Cheap Chinese competition and comparing AI investors to gamblers at the casino hitting chip stocks
The Korean market peaked in June at 9385. On Tuesday it closed at 6035
The Korean stock market is in freefall once again. Fears of cheaper Chinese competition making ground and criticism leveled at investors in AI stocks by Broadcom's chief executive combined to wipe more than 5% off its benchmark KOSPI index.
After suffering heavy losses last Friday and Monday, the Kospi's KR:180721 losing streak extended to five consecutive sessions and the market now languishes more than a third below its all-time high set in June of this year. Korea's two largest companies by market capitalization, Samsung Electronics (KR:005930) and SK Hynix (KR:000660), bore the brunt of the selloff with falls of 10% and 7% respectively, and the pair was responsible for roughly half the market's decline.
Korea's stock-market fortunes are often taken as a proxy by investors for the AI trade as a whole. Nasdaq 100 (NQ00) futures fell by 0.5% on Tuesday.
An article carried by the South China Morning Post on Monday detailed the progress made on memory chip architecture by China's biggest semiconductor manufacturer CXMT (CN:688825). Technological breakthroughs have enabled them to increase the storage density of their chips, boosting their competitive threat to Samsung and SK Hynix.
While Samsung Electronics and SK Hynix have both been generating extraordinary profits and operating on record margins for the last eighteen months, many investors have been concerned about a slowdown in the pace of AI capital expenditure or the competitive threat from cheaper, mostly Chinese, manufacturers.
Plummeting share prices for the Korean memory chip makers were aggravated by a drop in chip stocks in the U.S. Monday. The Philadelphia Semiconductor Index exchange-traded fund SOX lost 2.5% while chip plays like Intel (INTC) and Micron (MU) also lost ground.
Sentiment was damaged by comments from Broadcom's (AVGO) chief executive officer, Hock Tan who spoke at a technology event in Singapore on Monday, who likened AI investors to being in a casino.
He's not alone in expressing his concerns, though. Nic Puckrin, cross-asset analyst and founder of Coin Bureau, wrote in an email to MarketWatch, "The sell-off we're seeing in chip stocks might look like a tempting buying opportunity for some investors, but I wouldn't treat it as such. It's increasingly looking like the start of structural repricing of the AI trade rather than a short-term dip."
Nonetheless, investors in chip stocks will add Tan's views to longstanding concerns about the sustainability of the AI boom and the capex associated with the buildout of AI infrastructure.
However, at the same event in Singapore, Intel's CEO Li-Bu Tan offered some reassurance for the likes of Samsung and SK Hynix by emphasizing that hardware will remain in short supply for the next two to three years.
Moreover, despite the stock-market slump, the fundamentals for Korean companies remain very supportive. September exports reached a record $120.9 billion and the trade surplus hit $49.9 billion, making the year-to-date balance now $252 billion. Little wonder then the Korean won (USDKRW) has rallied 10% almost in the last three months.
Exports of chip stocks and artificially cheap currencies has generated huge trade surpluses for Korea and Taiwan
Korean equities are also trading at very low valuations with Samsung's price-to-earnings multiple for 2027 standing at just 3.5 times according to FactSet, while SK Hynix is 3.3 times. The respective dividend yields according to FactSet are 6.5% and 3.5%. The Korean market as a whole is valued at 5.3 times the next 12-month earnings, compared to the MSCI Emerging Markets Index EEM at just over 10 times.
-Jules Rimmer