Concerns over inflationary pressures from rising oil prices are bringing an end to the artificial intelligence (AI) trading frenzy in Asia, accelerating an outflow of overseas capital, with South Korean equities bearing the brunt of the sell-off. On Wednesday, South Korea's benchmark KOSPI index plummeted by more than 12% at one point, triggering a market-wide circuit breaker and halting trading for 20 minutes. The two-day cumulative loss widened to 20%, erasing all gains made since February and marking the steepest two-day decline since the 2008 financial crisis.

According to Bloomberg, overseas investors net sold approximately $3.1 billion worth of South Korean stocks and around $3.6 billion of Taiwanese stocks this week, with both markets experiencing their largest weekly capital outflows since the end of last December. The selling pressure has been concentrated heavily in chipmakers, which were previously market leaders. Samsung Electronics and SK Hynix each fell nearly 20% this week, while Taiwan Semiconductor Manufacturing Co (TSMC) also dropped over 5%. The South Korean won fell 3.3% against the US dollar on Tuesday, its largest single-day decline since 2009, indicating that global funds are simultaneously hedging risks in the foreign exchange market while offloading equities. Tareck Horchani, Head of Prime Brokerage Sales at Maybank Securities in Singapore, suggested the sell-off resembles position unwinding and risk reduction rather than a fundamental deterioration in corporate earnings. When oil prices surge abruptly and foreign exchange volatility spikes, global capital tends to retreat swiftly from the most liquid index heavyweight stocks—precisely the targets of the current sell-off. Crowded AI Trades Meet Geopolitical Shock, Investors Rush to Reduce Exposure Prior to this sell-off, warnings about an AI bubble had largely been ignored in Asian markets. The KOSPI had been one of the world's best-performing indices year-to-date, with regional chip suppliers viewed as reasonably valued beneficiaries of ongoing capital expenditure by tech giants, leading to a steady accumulation of long positions. However, a sharp escalation of tensions in the Middle East acted as the trigger that broke market confidence. Matthew Haupt, Portfolio Manager at Wilson Asset Management in Sydney, stated, "As the Iran situation appears to worsen, crowded long positions in AI and other sectors are being sold off heavily, with investors racing to reduce exposure across the board." He added that the impact has been particularly acute for AI-related stocks, as doubts persist over whether the sector's massive capital expenditure plans will ultimately translate into sufficient profits. Market worries that soaring oil prices will fuel inflation and delay interest rate cuts by the Federal Reserve are accelerating the unwinding of previously built-up high positions based on the AI narrative. Bloomberg strategist Garfield Reynolds pointed out that as long as fears remain that crude prices could surge further, the downturn in Asian equities will be difficult to halt. The high dependence of the Asia-Pacific region on Middle Eastern oil and gas means sharp swings in crude futures will force investors to continuously factor in worst-case scenarios. Capital May Return Once Situation Clarifies, but Short-Term Volatility Likely to Persist The sharp decline has exposed market vulnerability under crowded positioning—even if the long-term fundamental logic remains intact, many investors are choosing to sell first and ask questions later. The South Korean won and the Taiwanese dollar have become among the worst-performing Asian currencies this month, further evidence that global funds are synchronizing equity sales with currency hedging. Speaking on Bloomberg Television on Wednesday, Kerry Craig, Global Market Strategist at J.P. Morgan Asset Management, said that in the face of rising Middle East risks, investors "need to look at appropriate diversification and hedging within their portfolios." He also noted, "Once the outlook starts to improve, we could see investors moving back into these markets."