Asia Leads Losses as AI Frenzy Ebbs

Foreign investors pulled $33.8 billion out of emerging-market stocks and bonds in October, the most since March, with the selling concentrated in Asian chip stocks. The outflow followed withdrawals of $19.3 billion in September. To put the reversal in context, in October of last year, the same category saw some $27.4 billion of inflows.

Stocks accounted for almost all of it, at $31.7 billion, and emerging Asia accounted for $28.3 billion of that, according to the Institute of International Finance (IIF), a financial-industry trade group, which tracks these monthly flows.

The selling came amid a drop in U.S. Treasury yields and rising yields in Japan, a provider of cheap capital to the world. According to the IIF, the numbers point to a cooling of risk appetite for stocks, along with country-specific shocks, rather than a squeeze on dollar funding.

Taiwan and South Korea suffered the most as speculators betting on the buildout of artificial intelligence (AI) took profits. Spending on AI infrastructure and data centers could reach anywhere from $3 trillion to $7 trillion globally by 2030, according to estimates by Oxford Economics and PwC.

Markets in these two Asian countries had gained spectacularly on the back of expectations that chip makers and other ancillary industries would contribute to this buildout. The KOSPI and the TAIEX, the two stock benchmarks in those countries had gained 62% and 66% respectively in the first nine months of the year. Then third-quarter earnings from the largest US technology companies raised doubts about how soon their spending on AI will earn a return.

This comes as markets put the odds of a Federal Reserve rate increase in December at about 78% on Nov. 3, and the odds of a Bank of Japan increase at 76%. Another round of earnings and capital-spending guidance will likely test the appetite for speculation over the AI wave. Until then, the institute wrote, “the bar for a return of EM equity inflows stays high.”

A Month of Outflows

Investors also pulled $2.1 billion from debt, bringing the month’s total to $33.8 billion.

Every region lost money, with emerging Asia down $28.7 billion, emerging Europe losing $2.3 billion, Latin America $1.7 billion, and the Middle East and North Africa $1.2 billion. Year to date, flows stand at $135.9 billion, against $254.0 billion at this point last year, according to the IIF.

Daily data put outflows from Oct. 1 through Nov. 3 at about $42 billion on preliminary figures. In nominal dollars that already exceeds the first 90 days of the global financial crisis, the 2013 taper tantrum and the 2015 China scare. Only the COVID-19 shock in 2020 and the Iran war shock in March of this year drew out more, at close to $100 billion each.

How to read the numbers. IIF’s daily database sums non-resident flows reported at high frequency for 15 equity and nine debt markets, plus combined flows for Malaysia and Colombia, and excludes China debt. The monthly tracker adds model estimates benchmarked to balance-of-payments data to cover the full sample. On the daily basis, October flows were −$34.4 billion (−$38.6 billion equity, +$4.2 billion debt), against −$33.8 billion in the monthly tracker. Exchange data for single markets such as Taiwan and Korea can therefore exceed the regional estimates.

Seeds of a Doubt

The Philadelphia semiconductor index fell 15.4% in October and the Nasdaq 100 fell 6.7%. By the institute’s account, the turn came on Oct. 22, when investors rotated out of AI-related stocks and into bonds after the capital-spending plans of one of the largest technology firms deepened their doubts. The 10-year Treasury yield fell 17 basis points that day.

Though the institute did not name the company, Reuters reported that day that Meta Platforms fell 7.0% even though its results beat expectations, after the company posted its first cash outflow in more than a decade because of AI spending and said it would issue non-voting shares in a two-for-one split to raise capital. The Nasdaq Composite lost 2.6% in the session.

“Investors are starting to realize that there are some holes in the AI story”

Paul Nolte, market strategist at Murphy & Sylvest

The S&P 500 fell only 0.9%, held up by energy and defensive stocks, IIF said. Emerging-market equities fared worse than either US benchmark. The MSCI emerging-markets index lost 8.1%, its worst month since March, and its technology sector fell 12.4%.

