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Cast your mind back to July 1997. In a matter of weeks, the thriving economies of East Asia — Thailand, Indonesia, South Korea, Malaysia — watched their currencies collapse and their biggest companies teeter on the brink of bankruptcy. What followed was a financial tsunami that wiped out fortunes, toppled governments, and sent shockwaves across the globe.
Now, nearly three decades later, that familiar anxiety is creeping back. But this time, the villain isn't currency speculation or short-term foreign debt. It's something far more seductive: artificial intelligence.
What Happened in 1997 — And Why It Matters
The 1997 crisis didn't happen overnight. Years of rapid credit growth, inadequate supervision, and a dangerous reliance on short-term foreign borrowing had created a powder keg beneath the region's celebrated "economic miracle". When Thailand devalued the baht, it was the match that lit the fuse.
Investors panicked. Capital fled. Currencies plummeted. The IMF swooped in with harsh rescue packages demanding austerity and fire-sale privatisation. It was brutal — and the lessons were seared into Asia's collective memory.
Those scars are precisely why the region's banks are far stronger today. Capital adequacy ratios have improved, supervision has tightened, and reserves are far healthier. But here's the rub: the world has changed, and new vulnerabilities have emerged.
The 1997 crisis didn't happen overnight. Years of rapid credit growth, inadequate supervision, and a dangerous reliance on short-term foreign borrowing had created a powder keg beneath the region's celebrated "economic miracle". When Thailand devalued the baht, it was the match that lit the fuse.
Investors panicked. Capital fled. Currencies plummeted. The IMF swooped in with harsh rescue packages demanding austerity and fire-sale privatisation. It was brutal — and the lessons were seared into Asia's collective memory.
Those scars are precisely why the region's banks are far stronger today. Capital adequacy ratios have improved, supervision has tightened, and reserves are far healthier. But here's the rub: the world has changed, and new vulnerabilities have emerged.
The New Villain: America's AI Spending Frenzy
Wall Street has fallen head over heels for artificial intelligence. The so-called "Magnificent Seven" — Amazon, Microsoft, Alphabet, Meta, Nvidia, Tesla, and Apple — are pouring hundreds of billions into AI infrastructure. In 2026 alone, their combined capital expenditure is expected to exceed $780 billion.
That's an extraordinary bet. But investors are growing restless.
Amazon plans roughly $220 billion in capital spending this year. Microsoft is shelling out around $190 billion. Alphabet has committed between $195 billion and $205 billion. Meta's outlay sits at $130 billion to $145 billion. The numbers are staggering — and the returns? Still largely elusive.
In fact, a Bank of America survey found that 32% of fund managers now view an AI bubble as the biggest tail risk in global markets — ahead of inflation and geopolitical tensions. A record 54% say tech stock valuations are simply too high. Cash levels have dropped to 3.5%, triggering the bank's contrarian "sell" signal.
The message is clear: the easy money has been made, and the market is stretched.
Wall Street has fallen head over heels for artificial intelligence. The so-called "Magnificent Seven" — Amazon, Microsoft, Alphabet, Meta, Nvidia, Tesla, and Apple — are pouring hundreds of billions into AI infrastructure. In 2026 alone, their combined capital expenditure is expected to exceed $780 billion.
That's an extraordinary bet. But investors are growing restless.
Amazon plans roughly $220 billion in capital spending this year. Microsoft is shelling out around $190 billion. Alphabet has committed between $195 billion and $205 billion. Meta's outlay sits at $130 billion to $145 billion. The numbers are staggering — and the returns? Still largely elusive.
In fact, a Bank of America survey found that 32% of fund managers now view an AI bubble as the biggest tail risk in global markets — ahead of inflation and geopolitical tensions. A record 54% say tech stock valuations are simply too high. Cash levels have dropped to 3.5%, triggering the bank's contrarian "sell" signal.
The message is clear: the easy money has been made, and the market is stretched.
Why Asia Is Now Wearing Two Faces
For Asian markets, the AI boom cuts both ways. On one hand, the region is home to the world's most critical chipmakers. Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics, and SK Hynix are the indispensable backbone of the global AI supply chain. As global funds have rotated away from US software giants, they've poured money into Asia's hardware winners instead.
The MSCI Asia Pacific Index has risen more than 12% in 2026, while the S&P 500 has stumbled and the Nasdaq 100 has lost ground. It's a rare moment of divergence — and it's being driven by Asia's unique position as the "arms dealer" of the AI revolution.
But here's the uncomfortable truth: if the AI bubble bursts, Asia won't escape unscathed.
Capital Economics has warned that a US AI crash would hit Taiwan and South Korea particularly hard, given their outsized exposure to semiconductor demand. The logic is simple: if American tech giants slash their AI spending — whether through cutbacks, delays, or outright cancellations — the ripple effects would be felt immediately across Asia's factories and foundries.
And we've seen this movie before. In 1997, it was short-term dollar debt that brought Asia to its knees. In 2026, it could be a sudden slowdown in AI-related orders.
For Asian markets, the AI boom cuts both ways. On one hand, the region is home to the world's most critical chipmakers. Taiwan Semiconductor Manufacturing Company (TSMC), Samsung Electronics, and SK Hynix are the indispensable backbone of the global AI supply chain. As global funds have rotated away from US software giants, they've poured money into Asia's hardware winners instead.
The MSCI Asia Pacific Index has risen more than 12% in 2026, while the S&P 500 has stumbled and the Nasdaq 100 has lost ground. It's a rare moment of divergence — and it's being driven by Asia's unique position as the "arms dealer" of the AI revolution.
