Investors concerned about concentration risk in their portfolios after the recent AI market correction may consider increasing exposure to developed markets, particularly in Japan and Europe. The recent pullback highlighted a longer‑term trend: AI‑related stocks have been under pressure, with the iShares Semiconductor ETF (SOXX) down 3% last week and more than 10% year‑to‑date, while non‑tech equities have remained resilient. A diversified portfolio can help mitigate the sharp declines associated with the AI theme while still participating in its upside. Technology currently accounts for roughly 40% of the S&P 500, making diversification essential. Internationally, South Korea and Taiwan together represent nearly half of the iShares Emerging Markets ETF (EEM), which fell over 6% in October. The iShares MSCI South Korea ETF (EWY) and the iShares MSCI Taiwan ETF (EWT) have dropped about 14% and 5%, respectively. JPMorgan Asset Management’s David Lebovitz remains constructive on Japan and Europe, suggesting they could complement U.S. equities over the next decade to fifteen years, each driven by factors beyond AI. Near‑term risks remain, and Lebovitz notes the firm is overweight Japan but maintains market‑weight exposure in Europe, watching for attractive entry points amid volatility. The firm also trimmed its overweight position in emerging markets following the rapid rise in South Korea and Taiwan, aligning with a traditional 60/40 portfolio where 40% of the equity allocation is U.S. and 20% is non‑U.S., typically split evenly among Japan, Europe, and emerging markets. Factors supporting each region differ. Japan has benefited from a stronger yen, corporate‑governance reforms encouraging shareholder returns, and a improving earnings outlook, with the iShares MSCI Japan ETF (EWJ) up more than 17% this year. While lagging behind the 62% gain of South Korea and 69% of Taiwan, Japan’s broader sector diversification makes it more defensive. Europe offers lower valuations relative to the U.S., a stronger currency that could add about 0.5 percentage points to expected returns, and exposure to industrial and manufacturing firms that may gain from heightened defense spending. Nonetheless, Europe faces challenges including an energy crisis, political uncertainty, and potential interest‑rate hikes, prompting some investors to await clearer signals before increasing exposure. Osaic’s Philip Blancato is also interested in Europe but is holding back until AI policy clarity emerges. Overall, a thoughtful allocation to non‑U.S. equities may be a prudent component of a diversified portfolio as markets differentiate within the AI ecosystem, potentially supporting the broader rally.
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