AI boom "double-edged sword": Asian stock markets skyrocket leading globally, but high concentration implies severe pullback risk.

Concerns about the high concentration of US technology stocks have been long-standing, with the market value of the six major technology stocks now accounting for over 30% of the S&P 500 index. People worry that if companies like NVIDIA Corporation (NVDA.US) see their market value skyrocket from $1 trillion to $5 trillion in just two years, a rapid decline in this trend could have a huge impact. Meanwhile, the artificial intelligence boom this year has helped Asian stock markets outperform the global market; this boom is also changing the Asian market as fund managers race to keep up. In some Asian markets, the risks are more pronounced, with only one company, Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR (TSM.US), accounting for nearly 45% of the Taiwan Weighted Index (Taiex), which is three times higher than ten years ago. The South Korean Composite Stock Price Index (KOSPI) has formed a duopoly, with semiconductor giant Samsung Electronics and SK Hynix collectively holding a 30% weight. The dominance of technology stocks in Asian benchmark indices is disrupting traditional portfolio strategies. Index-tracking funds are forced to increase their allocation to technology stocks in order to keep up, while funds that restrict investments in individual stocks struggle to match the returns of indices dominated by a few chip manufacturers and internet companies. Vantage Markets analyst Hebe Chen said, "The increasing concentration of funds blurs the line between passive and active trading, with funds flowing more and more into a few stocks. With fewer channels for diversified investments, any stagnation in the momentum of artificial intelligence development could trigger a severe adjustment across the region." The soaring market value of Asian chip manufacturers, with Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR surpassing the $1 trillion mark in July, has prompted investors to chase stocks benefiting from significant investments in artificial intelligence in mega data centers, driving the MSCI Asia Pacific index up 26% this year, on track for its largest gain in eight years, surpassing the S&P 500 index. Vicious Cycle Recent financial reports from major participants in the Asian artificial intelligence supply chain have boosted market sentiment towards long-term demand trends. With stock prices continuing to rise, there are indications that market concentration may further intensify. Vey-Sern Ling, senior equity strategist for Union Bancaire Privee Asia Technology, said, "The excessive weight of technology stocks in indices and their continued growth is a problem because index-oriented investors have to increase their allocation to a few concentrated stocks, which in turn drives up the prices and index weights of these stocks. This is a vicious cycle that pushes up the valuation of popular stocks." For active funds constrained by European regulations, the 10% single stock holding limit poses a major obstacle. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR's share in the MSCI Asia Pacific ex Japan index surpassed this threshold last year and has since climbed to over 12%. Jian Shi Cortesi, a fund manager at GAM in Zurich, said, "We remain bullish on Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR in the long term, but the 10% holding limit restricts our ability to maintain a fully overweight position. We have shifted some investments to other companies with similar strong competitive advantages, such as Tencent and Foxconn." Hindered Investments Some index providers have taken measures to help investors deal with these issues. FTSE Russell has set upper limits on weights for some indices, while MSCI and S&P Global, Inc. have started to provide alternative versions with capped weight limits for key indices. Despite the challenges posed by changing market conditions, the absolute gains in stock prices remain substantial. Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR has risen 40% so far this year, while SK Hynix has surged over 220%. Companies like Meta Platforms (META.US) and Amazon.com, Inc. (AMZN.US) plan to increase their investments in technology hardware, which may continue to drive this rally. Winnie Wu, head of stock strategy for Bank of America Corp in Asia-Pacific, said, "The stock investors we have spoken to generally believe that artificial intelligence is a multi-year theme, despite the possibility of short-term corrections." She noted that technology stocks account for over 80% of the MSCI Taiwan Index and nearly half of the MSCI Korea Index, while markets in mainland China, Japan, and India are more diversified, thus less affected by fluctuations in the artificial intelligence or technology cycles. Wu stated that mainland China in particular can provide "diversified returns, hedging against risks related to the US stock market and the artificial intelligence cycle."