Mark Barnes, PhD
Indhu Raghavan, CFA
Belle Chang, MBA
- The evolving AI narrative has shifted technology leadership from software to hardware. Hardware companies benefit from tangible demand, secured orders, and near term cash flows, while software faces uncertainty around model economics, disruption risks, and capex payoff.
- Recent regional equity dispersion reflects differing exposures within the AI theme. Hardware and Telecom Equipment weights explain why APAC ex Japan ex China and Japan have led global returns, while software heavy regions, such as the US and China, have lagged.
- In APAC, Japan, Korea and Taiwan outperformed due to their heavy weights in Hardware and Telecom Equipment. These markets benefit from robust demand for memory chips, advanced semiconductors and precision equipment, essential for AI supply chain and infrastructure.
Introduction
Global equity markets have been driven to a great extent by the AI capex-fueled tech rally over the last three years. Until recently, there was not much differentiation between the Hardware and Software sectors of the Tech industry. Exhibit 1 shows that the two sectors diverged a bit in 2024, but by April 2025, when the US had announced and paused reciprocal tariffs, the FTSE All-World Software and Hardware sectors had almost identical returns for the period 31 March 2023 – 8 April 2025 (37% vs 35%). However, soon after, the two sectors began to rapidly diverge, with Hardware outperforming Software by 171% to 72% by February 2026 for the full period. This differentiation is due to a maturing of the AI narrative and has interesting implications for returns within Technology and related sectors globally.
Exhibit 1: FTSE All-World Software and Hardware sector cumulative returns (USD, rebased)
Evolution of the AI narrative
The Hardware-Software performance divergence is due to fundamental differences in the relationship of the two sectors to the AI narrative, uncertainty over the path of AI development, and more nuanced differentiation recently within the software component. The Software sector has been core to the AI narrative because that is where the foundational AI model providers, such as Google and Meta (besides a host of smaller and private companies), sit. On the other hand, hardware companies have played a supporting role providing the hardware necessary to develop and distribute these models, with the prime example being Nvidia. In the early excitement, the AI tide lifted all boats, and both sectors did well.
However, in January 2025, the release of China’s relatively cheap (and high quality) DeepSeek model left investors questioning whether the massive investments in LLM development were really necessary, and whether over-investment in AI could leave investors undercompensated. The difference here is that the payoff to AI software providers was to come at some undetermined time in the future while the support staff in the Hardware sector had contracts, were being paid, and were generating earnings right now.
Finally, in early 2026 we saw a differentiation within the software sector as new releases of LLMs showed the promise of AI tools easily replacing legacy software. Investors reacted energetically, generating sizable dispersion between the performance of those expected to be disruptors vs 'disruptees'.
Regional differences
One aspect of how this divergence can impact global equity markets is through the relative weights of Tech sectors in different regions, in addition to related sectors such as Telecommunications Equipment that is an important component of the AI support group providing connectivity hardware. Exhibit 2 shows that there are important regional differences between Software, Hardware, and Hardware and Telecom Equipment combined. Software weights are much higher in the FTSE USA and FTSE China indices compared to others. Hardware is similarly large in FTSE USA but simply dominates FTSE All-World Asia Pacific ex Japan ex China and the FTSE Japan indices compared to their Software weights. Finally, including Telecom Equipment is only important in Asia Pacific ex Japan ex China, where that combined group accounts for over a third of index weights.
Exhibit 2: Sector weights in regional FTSE indices
The recent differentiation within the AI theme can be seen in sector level performance in different regions. Exhibit 3 shows the cumulative returns for the Software and Hardware sectors in different regions during June 2025 and February 2026, approximately since the start of Hardware’s outperformance of Software at the global level. We observe the same trend across regions. In addition, the Telecom Equipment sector of the Asia Pacific ex Japan ex China index returned a whopping 254% over that time period.
Exhibit 3: Regional Software versus Hardware sector performance (USD, June 2025-February 2026)
If we combine the impacts of index exposure to AI-related sectors and the recent performance of those sectors, we can see that one of the major drivers of regional equity return dispersion recently is the AI-related performance differentiation.
Exhibit 4 shows the cumulative returns for the last 12 months ending February 2026. During this period we have seen a number of shocks related to US tariffs, monetary policy divergence and election shocks. However, it is interesting that among the worst-performing indices are the US and China, which have the largest Software sector, while the best-performing regions have been Japan and Asia Pacific ex Japan ex China, which has the largest Hardware + Telecom Equipment sector group. We take a closer look at these regions in the next section.
Exhibit 4: Cumulative returns of regional FTSE indices (USD, rebased)
The hardware-heavy APAC tech
As shown in Exhibit 2, Asia Pacific (APAC) markets, with the notable exception of China, have higher weights in Hardware and Telecom Equipment stocks, contributing to the recent outperformance of APAC vs the US or Europe.
