South Korean Tech Stocks Plunge as Global AI Market Shaky

Key Drops in South Korean Tech Index

The sell-off in AI stocks has intensified, driving South Korea's stock market down to its lowest level in three months. Investors continued to ditch chip stocks on Tuesday, amid rising concerns about the huge amount of borrowing among AI companies to fund their datacentre expansion plans. The South Korean semiconductor companies SK Hynix and Samsung Electronics fell by more than 10%, dragging the country’s Kospi share index down by 11.5% to its lowest point since mid-April.

US chip stocks also extended their recent losses when Wall Street opened on Tuesday, with Intel, Advanced Micro Devices (AMD), Sandisk, Western Digital Corp, and Seagate Technology all down by more than 4%. The Nasdaq 100 index of leading tech stocks fell by as much as 1.8% at one point, meaning since its early June record high it had fallen more than 10% – the technical definition of a market correction.

However, Apple bucked the trend, becoming only the second ever company to pass the $5tn valuation mark as investors losing confidence in AI stocks sought a safe haven. Analysts attributed the tech sell-off to renewed worries over AI investment spending and competition from cheaper Chinese companies, after a report by The Information that China had begun mass production of homegrown deep ultraviolet (DUV) chip-making tools.

According to Jing Jie Yu, an equity analyst at Morningstar, 'We believe the market was likely spooked by the progress of China’s chip-making equipment capabilities, and was worried that this progress would threaten the competitive position of global chip making and chip equipment leaders.' However, Yu added that the sell-off was 'largely a knee-jerk reaction and overdone.'

On Monday, shares in the Chinese memory chip maker CXMT rose by 466% when it floated on the Shanghai stock exchange, underlining China’s drive to create its own AI supply chain. This further fueled investor anxiety about potential competition from cheaper domestic sources.

AI Investment Dynamics and Market Reactions

In a noteworthy development, investors may also be growing jittery about the “circular funding” at the heart of the AI industry, through which artificial intelligence firms finance one another. On Monday, the Wall Street Journal reported that Nvidia was in discussions with OpenAI about providing $250bn (£188bn) for a massive datacentre project in Ohio.

This news reportedly led to a 5% drop in Nvidia's share price and an increase in the cost of insuring its debt against default, indicating heightened investor caution. Backing from Nvidia, which has an investment grade credit rating, could make it less expensive to raise funding for the project. News of the talks knocked Nvidia’s shares on Monday; they closed 5% lower, while the cost of insuring the chip company's debt against default using a credit default swap (CDS) rose.

Ipek Ozkardeskaya, a senior analyst at Swissquote, commented, 'The market reaction to the Nvidia news was swift. Nvidia fell 5% and closed the session below the $200-per-share mark. More importantly, Nvidia’s five-year CDS spiked, suggesting that it may not yet be the right time to buy the dip.'

Despite these challenges, analysts suggest that while concerns are valid, they might be overblown and could be temporary.

Source: The Guardian