AI-driven surge left valuations stretched
Moody’s said the turbulence followed a strong rally in January and February led by technology-heavy markets such as South Korea and Taiwan, fuelled by optimism around artificial intelligence.Gains were concentrated in sectors linked to semiconductor demand, particularly memory chips where South Korean firms hold dominant global positions. By early 2026, the benchmark index had “nearly tripled relative to early 2025”, leaving valuations stretched and markets vulnerable to sudden risk-off moves.The geopolitical shock proved to be “exactly such a trigger”, the report said, as investors reassessed elevated valuations amid rising macroeconomic uncertainty.
Energy dependence amplifies downside risks
Developed Asian markets remain particularly sensitive to commodity price shocks because of their reliance on imported energy. Moody’s said economies such as South Korea, Japan and Taiwan import most of the oil and gas they consume, making them vulnerable to inflation risks and potential policy tightening if energy costs remain elevated.Foreign investors, aware of this sensitivity, sold South Korean equities, adding downward pressure. The report observed that “with valuations inflated by the AI-driven rally, South Korean equities recorded some of the steepest declines across the region”.Elsewhere in Asia-Pacific, equity declines were more contained. China and India saw pullbacks broadly in line with normal market swings, supported by structural buffers such as lower foreign investor participation and, in China’s case, capital controls.
Volatility set to stay elevated
Moody’s expects market volatility to remain high in the near term. Realised volatility across most Asia-Pacific markets has moved close to the upper end of historical ranges, comparable to levels seen during earlier episodes of global trade tensions.Under its baseline scenario, the report assumes the Middle East conflict will be limited in duration and commodity flows will eventually normalise, allowing oil and gas prices to fall back toward pre-conflict levels.However, it warned of downside risks if tensions persist. Sustained high energy prices could inflict greater economic damage across the region and trigger sharper equity sell-offs, particularly in markets where AI-driven optimism had already pushed valuations to elevated levels.
