakness suppressing consumer confidence. Nevertheless, there were pockets of strength, with clear progress in some technology areas³. For example, reports emerged that China has begun manufacturing immersion ​deep ultraviolet lithography machines. Healthcare stocks also proved resilient, supported by improving company fundamentals i.e. their underlying financial health and whether factors such as sales, profit and cash flow are improving and attractive share prices⁴.

Elsewhere, the banking sector in Singapore mapped a strong global performance from the financial sector, reporting strong growth in areas such as wealth management⁵. It was a more difficult period for emerging Asean markets such as Indonesia and the Philippines. 

How the Diverse IAD Portfolio Avoided Some Market Volatility in Q3

The diversity of the Asia Dragon Trust was helpful over the quarter. The managers have been selective in their exposure to the AI infrastructure trade, and have sought to avoid those companies where demand is likely to be cyclical i.e. temporary rather than structural i.e. long-term and lasting. An underweight (holding less shares than its benchmark) position in SK Hynix, for example, helped the trust avoid some of the market volatility over the quarter. Nevertheless, the fund retains a significant position in TSMC, believing that it will remain a key beneficiary of AI infrastructure growth.

The trust has also sought to have exposure further down the AI supply chain, where valuations are lower and there is less crowding from investors. This includes Taiwanese companies such as MediaTek and Largan Precision. There are selected opportunities in the Chinese technology complex as innovation accelerates.

We continue to see investment opportunities in Asia as far broader than simply the volatile AI trade. For example, the region’s banking sector continues to benefit from the ongoing growth in Asian consumption and growing demand for wealth management and insurance products. These companies also tend to be more defensive during market volatility. 

What do recent events mean for Invesco Asia Dragon Trust?

Stock markets are now highly concentrated in the AI trade, which is proving increasingly volatile. While we believe in the long-term demand trajectory for AI-related companies, we are wary about increasing competition in areas such as semiconductors, plus high expectations. We see diversification as vital in this environment. 

At the end of September, the trust’s largest sector weights were in information technology (IT), financials, consumer discretionary and communication services. The largest country exposures were Taiwan, China, South Korea and Hong Kong. Relative to the trust’s MSCI AC Asia ex Japan Index benchmark, the trust’s larger positions were in the financials, consumer discretionary and communication services sectors. IT exposure was lower than the benchmark. 

Perspective

The past few months have been a clear demonstration in why diversification is still important in Asian markets. Even though there is no obvious weakening of demand for memory and semiconductors, it has become a crowded trade. Not only are there other options to tap into the AI theme, there are  also plenty of other growth themes within Asia. Equally, areas such as banking and insurance can provide some balance to a portfolio amid more volatile markets. 

Our approach is naturally contrarian, aiming to buy when companies are out of favour. Investors’ focus on a single area - AI - has left many other parts of the market neglected. As a result, we continue to find plenty of compelling opportunities in the current environment.

Invesco Asia Dragon Trust plc

Learn more about the trust.