The AI boom in Asia cools down as foreign capital withdraws from Japanese and South Korean stock markets at the fastest pace in seven months.

The Asian stock market feast driven by artificial intelligence is facing a reality check, as concerns over high valuations and weakening risk appetite prompt global investors to pull out funds from the region’s major AI markets at the fastest pace in at least seven months.

According to compiled media data, foreign investors have withdrawn nearly $4.6 billion from South Korea’s stock market so far this month, on track to reach the largest monthly outflow since April this year, making it one of the hardest-hit markets in the region. Data from Japan Exchange Group shows that, as of November 7, foreign investors have sold a net $2.3 billion worth of domestic Japanese stocks, marking the first net selling in six weeks.

This capital retreat is the latest sign that enthusiasm for Asia’s AI-related rally is fading. Concerns are mounting about high valuations and the disconnect between profit expectations and reality, while diminished hope for a U.S. Federal Reserve rate cut in December is also dampening global risk appetite.

Anna Wu, cross-asset strategist at Van Eck Associates Corp., said, “Although the long-term fundamentals of the global AI narrative remain unchanged, a combination of several factors in the near term have triggered ‘profit-taking and a short-term sentiment pullback’. She believes this short-term adjustment is ‘healthy.’”

Valuation concerns escalate as investors reassess the AI frenzy

In recent months, investors bet that Asia’s so-called “picks-and-shovels stocks”—chip and hardware suppliers powering the global AI race—would be shielded from market volatility, supported by continued spending from tech giants. These suppliers are mainly concentrated in Asia.

Now, as investors reexamine whether the AI boom has already exceeded reasonable levels, things are beginning to change. The latest spell of “circular trading”—where buyers and sellers conduct mutual business—has also raised concerns about inflated revenues and valuations. Some of these worries already impacted global markets last week, with Korea’s Kospi Index, which had surged 84% since April, falling back from its early November highs.

This wave of pessimism is also affecting neighboring Japan’s market. Based on data from Japan Exchange Group, as of November 7, foreign investors sold a net $2.3 billion in domestic Japanese stocks, the first net sales in six weeks. Including the futures market, the total would increase to $7.3 billion.

Taiwan’s Weighted Stock Index also gave back part of its gains this month.

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