Indonesia’s 16.7% drop came as index compiler MSCI proposed a potential two-notch downgrade for Indonesian equities, shifting them from an Emerging Market status directly to a Standalone Market status.

Among the markets tied to AI hardware, only Taiwan’s TAIEX (down 5.7%) fell by less than the Nasdaq 100.

Besides doubts about share prices, there was also a question of financing.

Follow the Money

Five AI-intensive companies raised $157 billion in bonds through August, IIF said, equal to $108 billion in 10-year equivalents and about a fifth of long-end Treasury supply. Capital-spending plans that outrun operating cash flow point to more borrowing. Other estimates run higher, depending on who is counted: Capital Group, an asset manager, put debt issued by five hyperscalers at $240.7 billion for the year through August 31, including $66 billion in currencies other than the dollar, in its October 1 note. Bond buyers have absorbed the supply without a lasting repricing of the borrowers, the institute said.

But data-center leases and chip-purchase agreements are off balance sheet, and headline debt figures may understate what the companies owe. A deeper fall in AI valuations could then reach credit markets as well as equities, and emerging markets would feel it through the North Asian suppliers of the physical buildout. “What appears diversified across issuers and sectors increasingly represents a single macro trade on AI,” analysts at Apollo described the exposure in January, according to City AM.

The doubts widened as the month closed.

Alphabet had its worst day on record after missing third-quarter estimates and reporting negative free cash flow of $9.07 billion, according to Wealth Professional. Amazon posted negative free cash flow of $42.4 billion and held its full-year capital-spending forecast at $220 billion.

“Last year was hope. This year is: At the end of the day, how does this work in real world terms, like how to finance it, and who gets the economics. Those questions are much more difficult to answer.”

Keith Buchanan, senior portfolio manager, Globalt

Easy Come, Easy Go

Foreign net sales of Taiwanese stocks hit a record in October, above the previous record set in March, according to exchange data cited by IIF. Net sales of Korean stocks were also heavy and concentrated in the semiconductor and hardware names at the center of the AI trade. The KOSPI fell 16.2% and the TAIEX 5.7%. The won gained 1.7% against the dollar while the Taiwan dollar fell 2.1%.

In Taiwan, foreign institutions sold NT$994.3 billion, about $30.6 billion, of shares in October, dealers told Focus Taiwan, with the selling centered on TSMC, MediaTek and Delta Electronics. TSMC alone accounts for more than 40% of the TAIEX’s market value, said Tony Huang, chief strategy officer at Taishin Securities Investment Advisory. U.S. investors hold a record $668 billion of Taiwanese equities, about 23% of the exchange’s market capitalization, up from about 13% a decade ago, according to BNP Paribas data cited by the South China Morning Post.

The selling did not follow weaker earnings.

Consensus estimates for Korea and Taiwan were revised up in October and memory-chip makers reported strong demand, IIF said, which points to foreign investors cutting large positions after a year of outsized gains. Dedicated emerging-market funds drew inflows through passive vehicles over the month, so most of the selling came from global and crossover investors outside those funds.

In Korea, foreigners had been net sellers all year.

They sold a net 208.65 trillion won of KOSPI-listed shares from January through Oct. 15, about 90 trillion won of it in SK hynix and about 87 trillion won in Samsung Electronics, The Herald Business reported. On Oct. 13 the KOSPI fell 5.46% to 6,035.35, about 36% below its intraday record of 9,385.59 set on June 19. SK hynix lost 10.09% that day and Samsung Electronics 7.39%, the daily said.

Analysts disagreed about the trigger.

“The biggest reason for foreign selling is the flow of funds into bonds as U.S. Treasury yields rise,” said Lee Je-chung, head of the Korea branch of CSOP Asset Management. Lee Jae-won, an analyst at Yuanta Securities Korea, pointed to thin demand: “There are not enough buyers to absorb the selling pressure, so falling prices are triggering further sell-offs.” However, Han Dong-hee of SK Securities argued the opposite. “Current share prices of Korean memory suppliers are already pricing in an extreme downturn,” he told The Herald Business.

