MSCI says the sector sits at the centre of the boom, not a hedge against it
South Korea's KOSPI index doubled in value this year and then gave back 40 percent in barely six weeks, a violent round trip that has pushed global fund managers to question whether emerging markets still deliver the diversification they once did.
The reversal since late June has concentrated in a narrow band of chipmakers at the heart of the artificial intelligence (AI) build-out.
According to Reuters, just nine companies, mostly the large Taiwanese and Korean technology firms plus China's Alibaba and Tencent, now account for more than 40 percent of the MSCI Emerging Markets (EM) index, leaving the benchmark more top-heavy than its US equivalent.
MSCI's research head, Ashley Lester, said emerging markets no longer offer the diversification investors once looked for, now that extremely large AI-related companies, particularly in AI hardware, dominate them.
"They're right in the centre of the AI boom," he said.
The scale of the move was stark.
Samsung Electronics and SK Hynix had led the KOSPI's earlier surge, while Taiwan's TSMC, the largest company in the EM universe, fell almost 14 percent as the selloff spread, Reuters reported.
Volatility on MSCI's US$1.8tn EM benchmark, which spans more than 1,175 companies across 24 countries, climbed past its peak during the COVID-19 pandemic.
The turbulence has unsettled professional buyers.
William Bratton, head of cash equity research for Asia-Pacific at BNP Paribas, said institutional clients had grown wary of chasing even solid earnings stories through the swings.
"The clients that we speak to, the institutional clients, are struggling with the level of volatility in Korea at the moment," he told Reuters.
The exodus shows up in the flow data.
International investors pulled money out of Asia-ex-China equity markets faster in the first half of the year than in any comparable stretch since at least 2010, per LSEG.
South Korea and Taiwan absorbed most of it, shedding more than US$100bn and US$44bn respectively, according to JPMorgan, as fund rules capping single-stock weightings prompted investors to bank part of the 500 percent and 1,100 percent 12-month gains on Samsung and SK Hynix.
Not everyone is retreating.
At Union Bancaire Privée, technology portfolio manager Dimitri Kallianiotis said he told rattled clients to hold their nerve, ride the volatility, and avoid overhyped names.
He said to Reuters those who sit out the worst days won't catch the rebound.
The correction has reopened the question of where EM money goes next.
In an email to Wealth Professional, Aubrey Capital Management director Mark Martyrossian described memory-chip makers as the picks and shovels of the AI rally and said the sector's cyclical nature had reasserted itself.
"The recent correction has been a reminder that this historically cyclical business is still sensitive to the supply/demand dynamic," Martyrossian wrote.
His firm has pared back but not exited.
"We have trimmed our AI exposure but still retain a decent position as the US hyperscalers are more likely to increase capex in the coming quarter than reduce it," he said, pointing to Alphabet's latest results.
Martyrossian also flagged India as the contrarian option.
The market has drawn US$27bn in foreign-institutional-investor outflows through mid-July, its weakest net buying since 2016, he wrote, though early signs of a reversal have appeared with US$1.8bn of net buying in the first two weeks of the month.
Aubrey has added modestly to its Indian holdings, he added, noting the economy grew more than 7 percent in each of the last two quarters.
