Emerging-market stocks took another hit on Tuesday, with the MSCI emerging-market index falling 1.4% and heading for a monthly decline of more than 7% — its worst since the onset of the US-Israeli war against Iran, according to Reuters. The selloff is being driven by a growing sense of doubt about the global artificial-intelligence buildout: investors are asking whether the enormous sums being poured into chips, data centers, and related infrastructure will ever generate the profits to justify the spending.
The pain has been most acute in markets most tied to the AI trade. South Korea’s KOSPI sank 3.5%, while Taiwan’s benchmark slid 2.5%, after soft results from tech giants like Samsung added to the pullback. These two markets are unusually exposed because their stock indices are heavily weighted toward chipmakers and electronics supply chains — the very companies at the center of the AI spending boom.
Why AI spending doubts are hitting Asia hardest
The core worry is simple: companies have been borrowing heavily to fund capital spending on AI-related equipment, but there is little evidence yet that this will translate into higher earnings. When that kind of debt-funded expansion fails to deliver, the fallout can be severe. South Korea and Taiwan are on the front line because their economies and stock markets are so dependent on the semiconductor industry.
Recent earnings from major tech players have done little to reassure investors. Samsung’s soft results, for example, have added to the sense that the AI boom may be cooling. This is not just a regional issue — European tech stocks have also slipped as similar doubts resurface, and Intel’s weak PC forecast has dragged down chip stocks globally. Even Asia’s chip suppliers insist AI demand remains strong, but investors are increasingly skeptical.
The market’s reaction has been sharp. Foreign investors have been pulling money out of Taiwan at a record pace, with NT$994 billion withdrawn in October alone. That kind of outflow can quickly turn a local selloff into a broader regional one.
Oil adds to inflation worries
At the same time, oil prices are climbing. Crude is headed for a fourth straight monthly gain, which can keep global inflation stickier than central banks would like. Higher energy costs feed into everything from transport to manufacturing, making it harder for inflation to fall back to target levels. That complicates the path for interest rates: if inflation stays high, central banks may be forced to keep rates elevated for longer, which tends to hurt riskier assets like emerging-market stocks.
This is a double blow for emerging markets. Not only are they dealing with AI-related jitters, but they also face the prospect of tighter financial conditions if oil keeps rising. Oil prices have already topped $118 in recent months amid Middle East tensions, and any further spike could rattle markets further.
Beyond AI: country-specific worries
While the AI trade is the main driver of the selloff, there are also local issues adding to the pressure. Indonesia, for example, is facing questions over market access and governance after MSCI floated the possibility of removing it from key indexes. That kind of index-review overhang can scare off foreign investors and make it harder for Indonesian stocks to recover.
These country-specific problems can get overshadowed when the whole asset class is falling, but they matter for investors with exposure to those markets.
What it means for investors
For everyday investors, the key takeaway is that a broad emerging-market selloff like this can have knock-on effects beyond the obvious. When the MSCI emerging-market index drops more than 7% in a month and fund flows slow down, fund managers often end up selling whatever is easiest to trade, not necessarily what is most overvalued. JPMorgan flow data cited by Reuters showed equity inflows cooling to $1.6 billion from $4.7 billion the previous week — a setup that can push funds to raise cash by trimming their largest, most widely held positions first.
That is why big daily moves in South Korea and Taiwan can start to steer the entire MSCI emerging-market index, even if other problems, like Indonesia’s index-review overhang, are more local. The knock-on effect is tighter financial conditions for the whole asset class: a weaker benchmark can trigger more hedging, more redemptions, and less willingness to take risk across smaller emerging markets too.
For investors with exposure to emerging-market funds, this is a reminder that these markets are highly sensitive to global sentiment and liquidity. The AI trade has been a major driver of gains in recent years, but when doubts creep in, the reversal can be swift. And with oil prices adding to inflation concerns, the path ahead may remain bumpy.
As always, it’s important to keep a long-term perspective. Emerging markets have historically been volatile, but they also offer growth potential that developed markets often lack. The current selloff may create opportunities for patient investors, but it also underscores the importance of diversification and understanding the risks.
