Earlier this week, the Democratic Party in the United States won both houses of Congress in the mid-term elections, raising concerns among markets that new legislation will likely tighten regulations on spending related to artificial intelligence (AI) and data center construction. The political shockwave detonated more slowly in the stock market, with investors accelerating their withdrawal from the chip sector.

This trend continued into the Asia-Pacific markets in recent trading days. However, analysts interviewed by Yicai News generally believe that the medium-term impact is mild, as the market had already anticipated the effects of the election results in advance; moreover, the trend of the Asia-Pacific stock markets is not solely determined by the AI policies of the Democratic Party, and the Democratic Party's absolute majority in both houses is not yet sufficient to ensure the implementation of these policies.

Japanese and Korean stock markets both entered a bear market

On November 6th, the MSCI Asia-Pacific index fell by 3% to 247.75 points, with stock markets in Japan and South Korea opening lower and experiencing sharp declines once again. Shortly after the opening, the Nikkei 225 index's decline widened to 6%, breaking below the 60,000-point mark for the first time since May, and falling by more than 20% from its June high, entering a "bear market" territory. Tokyo Electron and Advantest tumbled by over 12%, Hitachi and Keyence fell by nearly 7%, Sumitomo Mitsui Financial Group fell by over 6%, and Mitsubishi UFJ Financial fell by over 5%. SoftBank Group once fell by nearly 16%, recording the largest decline since August 2024.

The composite index of South Korea’s KOSPI rapidly fell by 8.8%, breaking below the 5,000-point mark and triggering a circuit breaker. Trading resumed after the circuit breaker mechanism was lifted. The small-cap Kosdaq index (Kosdaq) tumbled by more than 7%. As of press time, the KOSPI index has plummeted by 47% from its historical high of 9,385 points in June this year, further deepening the “bear market.” The decline for the two major chip giants was particularly severe: Samsung Electronics fell nearly 10%, and SK Hynix plummeted by 11.7%.

The South Korean Ministry of Finance stated that it does not rule out the possibility of a spillover effect of the decline in U.S. stocks on global markets, and will take necessary measures to prevent excessive fluctuations in stock prices that deviate from fundamental factors.

The Hang Seng Index opened down 1.58%, and the Hang Seng Tech Index fell 3.11%. Changfei Fiber & Optical Cable tumbled more than 12%, and Cambridge Technology also lost 12%. However, on the previous trading day (November 5th), the Hang Seng Tech Index closed up 5.5%, recording the largest single-day gain since the end of February 2025. An analyst team from CITIC Securities wrote that the decline in U.S. Treasury yields, combined with the flow of capital back into the market, suggests that Hong Kong's internet sector is poised for a new round of recovery. The expectation of declining U.S. Treasury yields after the mid-term elections is a relatively slow-moving factor, but it is expected to lead to a sustained inflow of capital globally. In terms of valuation, the Hang Seng Tech Index is at 17.6x, which is in the 16.2% percentile over the past five years. Companies in the tech sector that are sensitive to interest rates and have low valuations are likely to benefit first. On the capital side, both foreign and domestic funds' allocation to the internet sector is still at a low level, but foreign capital inflows in October have already exceeded the total of the first three quarters, indicating that a replenishment of funds is underway. Regarding performance, the net profit growth of leading internet companies has bottomed out in the second quarter of 2026, and they are expected to see year-on-year growth of 8% and 37% respectively, with the recovery period now coming into effect. The decline in interest rates creates room for valuation improvement, the replenishment of funds provides additional momentum, and the realization of strong performance lays a solid foundation. Coupled with the continuous advancement of commercialization in China, we continue to be firmly bullish on Hong Kong's internet sector.

Mild medium-term impact

An analyst from institution JonesTrading, named Aoluo ( Michael O ' Rourke ), stated bluntly that the construction of AI data centers will experience a substantial slowdown due to political factors, rendering invalid the profit forecasts that previously supported the bullish argument for the AI investment boom. Investors have no idea where these forecasts will be reset, so until they can make new, clear judgments, they can only continue to reduce their risk exposure, and this process is not likely to end soon.

Lu Bole ( Luca Paolini ), the chief strategist at Swiss asset management firm Pictet, told CBN reporters that, in fact, the initial market reaction was largely in line with expectations: tech stocks and Bitcoin weakened, while U.S. Treasury bonds and renewable energy stocks rose, reflecting the policy inclinations of the Democratic Party. However, the aforementioned market trends soon reversed significantly. One reason for this was that asset classes most closely linked to Trump's policy agenda, including Bitcoin, AI related stocks, and crude oil, had already corrected by about 10% from their recent highs before the election.

In the coming weeks to months, he stated that based on historical experience, the market is usually able to absorb a "divided government" situation relatively smoothly. This time, we also expect that there will be no substantial policy changes in the short term. The Congress, controlled by the Democrats, may limit the advancement of some of Trump's key policy agendas, including further tax cuts, deregulation, and efforts to expand AI. At the same time, this could also make it more difficult for the United States to escalate its conflict with Iran. Overall, it is expected that there will be a reduction in uncertain policy measures. It is also worth noting that to override the president's veto decision, both the Senate and the House of Representatives must obtain a two-thirds majority vote. This threshold is very high, but it is not impossible to achieve.

Zhao Yaoting, a global market strategist for Invesco in the Asia-Pacific region, told Yicai News that for investors in the Asia-Pacific region, the key to these elections is whether changes in the U.S. political landscape will affect the main drivers of regional markets. He believes that such impacts are likely to be relatively mild and limited.

Historically, mid-term elections have often been unfavorable to the party of the president. Over the past 60 years, the party to which the U.S. president belongs has lost an average of 22 seats in the House of Representatives during mid-term elections. Therefore, although the results of these elections may seem significant, it is not uncommon for mid-term elections to bring about changes in the political landscape, and the emergence of a political deadlock does not necessarily mean that policy will come to a standstill. However, if the Democratic Party gains control of Congress, it will make it more difficult for the U.S. government to pass major legislative initiatives. This could reduce the likelihood of the U.S. implementing large-scale additional fiscal stimulus measures in the coming two years, he said. "This may have some impact on Asian markets. A weakening of fiscal stimulus could ease the pressure on U.S. economic growth, inflation, and rising yields on U.S. Treasury bonds, thereby potentially alleviating the pressure on Asian currencies and monetary policies due to rising U.S. interest rates and a stronger dollar."

However, he stated that, in the end, trade remains the main source of uncertainty for the Asian market. Factors such as tariffs, export controls, technological restrictions, and supply chain security may continue to be significant sources of uncertainty. For example, the South Korean market is relatively sensitive to changes in the trade environment as well as global semiconductor and AI cycles. The situation in other Asian markets is more complex. India and some ASEAN economies may continue to benefit from the trend of supply chain diversification.

"Overall, the results of the U.S. mid-term elections have not fundamentally changed the investment environment in the Asia-Pacific region. For investors in the region, the key variables remain U.S. interest rates and the trend of the dollar, China's economic growth prospects, trade and technology policies, as well as corporate earnings performance," he said.