Overview
A shift in investor attention from U.S. mega-caps to Asian chipmakers has rewired the composition and risk profile of emerging market equities. Firms in South Korea and Taiwan that dominate memory and semiconductor manufacturing rode the AI investment wave, lifting markets that had previously lagged behind U.S. technology names. The surge, however, has left those markets vulnerable to steep drawdowns and sudden illiquidity.
From niche to centre stage
Just a few years ago, interest in emerging markets was limited as many investors focused solely on U.S. technology stocks. That dynamic reversed this year as the AI boom propelled South Korean and Taiwanese firms to the forefront of global emerging market indexes. One long-time emerging market fund manager described how investor preferences shifted from an exclusive U.S. focus to a renewed appetite for these Asian tech leaders.
The price of outsize gains
Rapid appreciation was followed by an abrupt unwind. After dramatic gains earlier in the cycle, South Korea’s KOSPI index retraced roughly 40% in a six-week span amid a mixture of market concerns and regulatory curbs. Taiwan Semiconductor Manufacturing Company (TSMC), the largest company by market capitalization in the emerging market universe, fell nearly 14% during the same period. The volatility spilled into broader measures: volatility in South Korea surged and volatility metrics for MSCI’s $1.8 trillion emerging market benchmark exceeded the peaks seen during the COVID pandemic.
Those shifts were aggravated by the fact that nine companies - predominantly the large Taiwanese and Korean technology firms, along with Alibaba and Tencent in China - now represent more than 40% of MSCI’s emerging markets index. That concentration has made the EM index even more top heavy than the U.S. benchmark.
Institutional unease
Institutional clients have reacted to the heightened swings by pulling back. William Bratton, head of cash equity research for APAC at BNP Paribas, said the level of volatility in Korea has been a material impediment to investment decisions. He noted that some clients feel that potential fundamental earnings upside is not worth pursuing in the face of the current turbulence.
MSCI’s head of research, Ashley Lester, said the emergence of very large AI-related hardware companies has reduced the diversification benefit investors traditionally sought in emerging markets. "What we’re seeing is that emerging markets, which people used to look to as a source of diversification, because of the emergence and importance of these extremely large AI-related, particularly AI hardware-related companies, are not really a source of diversification anymore," she said. "They’re right in the centre of the AI boom."
Market mechanics and fund flows
Data from LSEG showed that the speed of investor withdrawals from Asia ex-China share markets in the first half of the year was faster than any comparable six-month period back to at least 2010. JPMorgan estimated that during the period in question South Korea and Taiwan experienced the heaviest outflows, with more than $100 billion leaving South Korea and in excess of $44 billion exiting Taiwan.
Those redemptions were compounded by rules intended to limit the concentration of funds in a single stock, which prompted investors to trim exposure to names that had surged wildly. The article notes the respective 12-month gains of roughly 500% for Samsung Electronics and about 1,100% for SK Hynix, gains that in part triggered rebalancing and selling pressures.
Investor approaches and advice
Portfolio managers and private bank advisers described differing reactions. Some, like Ji Young Park at a large European asset manager, reduced exposure before the most acute volatility but still experienced significant costs as circuit breakers activated multiple times on the Korean market. Park emphasized that her investment horizon is multi-year and that extreme short-term movement is uncomfortable for long-term buying strategies.
UBP technology portfolio manager Dimitri Kallianiotis said some private bank clients were alarmed by the swings, but he counsels against panic. He suggested an approach of "riding the volatility" while avoiding names that were perceived as overhyped. "If you are not invested in the tempest days, you won’t be there for the rebound," he added.
Liquidity and index effects
The market stress showed up in MSCI’s liquidity factor for its EM index, which recorded its most dramatic drop ever as investors moved away from the previously high-flying shares. The liquidity deterioration reflects concentrated flows into and out of a small group of stocks that now exert oversized influence on the benchmark.
Implications for diversification
The reconfiguration of emerging markets toward a narrow set of AI-exposed technology firms has altered the role EM equities play in global portfolios. Investors who expected emerging markets to provide a diversification offset to U.S. equities now face a market where correlation and concentration have increased, at least while these large hardware and memory firms dominate returns.
Conclusion
The rapid ascent of Korean and Taiwanese chipmakers powered a striking EM rally this year but left markets exposed when sentiment shifted. Heavy concentration in a few stocks, rapid inflows followed by regulatory and rule-driven selling, and multiple circuit breakers in Korea combined to generate an episode of extreme volatility and reduced liquidity in benchmark measures. Institutional investors and wealth managers responded with caution, underscoring the trade-off between chasing fast growth and managing concentrated, headline-driven risks.