Under the AI investment frenzy, Asian stock markets have outperformed global markets this year.
As investors chase AI &#34;super giants,&#34; the MSCI Asia-Pacific Index has risen 26% this year, likely achieving the largest lead over the S&amp;P 500 Index in eight years.
However, beneath the rising trend lies an increasingly intensifying risk. Compared to the concerns over the high concentration of technology stocks in the U.S. market, some Asian markets face even more significant risks:
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<li>The weight of Taiwan Semiconductor in the Taiwan Weighted Index has approached 45%, three times that of ten years ago.</li>
<li>The Korea Composite Stock Price Index has become a duopoly, with the combined weight of memory chip giants Samsung Electronics and SK Hynix reaching 30%.</li>
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This concentration is disrupting traditional portfolio strategies, blurring the lines between active and passive investing, and raising concerns among investors that once the momentum of AI slows, it could trigger severe market corrections across the region.
However, Winnie Wu, head of Asia-Pacific equity strategy at Bank of America, pointed out:
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Although technology stocks account for over 80% and nearly 50% of the MSCI Taiwan Index and Korea Index respectively, markets like China, Japan, and India are more diversified, thus should be relatively less affected by fluctuations in the AI or technology cycle.
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Wu believes that especially the Chinese market offers &#34;diversified returns that can serve as a hedge against risks related to the U.S. stock market and the AI cycle.&#34;
<h2>&#34;Passive Investment&#34; Drives Up Valuations</h2>
The increasing weight of technology stocks in the indices is creating a &#34;vicious cycle&#34; that could lead to inflated valuations.
Vey-Sern Ling, senior equity advisor for Asian technology at Union Bancaire Privee, stated:
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Benchmark investors are forced to increase their holdings in a few highly concentrated stocks, which in turn further drives up the prices and index weights of these stocks, creating a 'vicious cycle' that inflates the valuations of 'hot' stocks.
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The overwhelming weight of technology stocks poses significant challenges for fund managers, especially those constrained by single-stock limits.
Ken Wong, an Asian equity portfolio expert at Eastspring, said:
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The high concentration of single-country benchmark indices makes investing in single-country funds like those in Korea and Taiwan more challenging.
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In Japan, AI concept stocks like Advantest and SoftBank Group have risen to become the highest-weighted stocks in the Nikkei 225 Index, each accounting for over 10%, a level that may trigger reductions under index compilation rules.
In Thailand, component manufacturer Delta Electronics Pcl also hit the 10% weight limit set by the exchange earlier this year.
According to Citigroup, the total weight of the top five stocks in the MSCI Asia-Pacific (excluding Japan) Index has reached 29%, close to the highest level since 2019.
<h2>Active Funds Seek Alternatives</h2>
Faced with holding restrictions and intensifying concentration risks, active fund managers are actively seeking alternative strategies
Some index providers have begun to set individual stock weight limits, while fund managers tend to choose alternatives directly related to leading stocks to help investors cope with these issues.
For actively managed funds governed by European rules, the single stock limit is 10%. Jian Shi Cortesi, a fund manager at GAM Asset Management, stated:
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We have a long-term belief in Taiwan Semiconductor, and although the 10% limit currently constrains our ability to overweight, we have shifted some exposure to other companies with similarly strong competitive moats, such as Tencent and Foxconn Industrial Internet.
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Xin-Yao Ng, a fund manager at Aberdeen Investments, mentioned:
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For accounts with a 10% holding limit, we tend to look for stocks that are as close as possible to Taiwan Semiconductor in the value chain, such as ASE Technology Holding, Hon Hai Precision, Chroma ATE, and GlobalWafers.
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He added:
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There are many highly liquid tech stocks in Taiwan that are highly correlated, and many companies have even outperformed Taiwan Semiconductor.
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<h2>AI Remains a Multi-Year Investment Theme</h2>
Despite the changing market landscape making fund managers' jobs more challenging, the absolute returns on stocks have been substantial.
Year-to-date, Taiwan Semiconductor's stock price has risen by 40%, while SK Hynix's increase has exceeded 220%.
Analysts believe that tech giants like Meta and Amazon plan to continue investing heavily in technology hardware, which may continue to fuel this rally.
Winnie Wu, Head of Asia Pacific Equity Strategy at Bank of America, stated:
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The stock investors we have communicated with generally believe that, despite the possibility of short-term pullbacks, AI is a multi-year investment theme
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The MSCI Asia-Pacific Index has risen 26% this year, expected to achieve the largest lead over the S&P 500 Index in eight years. Bank of America stated that although technology stocks account for over 80% and nearly 50% of the MSCI Taiwan Index and the Korean Index respectively, the Chinese market offers diversified returns and can serve as a tool to hedge against risks related to the U.S. stock market and the AI cycle

- The Asian stock market has outperformed global markets this year, with the MSCI Asia Pacific Index rising 26% amid an AI investment frenzy.  
- However, risks are increasing due to high concentration in certain markets, such as TSMC's nearly 45% weight in Taiwan's index and Samsung and SK Hynix's 30% in South Korea's index.  
- Despite these challenges, some markets like China, Japan, and India remain diversified, potentially mitigating the impact of AI-related volatility.

The whole world is speculating on technology stocks! The AI frenzy is also reshaping the Asian stock market