EMERGING MARKETS-Asia stocks, South Korea's KOSPI slump as AI-fueled rally unravels

By Roshan Thomas and Sameer Manekar

Nov 5 (Reuters) - Asian equities saw their sharpest drop in months on Wednesday, led by a 6% plunge in South Korea, as investors pulled back from overheated tech stocks on valuation worries, though most markets later pared losses.

The MSCI index of emerging Asia equities .MIMS00000PUS and a broader index tracking Asia equities excluding Japan .MIAPJ0000PUS were down over 1% in their worst intraday decline since the early April "Liberation Day" tariff turmoil.

Shares slid after the CEOs of Morgan Stanley MS.N and Goldman Sachs GS.N cast doubt on whether the recent AI-fueled rally and record-high valuations could be sustained.

Traders hit regional markets hard early on Wednesday, with South Korea’s KOSPI .KS11 seeing its steepest intraday fall since August last year before closing just above the key 4,000 level.

The KOSPI has surged a staggering 80% since April, with more than a third of the gains coming last month. Chipmaker Samsung Electronics 005930.KS has risen 90% this year, while peer SK Hynix 000660.KS has more than tripled.

Those gains have firmly positioned the index among the top-performing equity markets globally this year.

Taiwan's benchmark index .TWII has advanced 20% this year, driven mostly by a 40% rally in TSMC 2330.TW shares.

But it all came to a head on Wednesday as caution over an overheated rally, stretched valuations, a reassessment of Fed cuts and caution from Wall Street bigwigs triggered the steepest sell-off in months.

"This isn't a broad market crash but more of a healthy recalibration in overheated sectors," said Tareck Horchani, Head of Dealing, Prime Brokerage at Maybank Securities.

"While short-term sentiment may remain fragile, we expect the market to stabilize as earnings normalize and macro visibility improves, particularly if U.S. rate guidance or China demand provide a clearer backdrop".

On Wednesday, South Korea's KOSPI .KS11 fell 6.2% to drop below the psychologically key 4,000 level, marking its worst intraday decline since August last year. The benchmark index ended the session down 2.9%.

The South Korean won KRW=KFTC extended losses, weakening 0.7% to its lowest point since mid-April.

Taiwan's stocks .TWII shed 2.6% to fall by the most in three weeks. Its dollar TWD=TP weakened for the sixth consecutive session to hit its lowest point since early May.

In Southeast Asia, Singapore's FTSE Straits Times index .STI slipped more than 1%, while Malaysia's KLCI .KLSE lost 0.6%. Stocks in the Philippines .PSI shed 1.8%.

Most currency markets in the region were largely on the back foot against a steady U.S. dollar =USD.

The Philippine peso PHP= lost 0.5% and the Indonesian rupiah IDR= inched 0.2% lower, continuing to hover around a six-week low.

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