AI boom reshapes emerging markets, but surging volatility tests investor nerves

The artificial intelligence-driven rally that has transformed global equity markets is also reshaping emerging markets, with technology heavyweights in South Korea and Taiwan taking center stage. According to Reuters, companies linked to AI hardware and memory chips have helped emerging market (EM) equities step out of the shadow of Wall Street's dominant technology stocks, although the sharp gains have also brought heightened volatility.

For years, many investors concentrated on U.S. technology giants, particularly the so-called "Magnificent Seven," leaving emerging markets with limited attention. Reuters reported that this trend has shifted in 2026 as AI-related demand boosted South Korean memory-chip makers and Taiwan's semiconductor leaders, driving strong performances in EM stock indexes.

AI fuels emerging market resurgence

The renewed enthusiasm has been powered largely by semiconductor manufacturers essential to AI infrastructure. South Korean firms such as Samsung Electronics and SK Hynix, alongside Taiwan Semiconductor Manufacturing Co. (TSMC), have emerged as key beneficiaries of soaring demand for AI chips.

Reuters reported that the rally helped South Korea's KOSPI index nearly double in value before sentiment reversed sharply in recent weeks. Taiwan's TSMC, the largest company in the MSCI Emerging Markets Index, also came under pressure as investors reassessed valuations.

Veteran emerging markets fund manager Carlos von Hardenberg, co-founder of MCP Emerging Markets, told Reuters that investor interest has swung dramatically from an overwhelming focus on U.S. technology stocks to renewed enthusiasm for emerging-market AI leaders.

Volatility replaces optimism
The rapid gains have been followed by an equally dramatic rise in market volatility.

According to Reuters, South Korea's KOSPI index lost around 40% in just six weeks after concerns over regulations and investor positioning triggered heavy selling. TSMC also suffered a double-digit decline during the correction.

The turbulence has been significant enough that volatility in MSCI's $1.8 trillion Emerging Markets Index exceeded levels seen during the COVID-19 pandemic, Reuters reported.

William Bratton, head of cash equity research for Asia-Pacific at BNP Paribas, told Reuters that institutional investors have become increasingly cautious toward South Korea despite strong corporate earnings, with many preferring to stay on the sidelines until volatility subsides.

Concentration risk grows
The AI boom has also increased concentration risk within emerging markets.

Reuters reported that just nine companies—primarily major technology firms from Taiwan and South Korea, along with Chinese internet giants Alibaba and Tencent—now account for more than 40% of the MSCI Emerging Markets Index.

This concentration has reduced the diversification benefits traditionally associated with emerging-market investing. Ashley Lester, MSCI's chief research officer, told Reuters that emerging markets are now closely tied to the global AI investment cycle because of the growing dominance of large AI-related hardware companies.

Investors remain cautious
Portfolio managers are adjusting their strategies amid the heightened uncertainty.

Reuters reported that Amundi portfolio manager Ji Young Park had already trimmed some of her exposure before the market turbulence intensified, although the correction still affected performance. She noted that repeated circuit breakers in the South Korean market highlighted the extreme volatility.

Meanwhile, UBP technology portfolio manager Dimitri Kallianiotis told Reuters that although some clients have become nervous, investors should avoid reacting emotionally to short-term market swings.

Foreign investors pull back
International investors have also reduced exposure to Asian equity markets.

According to Reuters, data from LSEG showed that overseas investors withdrew money from Asia excluding China at the fastest pace for any first half of the year since at least 2010.

Reuters, citing JPMorgan estimates, reported that South Korea experienced foreign outflows exceeding $100 billion, while Taiwan saw withdrawals of more than $44 billion. The selling was partly driven by portfolio rules limiting exposure to individual stocks after Samsung Electronics and SK Hynix posted extraordinary gains over the previous year.

Despite the recent correction, many investors continue to believe the long-term AI investment theme remains intact, though the experience has highlighted that emerging markets are increasingly exposed to the same technology-driven volatility that has defined global equity markets.