The long-standing concern over excessive concentration in U.S. tech stocks persists, with the "Big Six" now accounting for over 30% of the S&P 500’s market cap. Fears loom that a rapid pullback—such as Nvidia’s (NVDA.US) valuation surging from $1 trillion to $5 trillion in two years—could trigger massive market shocks. Meanwhile, Asia’s AI-driven equity rally this year has outpaced global peers, reshaping regional markets and forcing fund managers to adapt.

Risks are particularly acute in some Asian markets. Taiwan Semiconductor Manufacturing (TSM.US) alone now represents nearly 45% of Taiwan’s Taiex index, triple its weight a decade ago. South Korea’s KOSPI is dominated by a duopoly—Samsung Electronics and SK Hynix—which jointly hold a 30% index share. This tech-heavy skew is upending traditional portfolio strategies: index-tracking funds must overweight tech, while funds with single-stock caps struggle to match benchmarks dominated by chipmakers and internet giants.

"The blurring line between passive and active investing reflects extreme concentration," said Hebe Chen, analyst at Vantage Markets. "Any AI momentum stall could trigger a broad regional correction given dwindling diversification options."

Asian chipmakers’ valuations have soared, with Taiwan Semiconductor Manufacturing surpassing $1 trillion in July. Investors chasing AI data center beneficiaries propelled the MSCI Asia-Pacific Index to a 26% YTD gain—on track for its best year since 2016—outpacing the S&P 500.

**Vicious Cycle** Upbeat earnings from key AI supply chain players have fueled optimism, driving further price surges that may exacerbate concentration. "Overweighting forces benchmark-driven investors into crowded trades, inflating valuations—a self-reinforcing loop," noted Vey-Sern Ling, Asia tech advisor at Union Bancaire Privee.

Single-country funds face acute challenges. "High concentration in indices like Korea’s makes dedicated mandates tough," said Ken Wong of Eastspring Investments. Even Japan sees outliers: Advantest and SoftBank now each exceed 10% weight in the Nikkei 225, nearing exchange-imposed caps.

Regionally, the top five stocks in the MSCI Asia ex-Japan Index hold a combined 29% weight—near 2019 highs, per Citi. Analysts flagged extreme crowding in Alibaba (BABA.US), Tencent, and Taiwan Semiconductor Manufacturing.

**Investing Constraints** For EU-regulated active funds, the 10% single-stock limit is a hurdle. Taiwan Semiconductor Manufacturing breached this in MSCI Asia ex-Japan last year, hitting 12%. "We’re bullish long-term but constrained by the cap," said GAM’s Jian Shi Cortesi, shifting exposure to Tencent and Foxconn.

Some seek alternatives within the supply chain. "For capped accounts, we target Taiwan Semiconductor Manufacturing-adjacent plays like ASE Technology or GlobalWafers," said Aberdeen’s Wu Xinyao.

**Multi-Year Theme** Despite operational headaches, absolute returns remain stellar: Taiwan Semiconductor Manufacturing is up 40% YTD; SK Hynix has rocketed 220%. Meta (META.US) and Amazon’s (AMZN.US) planned tech spending may sustain the rally.

"Investors view AI as a multi-year theme, albeit with near-term volatility," said Bank of America’s Winnie Wu. She noted Taiwan and Korea’s indices are 80% and 50% tech-weighted, respectively, while China, Japan, and India offer diversification to hedge U.S. or AI cycle risks—with China particularly positioned for "defensive diversification."