Big Asia Stock Funds Turn to Laggards to Cut Risk From AI Swings

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(Bloomberg) — Investors in Asia are snapping up stocks from Indonesian banks to Chinese e-commerce titans and Indian technology firms, trimming bets on popular AI trades which have turned increasingly volatile.

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Fidelity International and BNP Paribas Asset Management are among those reducing exposure to Korean equities and semiconductors to add wagers on Chinese companies. Similarly, M&G Investments has cut holdings in Taiwan while Eastspring Investments has rotated into laggards including India.

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As a result, Southeast Asian stocks are on track for their best monthly performance against broader Asian peers in 24 years, with Indonesia one of the world’s top performers in July. Meanwhile, India is among regional markets that have drawn the most foreign inflows this month.

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The reshuffle highlights growing caution among investors on the AI trade, which in Asia has been characterized by wild swings in markets such as South Korea. Even as global chip stocks staged a partial recovery from a rout earlier this month, nagging concerns about firms’ ability to monetize the revolutionary technology has led more fund managers to seek opportunities in defensive sectors from banks to consumer goods, as well as underperformers including China’s Internet giants.

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“The extreme volatility you’re seeing in Korea and to a lesser extent Taiwan has made it a little bit more difficult to buy the dip,” said Ian Samson, a portfolio manager at Fidelity. “The volatility means that from a portfolio construction perspective, we have to be careful about buying too aggressively.”

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Like Fidelity, Citigroup also recently cut Korean stocks and upgraded their Chinese peers in its emerging-market allocation, citing volatile trading in Korea and the potential for China to benefit as the local rally broadens beyond a narrow group of AI winners.

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Korean shares have slumped more than 21% this month, while Taiwan’s have fallen over 5%, with overseas investors pulling about $4.4 billion and $19 billion from Korean and Taiwanese equities, respectively. 

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“Kospi VIX remains super elevated and waiting for the leverage holdings to wash out,” said Matthew Haupt, a hedge fund manager at Wilson Asset Management, referring to the volatility gauge tracking Korea’s equities benchmark. “There are more stable markets to trade themes rather than Korea at the moment.”

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By contrast, Hong Kong’s Hang Seng Index is set for its biggest monthly outperformance ever against Korea’s Kospi gauge, boosted by catch-up gains in Chinese internet giants and banks.  

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Elsewhere in the region, the MSCI ASEAN Index has climbed 5.8% this month, versus a near 4% decline in the MSCI Asia Pacific Index, putting it on pace for the biggest monthly outperformance in more than two decades.

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Leading the Southeast Asian pack, Thai stocks have surged around 30% this year on bets that the country’s current government will bring an end to years of political turbulence. In Indonesia, banks have rallied following a surprise central bank rate hike.