A sharp pullback in the artificial intelligence trade has investors hunting for portfolio buffers against tech concentration risk, and developed markets overseas look increasingly attractive. Japan and Europe in particular offer exposure to durable growth trends that do not depend on AI mania.
The latest volatility reprises a pattern that has persisted for months. Chip stocks stumbled again last week, dragging the iShares Semiconductor ETF (SOXX) down 3%, while October losses breached 10%. Yet equities outside the technology complex continue to show resilience.
That divergence underscores the value of diversification at a moment when tech carries roughly 40% of the S&P 500’s weight. Emerging markets present a mirror image of the same problem. South Korea and Taiwan together constitute nearly half the iShares Emerging Markets ETF (EEM), driven by the outsized dominance of their semiconductor manufacturers.
Consequently, EEM has fallen more than 6% this month. The iShares MSCI South Korea ETF (EWY) tumbled nearly 14%, while the iShares MSCI Taiwan ETF (EWT) lost close to 5%.
David Lebovitz, global market strategist at JPMorgan Asset Management, sees a constructive long-term case for Japanese and European equities. He describes them as complements to U.S. holdings over the next 10 to 15 years, each supported by non-AI growth drivers.
Lebovitz’s firm currently maintains an overweight position in Japan against a market-weight stance in Europe, where volatility keeps entry points uncertain. Meanwhile, the firm trimmed its overweight allocation to emerging markets after the rapid run-up in Korean and Taiwanese stocks.
Japanese equities have climbed more than 17% this year through the iShares MSCI Japan ETF (EWJ). Though that trails South Korea’s 62% surge and Taiwan’s 69% advance, Japan offers a more balanced sector mix and greater insulation from tech-specific whipsaws.
Corporate governance reforms remain a key catalyst there, pushing companies to deploy idle cash and prioritize shareholder returns. Lebovitz also points to improving nominal growth, which bolsters earnings without inflation adjustment, and a weak yen that could add 2.4% to expected returns.
Europe offers cheaper valuations relative to the U.S. and a different industry composition. Industrial and manufacturing firms stand to benefit from accelerating defense spending across the region. A stronger currency contributes roughly half a percentage point to return expectations.
Europe still carries its own hurdles, including energy pressures, political risk, and lingering rate concerns. Philip Blancato, chief market strategist at Osaic, wants more clarity on European AI policy before expanding exposure.
Lebovitz frames the shift as healthy, noting markets increasingly distinguish among different AI ecosystem players. That differentiation, he argues, extends the rally rather than signaling its end.