Indonesia, China and the rest of Asia

In Indonesia the trigger was an index provider.

On Oct. 15, MSCI said it considers Indonesia’s continued emerging-market classification “no longer appropriate” and opened a consultation on moving the country to standalone status, citing “persistent opacity in shareholding structures and suspected coordinated trading behavior.” A move to frontier-market status, MSCI said, “would not properly recognize the depth of the market problems.”

The Jakarta Composite Index fell 10.6% the next day, its worst session since January 1998, taking its decline for the year to 39%, according to Business Today. IIF put Indonesian equities down 11.6% on Oct. 16 and 16.7% for the month. MSCI said it expects to proceed unless the consultation finds “clear evidence of material improvements in market governance and functioning.” Feedback is due April 30, 2027, with a decision on or before June 30, 2027. IIF lists the outcome as a continuing source of equity outflow risk.

India witnessed some modest recovery after a steady bout of selling. Indian equities rose 2.7% in October, even with higher oil prices adding to the pressure on energy importers such as India and Egypt.

China, however, is the worrying part, given its importance to Asian and global markets. Foreign selling there is now in its fifth month.

Equity outflows reached $5.0 billion in October after $2.8 billion in September, bringing net sales to $21.4 billion since July on IIF’s preliminary estimates. The CSI 300 fell 8.5%, its worst month since January 2016, and MSCI China fell 7.2%, even as the renminbi gained 0.8% against the dollar. Chinese authorities signaled further support for the stock market at the start of November. China equity flows are still up $32.3 billion this year, because purchases from January to May outweigh the selling since June.

The bond market lost more. China debt saw $9.3 billion of outflows, the largest since May, and the 10-year government yield slipped 4 basis points to 1.64%.

Debt Held Up

Outside China, emerging-market debt drew $7.2 billion, enough to offset most of China’s bond outflow, even though dedicated hard-currency bond funds recorded outflows in four of the five weeks.

The 10-year Treasury yield fell 36 basis points over the month to 4.93%, after touching 5.30% on Oct. 5 with real yields accounting for 33 basis points of the drop. Hard-currency sovereign debt returned 1.4%, while local-currency government debt lost 0.7% in dollar terms as currencies weakened. A broad index of emerging-market currencies fell 1.1% against a 0.4% rise in the dollar index.

Primary markets stayed open.

Colombia sold a $5.2 billion, three-tranche dollar bond on Oct. 26. Year to date, debt inflows stand at $263.3 billion, against $272.4 billion a year earlier.

Brazil swung hardest within the month.

After the first round of its presidential election on Oct. 4, the Ibovespa rose 7.7% and the real 4.4% in a single session on heavy foreign buying. The Oct. 25 runoff reversed it. President Luiz Inácio Lula da Silva won reelection against polls and market pricing, IIF said, and on Oct. 26 the Ibovespa fell 13.9%, the real fell 8.1% and the 10-year local yield rose 231 basis points. Over the month the Ibovespa lost 9.9%, the real 4.8%, and the 10-year yield rose 115 basis points to 15.25%.

Lula won 51.79% of valid votes to 48.21% for Senator Flávio Bolsonaro, with 99.99% of polling sections counted, The Rio Times reported. Foreign purchases earlier in the month kept the region’s equity outflow to $0.3 billion, though Latin America as a whole lost $1.7 billion after taking in $5.4 billion in September. Mexico saw a reprieve, with equities up 8.7% and 10-year yields down 37 basis points, even as the peso weakened 3.8%.

Brent crude rose 13.6% to $117.6 a barrel, a second straight month of double-digit gains, amid friction in the Middle East. It fell back to $104.5 on Nov. 2 as those tensions showed signs of easing. Turkish equities fell 9.9%.