If we take a closer look at individual markets’ sector breakdown (Exhibit 5), China and India have higher weights in Software, while Taiwan, Korea and Japan are more concentrated in Hardware, particularly Semiconductors, and Telecom Equipment. The region’s distinct industry structures and competitive advantages riding AI waves explain why, over the past year, Korea, Japan and Taiwan have outperformed China and India in tech (Exhibit 6).
EXHIBIT 5: TECH SOFTWARE VS HARDWARE AND TELECOM SECTOR WEIGHT OF MAJOR APAC MARKETS (% OF FTSE ALL-WORLD ASIA PACIFIC INDEX)
| Weight (% of All-World Asia Pacific Index) | Taiwan | China | Korea | Japan | India | Sum | |
|---|---|---|---|---|---|---|---|
| Software | Computer Services | 0.12% | 0.05% | 0.57% | 1.00% | 1.74% | |
| Software | 0.15% | 0.07% | 0.02% | 0.24% | |||
| Consumer Digital Services | 4.32% | 0.36% | 0.15% | 0.11% | 4.94% | ||
| Hardware | Semiconductors | 8.20% | 0.21% | 1.47% | 0.29% | 10.17% | |
| Electronic Components | 1.04% | 0.21% | 0.14% | 0.51% | 0.01% | 1.91% | |
| Production Technology Equipment | 0.21% | 0.05% | 0.02% | 1.51% | 1.79% | ||
| Computer Hardware | 0.76% | 0.02% | 0.01% | 0.27% | 1.07% | ||
| Electronic Office Equipment | 0.38% | 0.38% | |||||
| Telecom equipment | Telecommunications Equipment | 0.12% | 0.73% | 2.64% | 3.50% | ||
| Software + Hardware + Telecom Equipment (% weight of country/market) | 81.12% | 60.54% | 28.36% | 14.89% | 11.75% |
Source: FTSE Russell/LSEG. Data as of 28 February 2026. Past performance is no guarantee of future results.
In Korea, the strength of the hardware segment is anchored by the explosive demand for memory chips produced by SK Hynix. Samsung Electronics, classified as Telecommunications Equipment under ICB, not only delivered strong growth in smartphone sales, but also has benefited from securing orders of memory chips from Nvidia. Taiwan’s hardware outperformance is tied to its dominance in advanced semiconductor manufacturing. Japan’s gains come from its precision equipment makers, who supply the specialized tools and machinery essential for producing cutting‑edge semiconductors.
EXHIBIT 6: 1-YEAR TOTAL RETURNS (USD, %)
| Sector | Sub-sector | Taiwan | China | Korea | Japan | India | APAC | All-World |
|---|---|---|---|---|---|---|---|---|
| Software | Computer Services | 8% | 81% | 8% | -21% | -6% | -10% | |
| Software | 2% | -42% | -15% | -23% | -10% | |||
| Consumer Digital Services | -2% | 79% | -8% | -5% | 2% | 33% | ||
| Hardware | Semiconductors | 96% | 74% | 471% | 59% | 120% | 64% | |
| Electronic Components | 76% | 52% | 203% | 71% | 83% | 96% | ||
| Production Technology Equipment | 162% | 81% | 255% | 134% | 136% | 132% | ||
| Computer Hardware | 30% | 14% | 59% | 35% | 28% | 15% | ||
| Electronic Office Equipment | 0.10% | 0.10% | 0.10% | |||||
| Telecom Equipment | Telecommunications Equipment | 111% | -13% | 303% | 173% | 91% |
Source: FTSE Russell/LSEG. Data as of 28 February 2026. Past performance is no guarantee of future results.
In contrast, the uncertainty around US-India tariffs and US H1-B visa weighed on Indian software stocks in 2025. In China, software stocks lagged hardware stocks. Chinese financial regulators’ cautious stance on bull markets has cooled industries, including the Software sector, which saw strong returns after the DeepSeek AI boost in January 2025. Concerns on valuation and profitability also weighed on software stocks. However, as discussed in China equity: What to watch after the fourth plenum? (Dec 2025), Hardware stocks continued to benefit from rising chip demand, and the government’s push on tech self-reliance and anti-involution campaigns.
Conclusion
As the AI narrative has evolved, we have seen differentiated performance between various pockets of the AI ecosystem such as the Software, Hardware and Telecom Equipment sectors to name a few. Regional equity indices’ relative exposure to these sectors have been one source of recent regional equity return dispersion. Hardware-heavy regional industries and equity indices, such as those in APAC, have benefitted enormously from Hardware’s outperformance of Software. To the extent that this trend continues, we may potentially see further return dispersion as a result.
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