In the first half of this year, the artificial intelligence (AI) boom propelled South Korea, Taiwan, and Japan to become Asia’s best-performing stock markets. However, with capital extremely concentrated in a handful of star companies supplying critical AI components, analysts are beginning to warn that markets in Taiwan, Japan, and South Korea face risks of profit-taking sell-offs and heightened volatility. The next wave of sector rotation winners could shift to other industries.
South Korea’s KOSPI Index more than doubled in the first half of the year, while Taiwan’s TAIEX surged 59% and Japan’s Nikkei Index climbed 39% over the same period. The strong performance of these three markets was primarily driven by fervent investor demand for AI superstars such as Samsung Electronics, SK Hynix, and TSMC (2330.TW). But as stock prices have soared, concerns over stretched valuations and excessive capital concentration have intensified.
“While fundamentals remain supportive, investors’ exposure is highly concentrated, increasing the risk of more violent swings in these stocks,” said Angela Cheng, Head of Research at CGS International. She emphasized that once market sentiment reverses, turbulence in these heavyweight stocks will rapidly transmit to the broader market.
Zavier Wong, an analyst at eToro, pointed to structural risks using the South Korean market as an example. He noted that Samsung and SK Hynix combined account for roughly half of the total weighting of South Korea’s KOSPI Index. “A sharp move in either of these two stocks would directly drag down the entire index before the remaining roughly 900 listed companies could even play a role,” he said.
In Japan’s stock market, representative AI-trade names such as SoftBank, Advantest, and Kioxia have also experienced significant swings recently. Market sources indicate this reflects dramatic shifts in investor sentiment, oscillating between狂热 over AI’s long-term prospects and pessimism over commercial monetization and sky-high valuations.
This wave of selling eased somewhat in early July. According to foreign media reports, U.S. nonfarm payrolls added fewer than half the expected number of jobs in June, while data for the prior two months was also revised downward. The market interpreted this as the U.S. labor market being less robust than previously thought, giving the U.S. Federal Reserve room to pause the pace of interest rate hikes. Buoyed by this, South Korea’s KOSPI Index rebounded 5.8% in a single day on July 3, while major Asian markets including Tokyo and Hong Kong also broadly closed higher.
However, the short-term rebound has not fully dispelled deep-seated concerns about AI overcapacity. According to market sources, social media giant Meta Platforms (META) is reportedly planning to sell some of its AI computing capacity and model access rights, sparking worries about whether large tech companies have overbuilt AI infrastructure. Meanwhile, rumors that Apple (AAPL) may evaluate purchasing memory chips from Chinese suppliers have also prompted the market to reassess the competitive pressures facing South Korean memory chip giants.
In this global sector rotation, South Korea’s capital market is the most sensitive to risk. Samsung Electronics and SK Hynix are not only the largest weighted stocks in the KOSPI Index but also crucial pillars supporting South Korea’s economic growth, corporate earnings, and export competitiveness. Over the past six months, South Korea’s stock market has been highly dependent on the performance of these two semiconductor leaders; however, as stock prices have pulled back sharply from their highs, this has exposed the South Korean capital market’s heavy reliance on a single AI trade. Market participants worry that if the global AI infrastructure investment boom continues to cool and further transmits to memory chip demand and pricing, it will directly impact South Korea’s export performance and macroeconomic stability.
“From a fundamental perspective, the long-term structural trend of AI hardware demand will not change in the short term, but the market still needs corporate earnings reports to reconfirm demand and profit momentum,” said Dilin Wu, Research Strategist at Pepperstone. Among these, TSMC’s upcoming earnings report will serve as a key indicator for observing AI chip demand and the semiconductor cycle.
Regarding future capital flows, Lorraine Tan, Director of Asia Equity Research at Morningstar, sees a challenging outlook and expects significant volatility to persist. She noted that given technology sector valuations are now quite inflated, investors may rotate into other sectors with more reasonable upside potential, such as healthcare.
Charu Chanana, Chief Investment Strategist at Saxo, offered a more forward-looking perspective. She analyzed that the current AI-led rally has been concentrated in infrastructure-related stocks, but the next phase of the market may focus on finding “AI efficiency winners” — companies and markets that can help lower AI costs or expand the scope of AI applications. This implies capital could rotate from pure-play hardware and semiconductor manufacturers to software and application service providers that can actually monetize AI technology.
For Taiwan, AI servers, semiconductors, and the electronics supply chain remain important growth drivers for the market, but short-term stock prices may be influenced by international capital flows, changes in tech giant capital expenditure, and earnings expectations. Analysts caution that investors still need to be mindful of volatility risks amid high valuations, especially under a structure where capital is heavily concentrated in a few heavyweight stocks — any news-driven disturbance could trigger sharp index swings.