Central banks’ High Hurdle

These developments come as policymakers around the world are in little mood to offer relief amid surging inflation.

The Fed held its policy range at 3.75% to 4.00% on Oct. 28 in a 10-2 vote, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting in favor of a 25-basis-point increase. The European Central Bank held its deposit rate at 2.50% on Oct. 29. The Bank of Japan held at 1.25% on Oct. 30 in an 8-1 vote, with one member favoring a hike, and raised the pace of its exchange-traded-fund sales to ¥860 billion a year. All three central banks had raised rates in September.

Those holds keep policy rates at levels that leave the hurdle for emerging-market duration and carry trades high, IIF said, even after October’s fall in US yields.

ING expects the Bank of Japan to raise rates in December and again in March or April; the central bank said for the first time that its 2% inflation target had been met, according to ING’s Chris Turner. With markets pricing hikes at 78% for the Fed and 76% for the Bank of Japan, dollar- and yen-funded carry trades are set to cost more into year end.

Three other things bear on the outlook.

Debt inflows to emerging markets outside China can continue as long as the 10-year Treasury yield stays below its early-October peak of 5.30%, IIF said. In Brazil, the late-October losses could extend if the economic team and the fiscal signals of the new term disappoint investors. In China, the US-China trade truce, which runs to mid-January, sets the backdrop for foreign flows.

A Year of Gains

October’s outflow follows a bigger one earlier this year.

IIF dates the Iran war shock to Feb. 28. By March 6, the war launched by the United States and Israel against Iran had all but closed the Strait of Hormuz, The Star of Malaysia reported, and MSCI’s emerging-market index was down 6.5% for the week and its currency index down 1.4%, the sharpest weekly drops since March 2020. The KOSPI was headed for an 11.4% weekly slide, its steepest in six years, and Brent had climbed more than 15% to about $83. It ended October at $117.6.

Elias Hilmer, a markets economist at Capital Economics, said at the time that the war was not the only vulnerability. “But independent of the conflict in the middle east, EM assets appeared vulnerable to a fall,” he said. “EM assets have been on a tear over the past year or so, leaving asset valuations looking stretched in some places.”

The next round of earnings and spending guidance will be a key test, and a December rate increase from the Fed or the Bank of Japan would raise the cost of dollar- and yen-funded carry into year end.

“A recovery in equity flows to North Asia will turn on how quickly investor confidence returns to the AI investment cycle that drove much of this year’s gains,” Jonathan Fortun, the IIF’s senior economist, wrote.

Sources

• Jonathan Fortun, IIF Capital Flows Tracker, November 2026: “Asia Leads Outflows as AI Confidence Cracks,” Institute of International Finance, November 5, 2026.
• MSCI, “MSCI Launches a Consultation on a Proposal to Reclassify Indonesia from Emerging Market to Standalone Market Status,” October 15, 2026.
• Amit Mudgill, Business Today, October 16, 2026.
• Chung Jung-feng and Frances Huang, Focus Taiwan (Central News Agency), October 31, 2026.
• Peggy Ye, South China Morning Post, “US investors drive record outlay in Taiwan’s equities market on the back of AI boom.”
• The Herald Business (English translations): foreign-investor selling and analyst interviews, October 16, 2026; KOSPI, Samsung Electronics and SK hynix moves, October 13, 2026; analyst comments on valuations, October 16, 2026.
• Stephen Culp, Reuters, October 22, 2026.
• Jhoanna Hines, Wealth Professional, November 2, 2026.
• Capital Group, “AI debt boom: balancing risk and opportunity,” October 1, 2026.
• Saskia Koopman, City AM, January 27, 2026.
• The Star (Malaysia), “Oil shock, war risk drag Asian FX, stocks to worst week since 2020,” March 6, 2026.
• The Rio Times, “The Big Read: Brazil, Monday 26 October,” October 26, 2026.
• Mitrade, October 29, 2026.
• Chris Turner, ING, via Mitrade, October 30, 2026.