AI stocks have rattled U.S. and emerging markets. Japan and Europe could help investors diversify

The October AI-related selloff has highlighted concentration risk: the iShares Semiconductor ETF fell more than 10% this month, while the Emerging Markets ETF declined over 6%; South Korea and Taiwan ETFs fell almost 14% and close to 5%, respectively. JPMorgan Asset Management favors Japan, where its allocation is overweight, and sees Japan and Europe as potential complements to U.S. equities over the next 10–15 years, while remaining market weight in Europe and trimming its emerging-markets overweight. Japan's ETF is up more than 17% this year, and strategists cite corporate-governance changes and potential currency contributions to returns, alongside risks including Europe's energy and political challenges.

Analysis

The useful portfolio distinction is not “AI versus non-AI,” but concentrated semiconductor beta versus broader earnings and currency drivers. Japan may diversify the U.S. growth-heavy exposure better than Korea or Taiwan, though it is not an AI hedge: its manufacturers and technology suppliers can still be pulled lower if chip capex expectations reset. A weaker yen can support translated returns for dollar investors, but a yen rebound would reverse that cushion; currency-hedged and unhedged exposure should not be treated interchangeably.

Europe offers a different mix, with defense and industrial spending as potential earnings supports, but the region’s energy exposure and rate sensitivity make it vulnerable to renewed supply shocks or higher yields. The policy uncertainty around AI is a near-term catalyst for delayed flows, not yet evidence of a durable earnings impairment. Less expensive relative pricing alone is not a sufficient entry signal.

Over the next 1–3 months, watch semiconductor earnings/guidance, yen direction, European energy prices and rates for confirmation or reversal. Over 6–18 months, governance-driven capital returns in Japan and defense-led investment in Europe could broaden equity leadership if execution appears in company results. The contrarian risk is that diversification is being presented as protection against an AI selloff when a global risk-off move could still correlate these markets. The named JPMorgan source is an asset-management strategist; this does not establish an investment signal for JPMorgan Chase (JPM).

Key Decisions for Investors

• Consider a staged relative position long EWJ against EWY, rather than treating Japan as a stand-alone AI hedge. The thesis is broader sector exposure and potential governance/capital-return support; keep sizing disciplined because Japanese manufacturers remain exposed to global tech and cyclical demand.
• Do not chase Europe solely on relative valuation. Add exposure only as a watch-list or staged allocation after evidence that energy risks and rates are stabilizing and policy uncertainty is clearing; industrial and defense beneficiaries need to convert spending into earnings.
• For portfolios dominated by U.S. technology, reduce concentration through allocation changes rather than assuming EEM provides broad diversification: its Korea/Taiwan concentration can leave it highly exposed to semiconductor drawdowns. Reassess if chip-sector guidance stabilizes and those markets’ relative weakness reverses.
• Falsify the Japan-over-Korea relative thesis if EWJ materially underperforms EWY while yen strength erodes dollar returns, or if Japanese corporate-return and earnings progress fails to appear. Reconsider Europe adds if energy costs or yields rise enough to pressure regional earnings expectations.