AI Stocks Trigger Record Market Volatility Across South Korea, Taiwan and Japan

AI Boom Transforms Emerging Markets Before Sharp Reversal

The AI boom that dominated global markets has dramatically reshaped emerging markets, propelling South Korea and Taiwan into the spotlight as semiconductor stocks surged on AI hardware demand1

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. For years, investors focused almost exclusively on U.S. technology giants, particularly the Magnificent Seven, leaving emerging markets struggling for attention. Carlos von Hardenberg, co-founder of MCP Emerging Markets, told Reuters that investors would say they were only interested in the U.S. stocks because they were performing so well1

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. That dynamic shifted in 2026 as AI stocks in South Korea and Taiwan helped emerging market indexes step out of Wall Street's shadow2

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. Samsung Electronics, SK Hynix, and TSMC became key beneficiaries of soaring demand for AI chips, with the Kospi index nearly doubling in value before market volatility struck2

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Market Volatility Reaches Pandemic-Era Levels

The rapid gains came at a steep cost as extreme market volatility took hold in late June. South Korea's Kospi index, which had doubled in value, ripped back 40% in just six weeks on a mix of concerns and regulatory curbs1

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. Taiwan's TSMC, by far the biggest company in the MSCI Emerging Markets Index, fell almost 14% during the AI-led selloff1

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. Japan's Nikkei 225 declined 8% in July as the tech hype unraveled across the region3

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. Volatility in the MSCI's $1.8 trillion emerging markets benchmark, which contains more than 1,175 companies from 24 different countries, surpassed the peaks of the COVID pandemic1

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. William Bratton, head of cash equity research for APAC at BNP Paribas, said institutional clients are struggling with the level of volatility in South Korea to the point that they think any fundamental positive earnings story is not worth pursuing1

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Asian Hedge Funds Post Record Losses in July

Asian hedge funds suffered their steepest monthly losses of the year as the AI stock rout erased early-year gains. Goldman Sachs estimated that Asia's primary stock-picking hedge funds lost an average of 15.2% during July, marking the worst monthly performance on record for the segment3

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. Multi-strategy hedge funds, which typically aim for steadier returns through diversification, posted monthly declines ranging from 3% to 9%3

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. Hong Kong-based Polymer Capital Management, one of Asia's top-performing multi-strategy funds managing more than $6 billion in assets, lost 6.9% in July, reducing its year-to-date gain to 11.5%3

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. Singapore-based Dymon Asia's $9 billion multi-strategy fund fell 6.5% during July, while Hong Kong-headquartered Pinpoint Asset Management's flagship fund dropped 9%3

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. The positions that had driven strong returns earlier in the year became the primary source of losses as investor sentiment toward AI-related companies weakened amid concerns over technology spending and rising geopolitical tensions in the Middle East3

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Concentration Risk Reduces Diversification Benefits

The AI boom has created dangerous concentration risk within emerging markets that threatens traditional diversification benefits. Just nine companies, mostly big Taiwanese and Korean tech firms plus Alibaba and Tencent in China, now account for more than 40% of the MSCI Emerging Markets Index, making it even more top heavy than the U.S. index1

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. Ashley Lester, MSCI's chief research officer, said emerging markets, which people used to look to as a source of diversification, are not really a source of diversification anymore because they're right in the center of the AI boom1

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. The Korean market's swings have even been larger than cryptocurrency bitcoin's this year, while the recent rout saw the most dramatic drop in the MSCI Emerging Markets Index's liquidity factor ever as investors moved away from shares that had been surging1

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Foreign Investors Pull Over $144 Billion from Asian Markets

International investors withdrew money from Asia excluding China at the fastest pace for any first half of the year since at least 20102

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. South Korea and Taiwan bore the brunt, shedding over $100 billion and $44 billion respectively, according to JPMorgan1

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. The selling was partly driven by portfolio rules limiting exposure to individual stocks as Samsung and SK Hynix posted respective 500% and 1,100% 12-month gains1

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. Ji Young Park, a portfolio manager at Europe's biggest fund manager Amundi, said there have been six or seven circuit breakers on the Korean stock market in the last month, illustrating just how volatile it has been1

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. Park had started scaling back exposure before the turbulence kicked off, but the AI-led selloff still proved costly1

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Investors Question AI Spending Returns as Market Correction Deepens

Growing concerns over whether companies investing billions of dollars in artificial intelligence will generate sufficient returns to justify the spending have added pressure on semiconductor stocks4

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. The market correction has been amplified by the unwinding of positions in newly launched exchange-traded funds that are heavily concentrated in one or two stocks, according to Goldman Sachs, though the brokerage maintains the underlying semiconductor cycle remains fundamentally strong4

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. SK Hynix Chief Executive Kwak Noh-jung expects the global memory industry to face its worst-ever supply shortage in 2027, with demand likely to remain above production capacity well beyond 2030 despite aggressive expansion plans4

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. Hebe Chen, senior market analyst at Vantage Global Prime, noted that South Korea's semiconductor industry continues to enjoy strong long-term demand, but elevated leverage has made the market more vulnerable to sharp corrections, with the double-edged sword now cutting the other way4

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. UBP technology portfolio manager Dimitri Kallianiotis advised clients to ride the volatility and try to avoid the overhyped names, noting that if you are not invested in the tempest days, you won't be there for the rebound1

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