Emerging market stocks tumbled to their lowest level in more than two months on Tuesday, caught between a spike in oil prices and a sudden loss of momentum in the artificial intelligence trade that had powered much of this year's gains in Asian tech shares.
The MSCI Emerging Markets Index slid as Brent crude climbed toward $80 a barrel after US-Iran strikes disrupted shipping through the Strait of Hormuz, a critical chokepoint for global oil supplies. At the same time, jitters about the sustainability of the AI rally weighed on tech-heavy markets in Asia, compounding the selling pressure.
Oil shock hits the Strait of Hormuz
The immediate trigger for the sell-off was energy-related. Iran reported that two oil tankers were disabled after attempting to transit the Strait of Hormuz, a narrow waterway between the Persian Gulf and the Gulf of Oman through which roughly a fifth of the world's petroleum passes. The disruption followed US military strikes against Iranian targets, escalating tensions in a region already on edge.
Brent crude, the international benchmark, had already spiked to $91.4 earlier in the session before settling back toward $80. The jump reignited fears that sustained high energy costs could squeeze import-dependent emerging economies, particularly in Asia, where countries like India and South Korea rely heavily on foreign oil.
For context, the Strait of Hormuz has been a flashpoint for decades. Any disruption there tends to send oil prices higher almost instantly, as traders price in the risk of supply shortages. The last major spike came in 2019 after attacks on Saudi Aramco facilities, and before that during the Iran-Iraq war in the 1980s. This time, the combination of military action and direct damage to tankers has made markets particularly nervous.
AI trade loses steam
Compounding the oil shock was a sharp pullback in the AI-related stocks that have driven much of the rally in emerging Asian markets this year. Shares of semiconductor companies and tech hardware makers—which had soared on optimism about AI demand—fell sharply as investors questioned whether the lofty valuations could be justified.
South Korea's KOSPI index, heavily weighted toward memory chip makers like Samsung and SK Hynix, was among the hardest hit. The index plunged 5% as the AI trade unwind accelerated. Taiwan's tech-heavy benchmark also slid, dragging down the broader MSCI EM index.
The AI trade has been a double-edged sword for emerging markets. On one hand, it has attracted massive inflows from global investors chasing growth. On the other, it has left these markets vulnerable to sudden shifts in sentiment. When the AI narrative wobbles—whether because of disappointing earnings, regulatory concerns, or simply profit-taking—the sell-off can be brutal.
What it means for investors
For everyday investors, the message is twofold. First, oil price spikes are a reminder that geopolitical risk can hit portfolios even if you don't own energy stocks directly. Emerging market funds, especially those with exposure to Asia, are sensitive to higher oil prices because they raise costs for businesses and consumers, potentially slowing economic growth.
Second, the AI trade is not a one-way bet. While the long-term potential of artificial intelligence is real, the stocks that have run up the most are also the ones that can fall the fastest when sentiment turns. Diversification across sectors and regions remains the best defense against sudden shocks like this one.
Investors should also keep an eye on how central banks in emerging markets respond. Higher oil prices can feed into inflation, making it harder for central banks to cut interest rates. That could be a headwind for bonds and rate-sensitive stocks. For now, the focus is on whether the Strait of Hormuz situation stabilizes or escalates further.
Related reading: Europe Stocks Dip as Brent Crude Tops $90 on Iran Supply Fears and South Korea's KOSPI Plunges 5% as AI Trade Unwind and Oil Spike Hit Emerging Asia.
For a broader look at how oil above $90 is rattling Asian markets, see Oil Above $90 Rattles Asian Markets as AI Rally Faces Higher Rate Threat.
