Emerging markets get a hard lesson in tech hype

Emerging market investors, long overshadowed by the dominance of US tech stocks, have spent this year riding – and increasingly reeling from – an AI-driven boom in South Korean and Taiwanese chipmakers, Reuters reports.

Veteran fund manager Carlos von Hardenberg, who co-founded MCP Emerging Markets alongside pioneering EM investor Mark Mobius, said the mood among clients has shifted sharply. Where investors once insisted the US and the "Magnificent Seven" tech giants were all that mattered, this year "everything turned the other way around", he said, as the AI boom lifted the memory-chip makers that dominate South Korea and Taiwan – and, with them, the global EM indices.

But the rally has come at a cost. Since late June, extreme volatility has gripped both markets. South Korea's Kospi index, having doubled in value on the back of even bigger gains for Samsung Electronics and SK Hynix, reversed by 40% in six weeks amid a mix of investor concern and regulatory curbs. Taiwan's TSMC – by far the largest company in the EM universe – fell almost 14%. Volatility in the MSCI Emerging Markets index, a $1.8 trillion benchmark spanning more than 1,175 companies across 24 countries, exceeded even its Covid-era peaks.

William Bratton, head of cash equity research for Asia-Pacific at BNP Paribas, said institutional clients were struggling with the scale of the swings in Korea, to the point that a genuine positive earnings story was no longer worth pursuing for many, in his view.

South Korea and Taiwan remain classified as emerging markets by MSCI largely because their currencies can be difficult for international investors to trade. Nine companies – mainly the largest Taiwanese and Korean tech firms, alongside China's Alibaba and Tencent – now make up more than 40% of the EM index, leaving it even more concentrated than its US counterpart. MSCI's head of research, Ashley Lester, said the shift means emerging markets can no longer be relied on as a diversification tool, since they now sit at the centre of the AI boom rather than offering an alternative to it.

Ji Young Park, a portfolio manager at Amundi, Europe's largest fund manager, said she had begun trimming her exposure before the volatility took hold but that the sell-off had still proved costly, noting the Korean market had triggered six or seven circuit breakers in the past month alone. Dimitri Kallianiotis, a technology portfolio manager at UBP, said some private banking clients had also been unsettled, though his advice has been against panic selling.

According to LSEG data, international investors withdrew capital from Asia-ex-China equity markets faster in the first half of the year than in any six-month period since at least 2010. JPMorgan figures show South Korea and Taiwan bore the brunt, losing more than $100bn and $44bn respectively, as position-limit rules prompted investors to lock in some of the 500% and 1,100% twelve-month gains recorded by Samsung and SK Hynix.

Kallianiotis summed up his approach as riding out the volatility while steering clear of the most overhyped names, arguing that investors who exit during turbulent periods risk missing the rebound.

SOURCE: Reuters. Additional reporting by Ankur Banerjee in Singapore.