Emerging market equities and currencies weakened for a third consecutive session, led by a sharp decline in the South Korean stock market. The MSCI Emerging Markets Index fell 1.7% to 1,728.66 points, while South Korea's Kospi index saw an intraday drop of as much as 7%.
The sell-off was concentrated in the chipmaking sector. Samsung Electronics Co., Ltd. and SK Hynix Inc. led the declines; together, these two companies account for over half of the Kospi's market capitalization. The downturn followed a shift in investor sentiment after Broadcom Inc. issued an AI chip sales outlook that failed to meet elevated market expectations.
Foreign investors' continued large-scale withdrawal was a significant driver of the market's decline. On the day, foreign investors were net sellers of approximately 3.5 trillion won (about $2.3 billion) worth of stocks, bringing the cumulative outflow for the week to over $10 billion. Concurrently, the South Korean won fell to its lowest level against the US dollar since March 2009.
Jung In Yun, CEO of Fibonacci Asset Management Global, noted, "Valuations in some parts of the AI supply chain have become high." He suggested that short-term volatility may remain elevated but that this does not necessarily indicate a change in the long-term trend.
As a result, emerging market stocks and currencies are on track to end the week lower, potentially breaking a two-week streak of gains.
Charu Chanana, Chief Investment Strategist at Saxo Markets, stated, "Broadcom's performance served as a trigger, making the market realize that previous expectations had become overly optimistic." She pointed out that investors had "priced in too much perfection for artificial intelligence," meaning even a slight disappointment could trigger a significant adjustment.
She further added that a stronger-than-expected US non-farm payrolls report could provide another reason for investors to reduce crowded AI trades. The market is closely watching this data for clues about the Federal Reserve's future interest rate path.
Simultaneously, stalled peace talks between the US and Iran have heightened market risk aversion. Reports indicate that after a US-brokered ceasefire proposal was rejected by Hezbollah, which is backed by Iran, uncertainty in the Middle East has increased, putting pressure on risk assets.
The emerging market currency index fell 0.3% on the day, marking a fourth consecutive session of decline. The South Korean won was the weakest performer, dropping 0.8%, primarily due to sustained foreign selling of Korean stocks.
Market views on South Korean assets have long been divided; bullish stances have largely focused on rapid corporate earnings growth while overlooking the won's weakness. However, the simultaneous decline in stocks, bonds, and the currency highlights a deteriorating macro environment.
In contrast, the Indian rupee has shown relative resilience. Reports indicate that recent supportive measures from Indian authorities, including providing tax exemptions for foreign investment in government bonds, have helped bolster the local currency.
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