Global funds are rapidly withdrawing from Asia's best-performing stock markets this year, as exuberance over the artificial intelligence (AI) trading boom is being replaced by concerns over inflation spurred by soaring oil prices. Following a record sell-off of $13.7 billion in South Korean stocks last month, overseas investors offloaded approximately $3.1 billion more this week. In the Taiwan region of China, foreign selling reached $3.6 billion, marking the largest weekly capital outflow since the end of December last year.
The market pullback has concentrated on the chipmaking giants that had previously driven both markets to record highs. South Korea's leading memory chip duopoly—Samsung Electronics and SK Hynix—each saw declines of nearly 20% this week, with Samsung facing its most severe two-day drop in nearly five decades. Shares of Taiwan Semiconductor Manufacturing Company also fell more than 5% this week.
Matthew Haupt, a portfolio manager at Wilson Asset Management in Sydney, noted, "As the situation with Iran deteriorates, investors are rushing to close long positions in popular sectors like AI to reduce overall market exposure." He added that AI-related stocks are bearing the brunt of the sell-off, given market doubts about whether massive capital expenditure in the AI sector will ultimately translate into substantial profits.
This week's declines provide fresh arguments for long-time skeptics of the AI boom. These views are resonating with geopolitical shocks, forcing investors to reassess risks, evaluate the inflationary threat from rising oil prices, and consider how these pressures will transmit through global markets.
South Korea's benchmark KOSPI index, which has been the world's top performer this year, plummeted over 12% during Wednesday's session, registering its largest single-day drop on record. Taiwan's weighted index has fallen more than 6% for the week.
Caution has spread to currency markets as well: the South Korean won fell 3.3% against the U.S. dollar on Tuesday, its largest daily decline since 2009. The won and the New Taiwan dollar have been the worst-performing Asian currencies this month, indicating that global funds are using forex hedging alongside equity divestment to manage market volatility.
For months, Asian markets appeared largely immune to warnings about the AI frenzy. Suppliers in the region were seen as resilient and valuation-advantaged, poised to benefit from continued capital spending by tech giants. However, as positions became increasingly crowded, the speed of the sell-off suggests that even if the long-term thesis remains intact, most investors are choosing to "sell first and ask questions later."
In an interview on Wednesday, Kerry Craig, a global market strategist at J.P. Morgan Asset Management, stated that as Middle East risks accumulate, investors "need appropriate diversification tools and hedges in their portfolios. But if the outlook begins to improve, we may see investors flow back into these markets."
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