But here's the uncomfortable truth: if the AI bubble bursts, Asia won't escape unscathed.
Capital Economics has warned that a US AI crash would hit Taiwan and South Korea particularly hard, given their outsized exposure to semiconductor demand. The logic is simple: if American tech giants slash their AI spending — whether through cutbacks, delays, or outright cancellations — the ripple effects would be felt immediately across Asia's factories and foundries.
And we've seen this movie before. In 1997, it was short-term dollar debt that brought Asia to its knees. In 2026, it could be a sudden slowdown in AI-related orders.
The Warning Signs Are Flashing
Several indicators suggest that the AI trade is approaching dangerous territory:
Overbought technicals: The Nasdaq 100's monthly RSI has entered overbought territory, historically a precursor to 5-10% pullbacks within weeks.
Slowing free cash flow: The Magnificent Seven's collective free cash flow has deteriorated sharply from its 2024 peak as capital spending devours an ever-larger share of operating cash.
Investor fatigue: As one analyst put it, investors are getting fed up with "otherworldly spending" and punishing companies with negative free cash flow.
Crowded positioning: Global equity allocation is at its highest since November 2021, leaving little room for disappointment.
Overbought technicals: The Nasdaq 100's monthly RSI has entered overbought territory, historically a precursor to 5-10% pullbacks within weeks.
Slowing free cash flow: The Magnificent Seven's collective free cash flow has deteriorated sharply from its 2024 peak as capital spending devours an ever-larger share of operating cash.
Investor fatigue: As one analyst put it, investors are getting fed up with "otherworldly spending" and punishing companies with negative free cash flow.
Crowded positioning: Global equity allocation is at its highest since November 2021, leaving little room for disappointment.
What a Slowdown Would Mean for Asia
If American AI spending stalls — even modestly — the consequences for Asia would be severe:
1. Semiconductor demand would crater. Asia's chipmakers rely heavily on orders from US hyperscalers. A slowdown would mean idle capacity, falling prices, and earnings misses.
2. Stock markets would tumble. Taiwan and South Korea are particularly vulnerable. TSMC alone approaches 45% of Taiwan's benchmark index, while Samsung and SK Hynix make up nearly 40% of Korea's Kospi.
3. Currency pressures could return. If foreign capital flees Asian tech stocks, regional currencies could come under pressure — echoing the capital outflows of 1997.
4. Confidence would evaporate. Just as the 1997 crisis shattered faith in the "Asian Miracle," an AI bust could undermine the narrative that has driven the region's recent outperformance.
If American AI spending stalls — even modestly — the consequences for Asia would be severe:
1. Semiconductor demand would crater. Asia's chipmakers rely heavily on orders from US hyperscalers. A slowdown would mean idle capacity, falling prices, and earnings misses.
2. Stock markets would tumble. Taiwan and South Korea are particularly vulnerable. TSMC alone approaches 45% of Taiwan's benchmark index, while Samsung and SK Hynix make up nearly 40% of Korea's Kospi.
3. Currency pressures could return. If foreign capital flees Asian tech stocks, regional currencies could come under pressure — echoing the capital outflows of 1997.
4. Confidence would evaporate. Just as the 1997 crisis shattered faith in the "Asian Miracle," an AI bust could undermine the narrative that has driven the region's recent outperformance.
Is Asia Better Prepared This Time?
The good news is that Asia's fundamentals are stronger. Banking systems have been recapitalised, non-performing loans have fallen, and regulatory oversight has improved dramatically since the late 1990s. The Asian Financial Crisis forced painful but necessary reforms that have made the region more resilient.
The bad news is that resilience doesn't equal immunity. As Capital Economics noted, even lower valuations in emerging markets "are unlikely to provide much buffer" if a global AI-driven selloff takes hold. Rising risk premiums would pressure Asia's tech-heavy indices regardless of their relative attractiveness.
The good news is that Asia's fundamentals are stronger. Banking systems have been recapitalised, non-performing loans have fallen, and regulatory oversight has improved dramatically since the late 1990s. The Asian Financial Crisis forced painful but necessary reforms that have made the region more resilient.
The bad news is that resilience doesn't equal immunity. As Capital Economics noted, even lower valuations in emerging markets "are unlikely to provide much buffer" if a global AI-driven selloff takes hold. Rising risk premiums would pressure Asia's tech-heavy indices regardless of their relative attractiveness.
The Bottom Line
Is today's market destined to repeat 1997? Not exactly. The triggers are different, the banking systems are stronger, and the region has learned hard lessons about financial fragility.
But the underlying warning is the same: when a single sector becomes the engine of global growth — and when investors pile in with abandon — the risk of a painful correction grows. In 1997, it was Asian real estate and export-driven credit. Today, it's AI infrastructure and insatiable American tech spending.
The AI boom may continue for years, fuelled by genuine technological transformation. But for investors in Asia, the message is clear: watch the AI spending taps carefully. If they tighten, the ghost of 1997 could return sooner than anyone expects.
Is today's market destined to repeat 1997? Not exactly. The triggers are different, the banking systems are stronger, and the region has learned hard lessons about financial fragility.
But the underlying warning is the same: when a single sector becomes the engine of global growth — and when investors pile in with abandon — the risk of a painful correction grows. In 1997, it was Asian real estate and export-driven credit. Today, it's AI infrastructure and insatiable American tech spending.
The AI boom may continue for years, fuelled by genuine technological transformation. But for investors in Asia, the message is clear: watch the AI spending taps carefully. If they tighten, the ghost of 1997 could return sooner than anyone expects.
Disclaimer: This article is for informational purposes only and does not constitute financial advice. Always conduct your own research before making investment decisions.
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