The plunge in Asian AI stocks casts doubt on the global rally

The sudden slump in Asian technology stocks over the past week has spooked investors and is a stark reminder that the global rally in artificial intelligence and semiconductor stocks may be approaching a short-term high.The region’s sharpest decline since April – driven by a tech-driven sell-off on Wall Street – has refocused attention on the cracks beneath the surface: the limited scope of the rally, the heavy reliance on retail traders and growing uncertainty over the timing of the Federal Reserve’s interest rate cuts.

“Last week’s sell-off is a reminder that Asia’s market structure is only more fragile,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. “There will be more corrections. The trigger, in my opinion, was the extension of valuations and we have not corrected that. So the Asian chip market is likely to be volatile.”Asia’s tech sector has outpaced its US counterpart this year, fueled by cheaper valuations and the excitement fueled by China’s AI breakthroughs, particularly those from DeepSeek. The MSCI Asia Pacific Index is up 24% in 2025 – on track to outperform the S&P 500 by the largest margin in 16 years.

Asian chip stocks fell the most since April on Wednesday

But the rapid rise has also raised concerns about overheating. The Korean stock exchange has even warned of the dangers posed by the more than 200% rise in SK Hynix Inc.’s shares. this year brings.

These big gains helped pave the way for last week’s turnaround. Technology gauge MSCI Asia fell as much as 4.2% on Wednesday, the biggest intraday decline since the US rate shock in April. South Korea’s Kospi fell to 6.2%, while Japan’s Nikkei 225 plunged as much as 4.7%. Major suppliers of Nvidia Corp. – including SK Hynix and Advantest Corp. – were among the hardest hit companies, losing around 10% each.

Concentration risks

Analysts say Asia’s outsized losses reflect another structural problem: the extreme concentration of tech giants in regional benchmarks. Taiwan Semiconductor Manufacturing Co. now accounts for more than 40% of Taiex, tripling its share a decade ago. In South Korea, Samsung Electronics Co. represent. and SK Hynix together hold approximately 30% of Kospi. Japan is no exception: the top five stocks in the Nikkei 225 account for about 38% of the total weighting. “If something goes wrong with the rise of AI or semiconductors, the Nikkei will immediately plummet,” said Takehiko Masuzawa, head of equity trading at Phillip Securities Japan in Tokyo. “I think we will continue to see more corrections and greater volatility in the future.”

Heavy retail investor involvement in the current rally has also amplified the swings, analysts say.

“With foreign investors still on the sidelines, higher private and domestic participation is driving greater volatility and sector rotation in Asian markets,” said Peter Kim, managing director at KB Securities Co. in Seoul. “Less liquidity and institutional participation, and the high beta characteristics of Asian stocks are mainly reflected in AI themes.”

Stronger dollar

Meanwhile, a strengthening U.S. dollar has increased pressure on Asian chipmakers, drawing money back into U.S. assets. Traders are also scaling back their bets on upcoming Fed rate cuts, removing a key tailwind for global stocks.

To be fair, not everyone saw last week’s setback as a cause for concern.

“What we saw was profit taking, nothing more, nothing less,” said Shawn Oh, a stock trader at NH Investment & Securities Co. in Seoul. “Psychology plays a big role instead of fundamentals. Many people probably thought there would be a correction at least once as well.”

Even after the crisis, valuations in the Asian chip sector remain relatively attractive: Bloomberg’s regional semiconductor index trades at about 18 times forward earnings, well below the 28 times of the Philadelphia Semiconductor Index.

For others, the sell-off in Asia’s tech sector – following the warnings of Goldman Sachs Group Inc. CEOs. and Morgan Stanley on the likelihood of a global equity pullback – just one more reason to become more cautious.

“We have been sellers in recent weeks,” said Vikas Pershad, Asian equities portfolio manager at M&G Investments in Singapore. “We are focused on future returns and that is why we took profits in the sector last month. We are not yet at a level where we would want to increase our exposure to those sectors.”