Key Takeaways:
South Korea’s Kospi index has soared more than 78% this year to a record high, while Taiwan’s Taiex has also repeatedly posted new peaks in a rally driven by the global artificial intelligence boom.
"In a word, it's the AI hardware theme that's clearly what is propelling things," Goldman Sachs strategist Tim Moe told CNBC. He noted that Taiwan is "well over 80%" exposed to AI-related revenue streams while South Korea stands around 60%.
The concentration is staggering, with Samsung Electronics Co. and SK Hynix Inc. together representing 44% of the South Korean market, while Taiwan Semiconductor Manufacturing Co. (TSMC) alone accounts for 45% of Taiwan's market, according to data from Quilter Cheviot Europe and Manulife Investment Management. The rally has occurred even as the war in Iran disrupts energy supplies for the import-dependent economies.
This heavy reliance on a narrow group of exporters leaves both markets highly vulnerable to the global AI spending cycle, geopolitical shocks, or any slowdown in data-center demand, creating a "double risk" for global investors who may be unknowingly doubling down on the same trade.
The record-breaking performance of Asian and US markets highlights a sharp divergence between soaring equity valuations and a slowing global economy hampered by an energy crisis. While the S&P 500 and Nasdaq-100 hit new highs, markets like India’s S&P BSE Sensex, which has low AI exposure, have fallen 9.3% this year.
The primary driver is the sustained momentum of the AI revolution, which appears disconnected from the current energy crisis. "Research shows that the technology sector leads the way, with consensus forecasts pointing to 38% earnings growth this year and 25% in 2027, thanks to AI," Russ Mould, investment director at AJ Bell, told Euronews. This was reflected in first-quarter results, where S&P 500 firms reported earnings growth of 28%, crushing the 13% forecast.
Technical market dynamics have also added fuel. Research from Goldman Sachs suggests that algorithm-driven funds and hedge funds that took short positions in mid-March were forced to cover them, creating a multi-billion-dollar short squeeze that amplified the rally.
Analysts warn the extreme concentration could amplify volatility. The strength of the rally in Korea and Taiwan has produced a "vol up, spot up" pattern, where implied volatility is rising along with prices, hovering near peak levels versus the S&P 500 Index.
While both markets are dominated by chipmakers, some strategists see a difference in their depth. Goldman's Moe argues South Korea's market is "deeper and broader," with investors also buying into shipbuilding, defense, and power equipment, making the rally more reflective of its wider industrial base. In contrast, Taiwan's market has become increasingly detached from its domestic economy and tied to TSMC. "Some people say Taiwan is just a one-trick pony. That's just TSMC," said Qi Wang, Chief Investment Officer at UOB.
This concentration risk was highlighted by the recent performance of Denmark's and Saudi Arabia's markets, which slumped when demand for Novo Nordisk's obesity drugs and oil prices fell, respectively. For investors in Seoul and Taipei, the risk is that any disruption to the AI supply chain could trigger a sharp correction.
This article is for informational purposes only and does not constitute investment advice.
