Adds strategic call from VP Bank

SINGAPORE, July 20 (Reuters) - Wall Street's enthusiasm for South Korea's red-hot AI rally is fading after a bout of sharp volatility in recent weeks, with Citi cutting the country to neutral and investors looking to other emerging markets for stronger risk-reward opportunities.

The KOSPI .KS11, a major beneficiary of the sweeping global AI trade and one of the world's best-performing stock markets this year, has been rattled in recent weeks by extreme swings linked to speculative retail flows into leveraged single-stock ETFs and growing unease over lofty valuations.

Here are some more details:

• Citi said nearly all of its client conversations are now returning to the likelihood of "broadening" performance in the second half of 2026 but it remains hesitant in fully rotating away from tech in its EM country allocation.

• Citi remains structurally bullish on the AI story, but moves to neutral on Korea, while upgrading China to overweight and remaining overweight on Taiwan markets.

• VP Bank said it favours Chinese equities in its emerging markets allocation, noting the Asian powerhouse currently offers a more attractive risk-reward profile than South Korea.

• Yardeni Research also downgrades emerging markets to market weight, citing rising oil prices, strong dollar due to a hawkish Federal Reserve and AI fatigue showing up in South Korea and Taiwan.

• There has been quite a bit of rotation in leadership so far in July, Yardeni said, noting the countries that led the broader 2026 rally, South Korea and Taiwan, are the worst performers this month to date.

• South Korean stocks down 23% so far in July but remain up 55% this year, while Taiwan markets .TWII are down about 8% in the month but up 47% in 2026.